Bond insurers claim under Australian Consumer Law dismissed by NSW Supreme Court

Following a lengthy 21-day hearing, the NSW Supreme Court has dismissed proceedings brought against former directors, officers and employees (the Defendants) of Forge Group Limited by its surety providers Swiss Re and QBE (the Plaintiffs).

The Plaintiffs alleged that the defendants engaged in misleading and deceptive conduct in respect of various surety bonds issued by the Plaintiffs shortly before Forge entered into voluntary administration.

In a lengthy judgment delivered by Justice Hammerschlag, the Court dismissed the claim, finding that:

  • there was no misleading and deceptive conduct on the part of any of the defendants; and
  • the alleged misleading and deceptive conduct was not causative of the Plaintiffs’ loss.

The case gave close consideration to the extent to which employees speaking on behalf of a company can be personally liable for loss arising from misleading and deceptive statements.

Background
Forge was a publicly listed engineering, procurement and construction company which, at 30 June 2013, had net assets of over $213 million and net profit after tax of $62 million. However, in February 2014 Forge collapsed and liquidators were appointed in March.

Forge entered into a joint venture in Western Australia known as Roy Hill in 2013. Under the Roy Hill project contract Forge was required to post security in the form of surety bonds on demand. Forge looked to its existing insurers, the Plaintiffs, to increase its existing facilities and issue the bonds.  By late October 2013, Forge had facilities of $150 million (Swiss Re) and $125 million (QBE).

The proceedings brought by the Plaintiffs concerned bonds issued between 15 November 2013 and 13 January 2014 for around $100 million. Shortly after Forge entered into voluntary administration in February 2014, the bonds were called upon by a third party and the Plaintiffs were required to pay them out in full.

The Plaintiffs brought proceedings against three former Forge executives – the CEO/ Managing Director, the CFO and the Executive Manager of Finance, suing for damages under s 18 of the Australian Consumer Law.  The Plaintiffs alleged that they were misled and deceived by the Defendants and had they known the true extent of Forge’s financial difficulties, they would not have issued the bonds.

The misleading and deceptive conduct complained of included, amongst other things:

  • providing cashflows that assumed the success of tax deferral negotiations with the ATO, when no payment plan was finalised; and
  • omitting to mention in November 2013 that cash flow was imminently negative without immediate assistance and that Forge has not been meeting its tax obligations.

Liability of employees for misleading statements

The Australian Consumer Law makes a clear distinction between principal liability and accessorial liability. The main difference is that with principal liability, an individual can engage in contravening conduct without intending to do so, and can be found personally liable, regardless of their state of mind. However, to be liable as an accessory, an individual must have known that the contravening conduct was misleading or deceptive.

The Third Defendant, Mr Bell was the Executive General Manager of Finance during the relevant period. The claim against Mr Bell was pleaded as a claim of principal liability and accessorial liability, although the latter claim was abandoned.

The defence argued that Mr Bell, as a natural person who merely conveys misleading statements or omissions on behalf of his company is not exposed to principal liability. Were it otherwise, company spokespeople would be exposed to an intolerable risk of personal liability each time they spoke for the company, because principal liability arises regardless of the individual’s knowledge of whether or not the statement is misleading or deceptive.

Significantly, Mr Bell was never a director of the company, nor was he an officer of the company during the relevant period. The allegations against him were made in his capacity as an employee of Forge. And it was submitted on Mr Bell’s behalf that his actions could not be construed as his own conduct under Australian consumer law – an argument that was successfully extended to the two other defendants.

His Honour agreed that in making misleading statements on behalf of the company, Mr Bell could only be exposed to a claim for accessorial liability –but this required proof that Mr Bell knew his conduct was misleading or deceptive.

Conduct not misleading and deceptive

Hammerschlag J observed that the Plaintiffs were substantial and sophisticated corporations, whose business is assessing and taking calculated risk.  And, at the time of issuing the bonds the Plaintiffs were aware of Forge’s financial position including large and successive write downs, default in tax payments, lack of cash, creditor stretching and trading halts.

On that basis the court held it was unlikely that the additional matters not disclosed had influenced the Plaintiffs’ decision to issue the bonds, citing the Plaintiffs’ long history with Forge and “vital commercial interest” in the company’s survival.

Ultimately, the claim was dismissed on the basis that the Plaintiffs failed to show the conduct in question was misleading and deceptive, or that the conduct influenced their decision to issue the bonds, which in turn caused their loss.

Conclusion

This decision shows that an employee cannot be principally liable for statements made on behalf of their company. An employee can be liable as an accessory for statements made on behalf of a company if it can be shown they knew the statements were misleading, although there may be exceptions to this rule, for example, if the employee adopts the statements as their own, gives personal assurances or conveys their personal views.

The decision also serves as a reminder to practitioners about the requirement to ensure allegations of misleading and deceptive conduct are properly pleaded and the importance of the correct presentation of materials such as the Court Book and chronology. Hammerschlag, J: helpfully stated “Where plaintiffs, in a proceeding such as this, wish to make significant charges of misleading or deceptive conduct with potentially very significant consequences, it is incumbent on them to articulate their case with precision…”

Kennedys acted for Mr Bell in these proceedings.

Read other items in the Professions and Financial Lines Brief - September 2018