Westpac Banking Corporation v Bell Group Ltd (in liq) (No 3)

Facts

Bell Group Ltd and associated companies granted security over their assets to a syndicate of banks led by Westpac in 1989–1990, at a time when the companies were insolvent or of doubtful solvency. The liquidators of the Bell Group companies brought proceedings alleging that the directors had breached their duties in entering into the security transactions, and that the banks were knowing participants in those breaches. The trial judge found in favour of the liquidators and ordered the banks to account for approximately $1.6 billion in proceeds.

Issues

1. Whether directors of insolvent or near-insolvent companies owe duties to act in the interests of creditors, and the content of those duties. 2. Whether the bank syndicate had requisite knowledge of, and thereby became knowing participants (as recipients of trust property or as accessories to breach of fiduciary duty) in, the directors' breaches. 3. Whether the security transactions were void or voidable as against the liquidators on the basis of breach of duty and knowing receipt or knowing assistance.

Holding

The Court of Appeal (by majority) upheld the finding that the directors had breached their duties to the companies by preferring the interests of the banks over creditors when the companies were insolvent or of doubtful solvency, and that the banks had the requisite knowledge to be liable as knowing recipients of trust property, affirming substantial liability but adjusting aspects of the remedy.

Ratio decidendi

When a company is insolvent or of doubtful solvency, directors owe a duty to the company to consider and act in the interests of creditors, and where directors breach that duty by disposing of assets to a third party who has the requisite knowledge of the breach, that third party is liable as a knowing recipient and may be required to account for the assets or their proceeds.

Obiter dicta

The court made extensive observations on the nature and juridical basis of the duty to creditors (whether founded in equity or as a gloss on the duty to the company), on the appropriate standard of knowledge required to fix a recipient with liability in equity (the five-category Barnes v Addy analysis), and on the operation of the equitable remedy of account in a commercial insolvency context. The court also commented on the difficulties of attributing collective knowledge to a syndicate of lenders.

Significance

The Bell Group litigation remains the most significant Australian authority on the equitable duty of directors to creditors on insolvency or near-insolvency, and on the conditions under which a secured creditor may be fixed with liability as a knowing participant in a director's breach of fiduciary duty; it has extensively shaped subsequent analysis of Barnes v Addy liability in a commercial lending context.

Key authorities

• Walker v Wimborne Walker v Wimborne (1976) 137 CLR 1applied
• Kinsela v Russell Kinsela Pty Ltd Kinsela v Russell Kinsela Pty Ltd (1986) 4 NSWLR 722applied
• Barnes v Addy Barnes v Addy (1874) LR 9 Ch App 244applied
• Consul Development Pty Ltd v DPC Estates Pty Ltd Consul Development Pty Ltd v DPC Estates Pty Ltd (1975) 132 CLR 373applied
• Equiticorp Finance Ltd (in liq) v Bank of New Zealand Equiticorp Finance Ltd (in liq) v Bank of New Zealand (1993) 32 NSWLR 50considered
• Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) Bell Group Ltd (in liq) v Westpac Banking Corporation (No 9) [2008] WASC 239considered
• Rolled Steel Products (Holdings) Ltd v British Steel Corporation Rolled Steel Products (Holdings) Ltd v British Steel Corporation [1986] Ch 246considered