The Bell Group Ltd (in liq) v Westpac Banking Corporation [No 9] [2008] WASC 239 dealt with a claim started in 1995 by the liquidators of Bell Group against 21 banks challenging the way in which securities were given and taken in 1990 by Bell Group following its takeover by Bond Corporation and seeking recovery of the proceeds of realisation (about $1.5 billion).

The judgement was so long (2,511 pages, excluding formalities, schedules and annexures) the Western Australian Supreme Court issued a guide to the reasons (27 pages). The trial took 404 hearing days, mainly in 2006.

A key part of the case relates to the duties of directors of a company when it is insolvent or nearly insolvent.

Here are some key quotes:

“At the heart of the claims by the liquidators and the trustee is the contention that at the time when the securities were given and taken, the main companies in the group were insolvent. They say:
• The directors of those companies knew that they were insolvent.
• The directors also knew that the effect of the giving of the securities was that all valuable assets of the companies were made available to the banks for repayment of the debts owed to the banks by some only of those companies in priority to the claims of all other creditors of the companies.
• There were shareholders and external creditors of the companies – in particular, the bondholders and the Deputy Commissioner of Taxation (DCT) – who were prejudiced by the giving of the securities.
• By giving the securities the directors breached duties that they owed to the companies.
• The banks knew that the companies were insolvent, that the effect of the giving and taking of the securities was as set out in the second bullet point above and that the directors had breached their duties to the companies.

“In those circumstances, the liquidators and the trustee say, the banks are liable to disgorge the proceeds from the realisation of the securities or otherwise compensate them for losses suffered because:
• The banks knowingly participated in the breach by the directors of their duties to the companies and received the proceeds from the realisation of the securities knowing of the breach of duty.
• The conduct of the banks amounted to an equitable fraud on the companies and on the trustee
• The securities were void or voidable because the circumstances in which they were given contravened various provisions of the Bankruptcy Act 1966 (Cth) and other statutes.”

The decision:
“I believe that in causing the companies to give the securities and enter into the Transactions the directors breached fiduciary duties they owed to the companies. They contravened the duty to act in the best interests of the companies and the duty to exercise powers only for proper purposes.”

The company was found insolvent at the relevant date but the directors did not know the companies were insolvent, although they knew the companies were nearly insolvent or of doubtful solvency.

The banks were successful in their defences against claims of fraud and knowingly assisting a breach of directors’ duties.

Final orders have not yet been made.