There are lessons to be learnt from the recent decision in the Westpac v The Bell Group saga in the WA Court of Appeal. Renée Dailey and Katherine Lindsay share their view.
Whether you are a John Donne, Ernest Hemingway or Metallica fan, the above clause rings a bell. In August, the Court of Appeal for Western Australia handed down a decision in the Westpac Banking Corporation v The Bell Group Ltd saga and provided its own musings on For Whom the Bells Tolls in Australia.
The Australian court decreed that the Bell [decision] tolls for “would be” secured lenders.
In the latest decision involving a 16-year protracted litigation, the Court of Appeal for Western Australia held that banks who took security over assets of The Bell Group a year before the company commenced liquidation proceedings were liable to the liquidators in an approximate amount of $2 billion for assisting the company directors in breaching their duties. The tolling of the bell for lenders has the follow-on consequence (which is likely unintended) of erecting hurdles to successful restructurings. There are lessons to be learnt in the decision for navigating these hurdles.
Don’t look back in anger
By way of background, in early 1990 The Bell Group experienced financial difficulties and, in the face of bank loan maturities and defaults, negotiated a restructuring agreement with its unsecured bank creditors. As part of the restructuring, the banks waived certain defaults and extended maturities and, in exchange, The Bell Group entities (some of which had not been original obligors or guarantors) granted additional guarantees and collateral to secure the bank loans (collectively: the Security).
In April 1991, The Bell Group commenced liquidation proceedings. As a result, the banks exercised on the Security and recovered funds in payment of their claim. Unlike in the US, under Australian law the stay of collection activities following commencement of insolvency proceedings does not apply to secured creditors.
Enter the liquidators: The liquidators sued the banks alleging (among other things), that not only should the Security, granted in 1990, be avoided because The Bell Group was insolvent at the time of the transaction, but that granting the Security was in breach of directors’ duties. The liquidators further alleged that the banks knew the directors were breaching their duties and assisted the directors in such breach and, therefore, were liable as accessories. The case proceeded to a 400-plus day trial.
Ultimately, in 2008 the trial court found in favour of the liquidators and ordered the banks to pay back the funds they had recovered from the sale of certain assets plus compounded interest, which over the course of approximately 22 years (plus some costs) amounted to a large price tag of approximately $1.5 billion.
The banks appealed, and the most recent decision from the Court of Appeal affirmed the trial court’s holding. The critical finding by the appeal court in Bell was that there was no real attempt at a restructuring but rather an impermissible asset grab by the banks when the companies were insolvent. Specifically, the court found that the banks did not act in good faith, since their motives in providing the extension were not to permit The Bell Group an opportunity to operate as a going concern and restructure.
Instead, the court found that the banks’ driving motives were to clarify a subordination issue in the documentation and to allow the requisite time to pass so that the Security could harden (i.e. the look-back period would expire). Additionally, the court noted that the level of control the banks had over the management of the companies amounted to an informal administration under the supervision of the banks.
The appellate court also found that a higher multiplier for damages was called for and increased the $1.5 billion judgment to approximately $2 billion. Upon first hearing of the decision, we speculated that the banks would appeal to the High Court of Australia and indeed that is the case (although at the time of the printing of this article, docketing of the appeal is in progress). Like many high courts, the High Court of Australia is not obligated to accept the application of appeal.
So what does all of this mean for lenders to Australian companies? Is it time to blow the bridge and give up on restructuring efforts altogether? Our view is a resounding no; we continue to believe that in most cases lenders achieve better value in consensual restructurings than in formal proceedings and the extra value is worth the effort.
There are a number of nuanced legal issues under Australian law regarding the liability of the banks as accessories and the nature of the directors’ duties and the found breach of such duties. These are issues that would benefit from a decision from the High Court.
Leaving aside the nuanced legal issues, which may or may not be settled on appeal, it is worth looking at some of the court’s comments regarding lender activities and considering the implications of such statements on future restructurings. We take no view on the accuracy of the court’s factual findings regarding solvency, bad faith or breach of duty, but irrespective of whether the court is correct or not, there are lessons to be learned (or re-learned as the case may be) for lenders.
First, the concept that fraudulent transfers (or uncommercial transactions) can be avoided or unwound is well settled. This is clearly not a sea change from prior precedent. The analysis of whether the transaction should be avoided is very fact intensive, which accounts in some part for the length of the court’s opinion. However, one important aspect that the Court of Appeal’s decision confirmed is that a creditor’s forbearance in suing on a debt can constitute consideration in exchange for the receipt of Security. The court cautions that the totality of the facts of the particular circumstance must be evaluated in determining the value of that consideration, but such a recognition would appear to be a win for creditors and their restructuring efforts.
As with many decisions, however, the court giveth and the court taketh. In the actual factual analysis, the court looked at many factors to determine whether there was in fact a corporate benefit to The Bell Group to justify the granting of the Security. The court (specifically, Drummond AJA’s decision) placed significant emphasis on the fact that the directors did not have a plan for how to use the additional time granted under the forbearance and infers that, therefore, the forbearance had little value and only served to allow the banks an opportunity to take Security.
While the Court’s ultimate conclusion may be appropriate in this scenario, the emphasis on this particular factor overlooks the reality and challenges of restructurings. In most cases, if the parties actually had a complete restructuring plan at the time of the forbearance agreement, they likely would have implemented it. But, as those who have lived through a restructuring know, it’s not that simple. Many large restructurings are achieved in phases, with the first being an extended forbearance and stabilisation period. Without a forbearance agreement or stabilisation period, a company may be forced into immediate proceedings, which typically leads to a forced sale at a low value. An important lesson to be learned here is if there are common goals or a framework for the restructuring that lenders and the company can agree on, state that in the agreement and be diligent in following up on the comprehensive restructuring transaction.
Second, it is worth noting that the trial court (and therefore the appellate court) did not rest its decision on findings of dishonesty or conscious wrongdoing on the part of the lenders or the directors. Instead the court noted that the transaction between the banks and The Bell Group was not “an arm’s length commercial transaction” since the banks knew that the company was in serious financial distress. The lesson this point illustrates is that lack of intent is not a defence in being an accessory to a breach of fiduciary duty.
Third, there continues to be a precarious balance in the level of lender activity in corporate affairs in restructurings. On the one hand the court faulted the banks for failing to make adequate enquiries to ensure that directors considered the corporate benefits of the various transactions.
Yet at the same time the court criticised the banks for requiring representations as to corporate benefit in the ‘whereas’ clauses of the relevant documents and for providing thoughts on, and possibly first drafts of, the resolutions that the directors were to approve and sign on the issue of corporate benefit. The lesson here continues to be the same but maybe with a new twist: Leave the directors’ decisions to the directors, but make sure they are making them on an informed basis and after due consideration.
The Bell Group situation is not the normal guerrilla war; plenty of restructurings pre and post Bell have been successful and, even if they failed, have not resulted in 15-plus years of litigation and significant damage awards. However, the decision serves as a reminder that lenders should engage in “earnest” restructuring negotiations and make sure the company is doing so as well. Follow these (not so) simple rules, and the bell should stay silent...
Renée Dailey is a partner in the financial restructuring group of Bracewell & Giuliani LLP in Hartford, Connecticut. Katherine Lindsay is an associate in the same group at the firm. Dailey and Lindsay recently represented the Centro Senior Lender Group in an out-of-court, debt-for-equity transaction that has been described as a template for future Australian restructurings.