Client Update: Lessons for lenders and directors from the Bell Group appeal decision
20 September 2012
In brief: The Western Australian Court of Appeal has handed down its 1024-page judgment in the Bell Group litigation, Australia's longest-running proceedings. The case arose out of an attempted work-out, in which a group of companies in financial difficulties gave security to banks in exchange for giving the borrower more time, and to avoid liquidation. More than a year later, liquidators were appointed to the companies and the banks enforced their security.
Under the judgment, the banks are required to hand back all the proceeds of the enforcement of their security, plus compound interest, which amounts to a huge sum. Among other things, the court found that the directors of each group company had breached their general law duties to the company – in very broad terms, there was insufficient corporate benefit, and the deal prejudiced other creditors. The court said the banks knew of that breach and were liable as constructive trustees to the companies.
The banks are seeking special leave to appeal to the High Court against the judgment, but, for the present, it is an important appellate decision. If the judgment stands, work-outs may be more difficult to achieve, as parties will be more cautious. The Court of Appeal had some significant things to say about directors' duties under general law (which continue in addition to their statutory duties) and the possible liability of lenders and others as constructive trustees. It said courts can 'second-guess' directors' business decisions. There are now some risks and issues for lenders in work-outs and in taking guarantees, and for directors.
What are the lessons to be drawn? How will they affect practice? What should lenders and directors do? Partner Diccon Loxton has prepared a report for clients on the case, suggesting some answers. If you would like to receive a copy, please email us.
If you would like to talk to any of our specialists, please contact one of our partners listed below.
- Diccon LoxtonSenior Finance Counsel,
Ph: +61 2 9230 4791
- Jeremy LowPartner, Sector Leader, Healthcare,
Ph: +61 2 9230 4041
- Warwick NewellPartner,
Ph: +61 3 9613 8915
- Geoff RankinPartner,
Ph: +61 7 3334 3235
- Karla FraserPartner,
Ph: +61 7 3334 3251
- Philip BlaxillPartner,
Ph: +61 8 9488 3739
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