Anchorage Capital Master Offshore Ltd & Ors v Bakewell & Anor [2023] HCATrans 164 (17 November 2023)

Last Updated: 17 November 2023

[2023] HCATrans 164

IN THE HIGH COURT OF AUSTRALIA

Office of the Registry
Sydney No S62 of 2023

B e t w e e n -

ANCHORAGE CAPITAL MASTER OFFSHORE LTD

First Applicant

ACMO FINANCE (IRELAND) DESIGNATED ACTIVITY COMPANY

Second Applicant

MIDTOWN ACQUISITIONS LP

Third Applicant

DEUTSCHE BANK AKTIENGESELLSCHAFT

Fourth Applicant

COMMONWEALTH BANK OF AUSTRALIA ACN 123 123 124

Fifth Applicant

and

ROBERT BAKEWELL

First Respondent

DELIA SPARKES

Second Respondent

Application for special leave to appeal

GAGELER CJ
BEECH‑JONES J

TRANSCRIPT OF PROCEEDINGS

AT CANBERRA ON FRIDAY, 17 NOVEMBER 2023, AT 10.12 AM

Copyright in the High Court of Australia

____________________

MR N.C. HUTLEY, SC: If your Honours please, I appear with my learned friend, MR T.L. BAGLEY, for the applicants. (instructed by Gilbert + Tobin)

MR M.R. PESMAN, SC: May it please the Court, I appear with my learned friends, MR E.A.J. HYDE and MS A.E. MUNRO, for the first respondent. (instructed by Baker McKenzie)

GAGELER CJ: There is a submitting appearance for the second respondent. Yes, Mr Hutley.

MR HUTLEY: The source of the error in the Court of Appeal’s reasons and the foundations of special leave questions is the court’s failure to confront the logic of the construction of the MAE Representation. If your Honours go to the appeal judgment, application book 361, commencing at paragraph 153, the court explained the proper construction of the MAE Representation. The effect of it can be derived ‑ ‑ ‑

GAGELER CJ: I am sorry, can you tell me that paragraph number again?

MR HUTLEY: I do apologise, your Honour.

GAGELER CJ: No, it is fine.

MR HUTLEY: Paragraph 153.

GAGELER CJ: Thank you.

MR HUTLEY: Page 360. The explanation goes from there through to, relevantly, 156. The Court of Appeal explained that the proper construction of the MAE:

was to the effect that there had been no change in the Arrium’s “financial position” –

which would have been reflected in notional accounts prepared at the time, and, secondly, materially increased the risk that Arrium would be unable to perform its obligations under the facilities. They are the two aspects. The approach the court then took to it – that exercise – commences, relevantly, at paragraph 197, which is application book 376. There, the Court of Appeal commenced by addressing the correct question, being:

when accounts . . . notionally prepared –

by management would have differed from the previous accounts. However, from there on, the court fell into error, and particularly in the final sentence. The error is in constraining the notional accounts to the actual knowledge of the board. The actual knowledge of the board, which we will come to, only became actual when they passed the accounts in February. The proper inquiry must be what would have happened if the company had prepared the notional accounts at a relevant date for the purposes of the contract, and the Court of Appeal treated that as 31 December 2015, which was actually the day of the half‑yearly accounts.

Now, once one had to undertake that exercise – creation of notional accounts because they hypothesise do not exist – one then must ask what did the company know at the time of these notional accounts, and, critically, the company’s knowledge included the knowledge of Mr Bakewell, the Chief Financial Officer of Arrium, who knew all the facts from which a conclusion could be drawn that the MAE Representations were false. That was found in the primary judge’s paragraph 482 at application book page 206. I am sorry, I had them around the wrong way.

BEECH‑JONES J: Sorry, what was that, Mr Hutley?

MR HUTLEY: It is not surprising your Honour missed that – the trial judge at 482, application book 206. It says there:

As to the question of knowledge, it was necessary for Mr Bakewell to know that the representations contained in the Drawdown Notices were false.

That is the no involvement point, that is not the point:

If the representations were false, then plainly Mr Bakewell knew the facts from which the conclusion of falsity could be drawn.

Then he goes on at an earlier stage to have dealt with all the matters he knew. He knew that the company was in desperate straits, et cetera, et cetera. I do not need to go to it. The Court of Appeal, at application book page 439, paragraph 352, if your Honours would go to that for a moment – it is actually at 439.

GAGELER CJ: Are we talking paragraphs, or page numbers?

MR HUTLEY: Paragraph 352, page 439, your Honour:

As to Bakewell, the appellants embrace the primary judge’s finding that he “plainly . . . knew the facts from which the conclusion of falsity could be drawn”.

They refer to – no one challenged his Honour’s finding in that regard – accepted. We say that really lies at the heart of our first question, which I will come back to in a moment. We say for the Court of Appeal to focus as it did on the board’s actual knowledge – and the board’s activities involved a failure to confront the logic of the MAE Representations.

GAGELER CJ: Do they have to be understood against the background of accounting standards?

MR HUTLEY: Yes, they have to, but the contract calls for the preparation of notional accounts, therefore, by hypothesis, it is not actual accounts. Therefore, the exercise requires, in effect, constructing what would be the accounts if properly prepared at the relevant time.

BEECH‑JONES J: You say that if the accounting standards require a certain subjective knowledge, the exercise is done on the hypothesis that you have prepared the accounts and acquired the knowledge.

MR HUTLEY: Quite. The whole point is – and oddly enough, in point of fact, the actual accounts for 31 December had the note, and the actual accounts for 31 December stated that was based on facts known at 31 December and nothing more. Your Honours will see that from the appeal judgment paragraphs 110 and 111, at page 346.

GAGELER CJ: Mr Hutley, you lost on a lot of grounds in this case. You have ‑ ‑ ‑

MR HUTLEY: Yes, and they are all very interesting, your Honour. Your Honour, I accept that, and, as your Honour will see with the frankness this Court would expect, we stated as our first basis on the special leave application we have to win each of those grounds. But each of those grounds, we say, raise an important question of law which goes to fundamental aspects of knowing involvement, knowledge, involvement, whether – as the Court of Appeal has said – reliance is essential to causation. So, each one. And I know we have lost them all, but we say we should have won them all. We say each is important. And we do not seek to change findings of fact, we say that the Court of Appeal merely misapplied the law on the given facts.

BEECH-JONES J: Are you going to have a stab at all of them in the 20 minutes or just ‑ ‑ ‑

MR HUTLEY: I was hoping to.

BEECH-JONES J: All right. So, I will be quiet.

MR HUTLEY: I am going to be quick, but I am going to do it. I was dealing with the first one. This is sounding really optimistic.

GAGELER CJ: Is that the most interesting one, Mr Hutley?

MR HUTLEY: I am sorry, your Honour?

GAGELER CJ: Is the first one the most interesting one?

MR HUTLEY: I have to win them all and therefore, if your Honours do not think the first one is interesting, I am going nowhere. But we do say, if your Honours go to paragraphs 110 and 111 in the appeal judgment, there your Honours will see the notes that were actually put in the accounts as at 31 December. Your Honours will see the note, which is a qualification for going concern, but if your Honours look at “Note 14 in the Accounts” at 111, it said those accounts were prepared solely on the basis of matters known, existing at 31 December.

Your Honours will be aware that one of the matters relied upon by our learned friends as to why we will not get special leave is the findings that the Court of Appeal made about the MolyCop transaction. Your Honours, the board was first provided with the proposed accounts and the draft going concern note on 11 February 2016. Your Honours will see that from appeal judgment 99 to 101.

If your Honours go to paragraph 202, from 202 onwards an alternative basis was put forward and the court, in effect, went to the facts and said that events associated with what might be called the failure of the MolyCop transaction after the 31st is relevant to the board’s determination with respect to the note. We submit that again failed to address the correct question. The correct question was – as at an inquiry time, which the court treated as 31 December – what, in the state of actual knowledge of the company, the accounts would look like. We say once one has the finding with respect to Mr Bakewell that his knowledge should be the knowledge of the company – and we have referred your Honours to Crowley v Worley in the Federal Court Reports. We say that is the end of that, therefore the note should have been there.

The second leave question is the outstanding Yorke v Lucas question: what is required for knowledge for a knowing involvement? We say if Mr Bakewell knew all the relevant facts as found, that is sufficient, even though he did not take the leap of realising its significance to be misleading because of the quality of the MAE, but he knew all the facts sufficient to substantiate that. That is the knowing involvement question. That is a question which is open in this Court, and we have referred to the disagreement at intermediate appellate courts as to what is required. That is an important question.

Then we have the question of involvement. And involvement, your Honour, is the third question. Now, not all acts of involvement require a causal connection between the involvement and the breach. A person can be involved by reason of their authority. As your Honours will see from the appeal judgment at paragraph 326, application book 428, Mr Bakewell suggested that the facility is being drawn down, and that had happened in December 2015, but prior to 8 February, the direction did not have the mandatory and immediate effect. We say the CFO authorising and not stopping misleading conduct by a company suffices, even if his authorisation is ultimately not relied upon to engage in the conduct.

GAGELER CJ: Did you say that to the Court of Appeal?

MR HUTLEY: Yes, we said it was knowingly involved. We have taken your Honours – because, at the time – we have addressed this at paragraphs 24 and 25 of the application. Their Honours said that one had to be knowingly involved because there had to be, in effect, a causative requirement. We accepted that his original direction was enacted upon, but he was the CFO, he had the knowledge which constituted sufficient to make it misleading, and he said, draw down the moneys if you can, if we are able.

We say he was in a position of knowing involvement because, by omission, he did not take steps to stop this company taking a step which required the issuance of a certificate – a drawdown notice – which required a representation, which on his state of knowledge could not be advanced. So, we say that is sufficient for involvement. Your Honours will see at paragraph 327 of the appeal judgment, at application book 428, that “involvement”, from 79(c), involves a person who:

has been in any way, by act or omission, directly, or indirectly, knowingly concerned in, or party to, the contravention.

Thus, it is a very broad concept and allows for omissions, and in any way. We say his original direction – the Bakewell Direction – coming from the CFO where the knowledge he had was sufficient to be, by omission and by commission, indirectly, knowingly involved in the contravention, being the sending of the notice. That is, he was in a position to stop it, he had the knowledge to stop it, and he knew that for a drawdown to take place, you needed a drawdown notice.

So, that is the third question. The fourth question is whether reliance is a necessary condition of causation. The Court of Appeal, we say, wrongly held that it was necessary to prove reliance as an element of causation. Your Honours will see that in the appeal judgment, paragraph 381, pages 452 to 453. At 381, they said:

reliance on the misleading conduct at some point is necessary to provide a causative connection –

GAGELER CJ: But that is the way you put your case.

MR HUTLEY: No, your Honour. Your Honour, our case was the issue of the certificate brought about the drawdown. Our case was, and the trial judge found, the bankers relied on the notice, but not on the representation. We say, under the contract, once there is a confirming drawdown notice, there is an obligation to pay unless the person to whom it was directed knew that it was misleading.

BEECH-JONES J: Just so I can get this right, Mr Hutley – and you say this in your reply as well – you say, but for the conduct, there would have been a qualified drawdown notice, and that would not have obliged you to advance the funds.

MR HUTLEY: Quite.

BEECH-JONES J: But that is not the same as saying whether you would have advanced the funds. Or do you say it is just a small step in an inference process, or something?

MR HUTLEY: A conforming notice obliges you to pay down, subject to a condition precedent which, in effect, you would have to prove the
negative rather than actual reliance. So, you get a notice, you are obliged to pay. We paid. That is sufficient to prove – and you can only get the notice if you have the misleading representation in it. By hypothesis, therefore, all we have to prove is it was a cause of the loss. That was a cause of a loss because it created a situation where we are obliged to pay, and we paid.

BEECH-JONES J: But with no counterfactual of, if we received a non‑misleading notice which we would not have paid.

MR HUTLEY: The case did not go up – the case went off on the fact that we did not prove reliance on the notice, not that if there had been an appropriately qualified notice, we still would have paid. Nobody ran that case. It was not put, and it was not the reason we lost, because – a moment’s reflection – if the qualification had been, there is a going concern – that is, we are at risk of not being able to – it is not a big leap to imagine that a banker is not going to advance large sums of money going forward. Some US$36 million is the one with which we are concerned. But the court, in effect, said, you have to find – our causation case, your Honours will see at paragraph 375, page 449. That is how we put it.

GAGELER CJ: Thank you.

MR HUTLEY: That was the simple point. And we have given your Honours the contract because there is a – it seems to have – a dispute has arisen about whether we were free to not pay. I do not want to take your Honour – if that is pursued, I will deal with that, if necessary, in reply, but the relevant clause your Honours will find in that contract at page 23, clause 2(a).

The condition precedent your Honours will find at 4(2)(c), on pages 23 and 24, and it is not a condition precedent of our relying, it is a negative condition precedent where they were obliged not to issue the notice if it was misleading. In other words, the point – the Court of Appeal has, in effect, determined this question on a point of law; a gloss, we say, on what this Court has determined in Campbell v Backoffice, et cetera.

I see the time.

GAGELER CJ: Thank you, Mr Hutley. Mr Pesman.

MR PESMAN: Your Honours, the essential reason the Court would not grant special leave is that even were the applicants to succeed on the only point that is actually important, which is the Yorke v Lucas knowledge point, it will not make any difference to the ultimate outcome. That is so, because, as your Honour the Chief Justice observes, they failed on everything.

There are three reasons, in essence, why we say that it will not make a difference. The first is that the conclusion that there was no misleading conduct, that is, that the MAE Representation did not become untrue before 11 February 2016, as the Court of Appeal and the primary judge found, is unimpeachably correct. The second reason – and just related to that, the special leave question that is asserted in relation to that point is what is called the imputation question. If nobody – and by “nobody”, I mean nobody within Arrium or its board or Mr Bakewell – knew prior to February 2016 that the MolyCop sale would not proceed, there is no knowledge to be imputed to anyone because no relevant person knew it.

The second point is that even if their representation was untrue at an earlier date, the Yorke v Lucas point does not arise, and it does not arise for two independent reasons. The first is that Mr Bakewell, even on the analysis contended for by the applicants, did not have the requisite knowledge of the requisite facts; and second, even if he had that knowledge, he did not engage in any relevant conduct. That is, he was not a known participant in any misconduct.

Your Honour the Chief Justice asked my learned friend how that particular part of the case was put at first instance. I can answer that question because of the submissions recorded by the Court of Appeal, and that is recorded at page 420 of my second volume of the application book, at paragraph 306, where the court records the way that the case was put:

The Anchorage appellants’ case that Bakewell incurred accessorial liability in respect of contravening conduct by Arrium depends in large part on the so‑called Bakewell Direction (indeed, the Anchorage appellants describe this issue as the central focus of their “knowingly concerned” case against him).

And as the Court knows, any reliance on the Bakewell Direction has now been abandoned in this Court. We say that this case about him stopping something happening is a new case, essentially run for the first time in the reply submissions.

Third, and finally – your Honours, I say “finally” in the introductory sense – even if all of those matters are decided against us, they still have the very fundamental problem in relation to causation – and your Honour Justice Beech‑Jones’ observation about that is correct, which is the counterfactual is not the one contended for by the applicants, and that in circumstances where ‑ ‑ ‑

GAGELER CJ: I think it can be “finally”, Mr Pesman.

MR PESMAN: May it please the Court.

GAGELER CJ: Mr Hutley.

MR HUTLEY: Thank you, your Honour. Your Honours, as to the way we put the case, we put it at the primary judgment paragraph 481. Your Honours see that that is exactly how we are putting it here; precisely the same. It was his position – his Honour the trial judge said it was not enough because there had to be a causative – and that is on the basis of the Bakewell Direction, which we do rely upon. It is the direction, draw it down if we can.

Our case was, because of his position, that was sufficient to be knowingly involved. That is, the person with the knowledge, the CFO, said to his reports, draw this down if you can, in circumstances where they knew – he knew – all sufficient to make it misleading. So, it is not a departure in any way from the case, it is exactly the same case. That has always been our case, because there was always dispute about whether the so‑called Bakewell Direction was pre‑emptory – you must do it or you must do it if you can – and submissions were made that even on that basis, that was sufficient to be knowingly involved.

That is why we say it is an important question, because, in effect, it involves a proposition that what is the extent for involvement – and the courts have said, having regard to 79(1)(c), you can be involved by omission. That is, putting out there something saying, draw down if you can, in circumstances where one has the requisite knowledge – which we say is the case – is sufficient to be knowingly involved. In fact, we say it is a classic case of being involved by omission, namely, not saying, do not draw it down because we cannot. So, we say it is a knowing involvement.

The second point is the first point our learned friend says is of no interest, but that is the Crowley question. The Crowley question to a notional accounting exercise is: is the notional creation of accounts to be taken by reference to – for the purpose of a representation, which is the MAE Representation – be the knowledge of the entire company?

The Court of Appeal said, in effect, quite wrongly, no, it has to be the board, and the board only has to know about this on 11 February. That, of course, renders the whole concept of these contracts absurd because, by hypothesis, the accounts were not prepared at that time. They could not be. It is notional. In fact, nobody would ever be aware of the form of accounts because by hypothesis they are notional. That is the difficulty.

That is why we say it is an important question, because the courts have, in effect, said, you can only have misleading and deceptive conduct in this case by the board achieving a state of knowledge even though you have entered into a contract of a representation by reference to notional accounts. In our respectful submission, the Court of Appeal never answered the right question, and the findings of fact made by the judge and the Court of Appeal established that accounts notionally prepared at that time would have had to have the qualification. As in fact, the actual accounts had at that time – and said to be based on the knowledge as at that date, not the MolyCop failure, which takes place after it.

So, we have the ironic situation – these notional accounts, we are saying, are exactly identical to the actual accounts prepared, and as the actual accounts said, are based on the state of knowledge which the company had at that date, and that only, which – by unchallenged finding of fact – Mr Bakewell was found to have had. Yet, we get to the situation where the Court of Appeal – there is no misleading and deceptive conduct, there is no knowing involved, et cetera, and goes on.

Those findings only exist because the Court of Appeal never asked the correct question. When you are dealing with a contract about a representation by the company, you look to the entire state of knowledge about the company, and particularly, when you would have it here in the form of a notional account, you have to, in a sense, create the accounts that a properly instructed company would produce at that moment. That was the case we ran, and it is a case, with respect, that no one has ever addressed. In our respectful submission, they raised all the questions of law which are important. I accept that we have to win them all.

Those are our submissions, your Honour.

GAGELER CJ: We are not persuaded that there are sufficient prospects of ultimate success in the appeal to warrant the grant of special leave. Special leave to appeal is refused with costs.

The Court will now adjourn to allow a video link to be established.

AT 10.43 AM THE MATTER WAS CONCLUDED