Australia: By Forge! The conduct of management in cash flow crisis not misleading.

This week's TGIF considers Swiss Re International v Simpson [2018] NSWSC 233, where the court found that three former executives of Forge Group had not engaged in misleading or deceptive conduct when trying to address a cash flow crisis.

What Happened?

In February 2014, Forge Group Limited collapsed. Up to that point, it was a publicly listed engineering, procurement and construction company operating across mining and other sectors

At the time of its collapse, one of Forge's largest projects was a subcontract with Samsung for the construction of an iron ore project in Roy Hill, Western Australia. The subcontract was crucial to Forge's business, as it was worth over $800 million.

Under that subcontract, Forge was required to put up security in the form of a number of large performance bonds totalling more than $100 million.

Forge looked to its existing insurers, Swiss Re and QBE, to increase its existing facilities with these insurers and to put up the bonds. Forge had existing bond facilities with both insurers – by late October 2013, Forge had a facility of $150 million with Swiss Re and $125 million with QBE.

An Acquisition Gone Bad

Forge's problems stemmed from an entity that Forge had acquired in January 2012. The entity held two power station construction projects, again in Western Australia.

By early November 2013, these projects had gone bad. It became apparent that Forge would need to book at least $60 million of losses on the projects.

The timing was not good. At the time that it was seeking an increase to its existing bond facilities, the crystallising losses from the projects were hitting Forge's cashflows.

Such was the significance of the losses, that Forge was placed into a trading halt and its shares were suspended from trading on the ASX.

Damning the Damned

From the moment the losses became apparent, management and the board took proactive steps to right the ship, including:

  • Exploring options for urgent equity raising, working capital loans, or a special situation debt raising, under close advice from bankers, lawyers and accountants;
  • Obtaining (and maintaining) the support of its bankers;
  • Preparing daily cashflows, and engaging an external investigating accountant to vet those daily cashflows; and
  • Meeting face-to-face with the insurers and brokers, and being forthright about the difficulties Forge was in and how they planned to meet those difficulties; and
  • From early in December 2013, engaging with the ATO to agree on a deferred payment plan.

In early January 2014, after much deliberation, Swiss Re and QBE issued the required performance bonds. That same day, Forge's bank, Swiss Re and QBE executed a side deed creating a banking club, which provided that:

  • the first $50 million recovered would go to the bank; and
  • the remainder would be distributed in agreed pro rata proportions.

A banking club of this kind was attractive to Swiss Re and QBE because it provided security for their bonds and it would place them in a position to influence ANZ's exercise of its banking covenants. The pro rata distribution to the club would also discourage any one member from sending Forge into formal insolvency. However, an ATO debt still loomed. By late January 2014, Forge had agreed to an 18 months instalment payment plan, subject to providing security that ranked behind the bank and insurers' club facility. After some consternation, the bank and insurers agreed to allow the security.

Ultimately, these actions were not enough to save Forge. In late January 2014, Forge needed additional cash flow coverage. It sought $30 million from its bank, but that would mean putting $30 million more into debts ranking with the banking club – something the ATO would not accept. It sought last ditch cash coverage of $12 million, but that was not forthcoming. Ultimately, on 11 February 2014, Forge was placed into voluntary administration and ultimately was voted into liquidation.

Meanwhile, Samsung called on the performance bonds and together, Swiss Re and QBE paid out nearly $100 million.

The Insurers' Failed Claim

In the wash up, the insurers brought proceedings against three former Forge executives – the CEO/MD, CFO and Executive General Manager of Finance. The insurers alleged that the three had engaged in misleading or deceptive conduct by, 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 (which did come) and that Forge had not been meeting its tax obligations.

The hard fought, fact-heavy trial lasted for 21 hearing days. Ultimately the insurers not only failed to show the conduct was misleading, but also that such conduct would have caused their loss.

Hammerschlag J held that the insurers had to show they would have taken a different course had the "proper" disclosures been made – that is, that they would not have issued the bonds had they been given the information. The non-disclosure had, at least, to be a contributing cause in their decision to issue the bonds.

However, his Honour held it "border[ed] on fanciful" to suggest that the minor matters not disclosed had made the difference. Hammerschlag J pointed to the litany of detailed information available and given to the insurers. In particular, at the time bonds were issued in January 2014, the insurers were aware of:

  • continually emerging bad news;
  • massive and successive write-downs;
  • default by Forge in payment of tax obligations;
  • Forge was cash strapped;
  • Forge was stretching its creditors;
  • Forge had been in a trading halt;
  • Forge's earlier healthy balance sheet of unsecured creditors no longer existed;
  • QBE had expressed reservations about the process before eventually approving the bonds; and
  • their own open scepticism as to the competence of Forge executives

Put shortly, Hammerschlag J held that the insurers could not complain when they had been provided all material information, but still went ahead with their eyes open to accept the commercial risk of issuing performance bonds on behalf of a company in deep trouble


For underperforming companies with strong fundamentals, an underlying viable business and a bright future, restructuring and work outs can preserve that company's value for greater collective benefit and avoid any insolvency process. If successful, a consensual restructuring or turnaround will likely provide far better outcomes for the company and its creditors than formal insolvency procedures.

Notwithstanding the implementation of the safe harbour protections for directors from insolvent trading, there are always legal risks for directors and management to consider when navigating a restructuring or turnaround process. And restructuring doesn't always succeed. One risk is that lenders or others who commit funds will allege in the wash up that they weren't given the full picture. This risk should not be ignored but rather should be tackled head on.

This decision demonstrates that keeping stakeholders fully informed and providing current and complete information to restructuring stakeholders is a key part of any restructuring or turnaround process. Management and directors should take steps to ensure that any decisions made by those stakeholders are made on a fully informed basis, including:

  • providing stakeholders with regular detailed financial information and cashflow, vetted by outside advisers;
  • communicating honestly in face-to-face meetings about why the company is in trouble, not just why it should be saved; and
  • facilitating direct communication between stakeholders, as their cooperation between themselves will often be as important as their cooperation with the company.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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