Refinancing and Workouts of Financially Distressed

Question: Discuss about the Refinancing and Workouts of Financially Distressed. Answer: Introduction: In this report we discuss the Australian case which involves breach of directors duties and officers duties under section 181 of the Corporation Act 2001. Case law which we choose is Bell Group LTD (in liq) v westpac banking corp (no 9) (2008) 225 FLR". Recently, the Western Australian Court of Appeal give its judgment in this case in which appeal is filed by the consortium of banks against the decision of Justice Owens in The Bell Group Limited (in liq) v Westpac Banking Corporation [No. 9] 2008 WASC 239. In the history of Australia this case is the longest and expensive case, and the judges, Lee, Drummond and Carr AJJA reach different conclusions and they provide different reasons for their conclusion. In this report, first we state the brief introduction of the case, and we also outline the duties and responsibilities of directors and officers that are breached and reasons for breaching the duties. In last we analyze the decision made by court or tribunal, and also the reason of decision take by court in relation to Corporation Act 2001. Subsequently this report is concluded at last. The Bell Group Limited (in liq) v Westpac Banking Corporation: Bell Group of Companies was the subsidiary of the Bell Group Limited (in liquidation). Bond Corporation Holding Limited controlled it from August 1988. There are number of banks in Australia which give facilities to the Bell Group of Companies, and facilities provided by these banks were independent, unsecured but these facilities are supported by pledge agreements which are negative. Bell Group of Companies has similar arrangements with the financial institutions set up in overseas. In 1980, Bell Group because of its high borrowings decided to sale its assets for the purpose of reducing its debts. In mid-1989 debts owned by the company to the Australian banks are too high, and company is not able to repay its debts and later on company restructure its facilities. In 1990 January Bell Group of Companies entered into number of transactions continuously and these transactions are related to refinancing and security documents. These transactions result in taken over security of valuable assets of Bell Group by banks (HWL Ebsworth, 2012). Almost after15 months provisional liquidator was appointed in Bell Groups, and banks started to precede the securities on the assets of the company and recover almost $283 million. In 1995, liquidators start proceedings against the banks, and they challenge the refinancing transactions and their validity. The main purpose of these proceedings was to recover the proceeds of the realization. Liquidators stated at the time of execution of transaction, the directors of the Bell Group of Companies knows or might be know that main companies of Bell Groups were insolvent, and they also stated that this conduct of directors result in breach of their duties. In their defense banks stated that the Bell Group of Companies were not insolvent at the time of execution of transaction, and in case if companies are insolvent then also banks were not aware about this. In first hearing Owens J made decision in favor of liquidators and found that: By entering into the transaction directors of the company breach their fiduciary duty towards the company and does not act in the best interest of the company and in such way which is for an improper purpose. It is wrong that banks are not aware about the breach of fiduciary duties by the directors of the company by executed the transactions which satisfied the first limb in Barnes v Addy. There is no liability on the banks for equitable fraud which was result of transactions and because of which one class of creditors gets preference over other cast of creditors. It was not necessary for the court to find whether intention of Bell Companies is to defraud, delay and hinder the creditors under section 121 of the Bankruptcy Act 1966 (Dibbs Barker, 2008). Breach of directors duties: Before discussing the breach of duties and responsibility by directors in this case, it is necessary that we understand the duties of directors stated in section 181 of the Corporation Act 2001: Clause (1) of this section states that it is the duty of the directors and other officers of the company that they must exercise their powers and discharge their duties in good faith or in the best interest of the company, and for proper purpose. Clause (1) of this section is the civil penalty provisions under section 1317E. Clause (2) of this section states that if any person contravenes clause 1 then he also contravenes this clause also. This section is also the civil penalty provisions under section 1317E (Corporation Act 2001, n.d.). In this case, plaintiff alleged that directors of the company breach their duties towards the company and do not act in the best interest of the company, and they also exercise their power for the purpose which is not proper and they are not able to avoid the conflict of interest. They argued that directors of the company: Not able to analyze the impact of the refinancing transactions on the company, creditors and future creditors of the company, and shareholders of the company. Directors decided to enter into refinancing transactions on the behalf of each company which result in making each company liable for the debts of BGF or BGUK to the banks, and both these companies are on the stage of insolvency at that time. Before entering into refinancing transactions only these two companies are liable towards the bank but now each company of Bell Group is liable. Directors take these steps to protect their position in TBGL and their financial interest in BCHL and other companies of Bond, and these steps was in conflict with their duties under section 181 of corporation act 2001 to the Bell Group of companies (Alert, 2010). The court held in this case directors breach their fiduciary duties by granting security in these circumstances. The duty breached by director was duty under section 181 that is to act in good faith and in the best interest of the company. Justice Owen considers to whom directors owned the duty, and judge found that duty is owned to the company itself not merely to the shareholders of the company. Justice Owen also held that it is necessary that directors of the company while discharging their duties is also take into account the interest of creditors of the company. His Honour's states that interest of the creditor must be take into account before the insolvent condition of the company. Court held that it is necessary to determine the duties of directors to act in good faith and in best interest of the company then this must be determine subjectively. In other words court must consider the state of mind of directors, and does not impose any analyzes which is objective in nature (Flannery, 2008). The last issue considered by Justice Owen was whether in discharging their duties to act in good faith and in best interest of the company of the relevant company, directors does not take into account the interest of whole group and only limit their duties to that particular company only. Its necessary that directors of the company must balance the interest of the company as well as interest of the group. The next question is whether directors breach their duties and answer is yes directors breach their duties to act in good faith and in best interest of the company. A director of the company does not consider the interest of the whole group but only consider the interest of the Bell Group such as that company on the assets of which security has been provided were insolvent at that time but directors of the company are not aware about the actual insolvency but they had knowledge of the chances of insolvency. Therefore it is clear that interest of each specific company involve the interest of unsecured creditors of the company (Hargovan Harris, n.d.). Before the refinancing transactions only specific numbers of companies are liable towards the financiers but after this decision of directors all companies which grant securities over their assets are liable towards the companies. These transactions are also not in the interest of unsecured creditors of each company because after these transactions financier has preferential rights over the assets of the companies. In other words, each individual company has incurred liability without obtaining any benefit. Some directors also enter into transaction with the aim to reduce likelihood of Bond Corporation Holdings Limited which has been on the situation of insolvency, and this act result in breach of their duty to act for the proper purpose. Lawyers of the company argued that minutes related to directors meeting must take into consideration to find out the reason for which directors of the company entered into transaction, and also set out the purpose of directors. Justice Owen does not give any importance to the minutes and said that in his view documents recorded I the meeting does not recorded exact facts for entering into transactions (Allens, 2009). Decision made by court/tribunal: In this case, there are four sets of decisions which have separate reasons, and these four sets includes decision given by trial judge that is Owen J and decision given by Lee, Drummond and Carr AJJA on appeal. This case involves number of legal issues such as equitable fraud, contractual obligations and rules stated in Barnes v Addy. In this High Court of Australia granted the special leave to appeal (Clark, 2010). Owen J in his decision held that at the time of refinancing transactions companies of Bell Group are insolvent, and banks held that they know if refinancing was not done then this group might be gone into liquidation. However, judge held that there are number of other options for restructuring which company can choose and there are not only refinancing agreement is the only option. Owen j also held that conduct of the bank was also prejudiced for the creditors of the company which are external because bank took securities over the assets of the company on which before these transactions there was no security. Later on, all the banks file appeal to the Western Australian Court of Appeal against the decision of the trial judge on 144 grounds. All three judges in the appeal confirmed the liability of the bank but also give slight different decisions with different reasons to the bank. Lee AJA agreed with the decision of trial judge and held that it is necessary that court consider whether directors acted in good faith or in the best interest of the company or not. Drummond AJA takes different approach and check whether court accesses the interest of the creditors of the company or not and whether they accessed objectively. Carr AJA held that Owen J consider the interest of creditors and determine the business decisions on the basis of creditors interest, and they also consider the duties of directors in respect of shareholders only. Both the trail judge and the judges on appeal held that directors of the company did not consider the interest of other creditors and only consider the interest of bank (Austlii, 2012; Austlii, 2013). Conclusion: In this report we state the legal issues raised in the case the Bell Group Limited (in liq) v Westpac Banking Corporation [No. 9] 2008 WASC 239. The above case imposes number of duties on the directors and the banks which they originally ignored. Especially for banks because banks obtain the securities then these securities were declared invalid and returned the proceedings of securities to the company, creditors and shareholders. There are number of legal issues are raised in this case which are set out in appeal and these issues are reviewed by the High Court of Australia. At last we conclude that it is necessary that directors of the company act in good faith and in the best interest of the company, and directors of the company must take into account the interest of all creditors not only single creditor of the company. References: HWL Ebsworth, (2012). The Bell Court of Appeal Decision. Retrieved on 16th December 2016 from: https://www.hwlebsworth.com.au/latest-news-a-publications/publications/insolvency-and-securities-enforcement/item/767-bell-round-2.html. Dibbs Barker, (2008). Bell Group Limited Decision. Retrieved on 16th December 2016 from: https://www.dibbsbarker.com/publication/Bell_Group_Limited_Decision.aspx. Corporation Act 2001- s181. Alert, (2010). REFINANCING AND WORKOUTS OF FINANCIALLY DISTRESSED COMPANIES: Lessons from The Bell Group Ltd (In Liquidation) v Westpac Banking Corporation. Retrieved on 16th December 2016 from: https://cornwalls.com.au/media/30115/article_feb%202010_bell%20group.pdf. Flannery, (2008). The Bell Tolls: Directors Duties and Financiers. Retrieved on 16th December 2016 from: https://www.mondaq.com/australia/x/71924/The+Bell+Tolls+Directors+Duties+And+Financiers. Allens, (2009). Restructuring Insolvency. Retrieved on 16th December 2016 from: https://www.allens.com.au/pubs/insol/foinsol14sep09.htm. Hargovan, A. Harris, J. Before the High Court For Whom the Bell Tolls: Directors Duties to Creditors after Bell. Retrieved on 16th December 2016 from: https://sydney.edu.au/law/slr/slr_35/slr35_2/433_Harris_Hargovan.pdf. Clark, M. (2010). Westpac Banking Corp v Bell Group Ltd (in liq). Retrieved on 16th December 2016 from: https://blogs.unimelb.edu.au/opinionsonhigh/2014/04/10/bell-group-case-page/. Austlii, (2012). WESTPAC BANKING CORPORATION -v- THE BELL GROUP LTD (IN LIQ) [No 3] [2012] WASCA 157 (17 August 2012). Retrieved on 16th December 2016 from: https://www.austlii.edu.au/au/cases/wa/WASCA/2012/157.html. Austlii, (2013). Westpac Banking Corporation Ors v The Bell Group Ltd Ors [2013] HCATrans 85 (23 April 2013). Retrieved on 16th December 2016 from: https://www.austlii.edu.au/au/other/HCATrans/2013/85.html.