Challenges for lenders to prove insolvency

By Emma Donaghue and Kate Dart

The recent decision of the NSW Court of Appeal in Anchorage Capital Master Offshore Ltd v Sparkes highlights the challenges faced by lenders seeking to prove insolvency and establish liability for misrepresentation. We discuss the case and some key takeaways for lenders.

Key takeaways

  • Lenders should avoid using drawdown notices as a 'tick and flick’ exercise. It is important lenders carefully review and diligently document their reliance on representations made by borrowers.
  • Lenders should approach restructuring or review activities of a borrower with a degree of caution.
  • If there is cause for concern, lenders should undertake their own independent assessment prior to making further advances.


Arrium, a publicly listed company in Australia, operated in multiple countries. Arrium’s businesses included its mining consumables business, MolyCop.

Following negative impacts on Arrium’s business during 2015 due to falling iron ore prices, the board undertook a strategic review, including a sale process for the MolyCop business.

Arrium continued to utilise its finance facility during this process and issued numerous drawdown and rollover notices to its lenders. Each notice contained representations to the effect Arrium was solvent and there had been no change to Arrium’s financial position which constituted a material adverse event.

Final bids for MolyCop received in February 2016 were considered unacceptable by Arrium’s board. Shortly after, in accordance with recommendations from its advisors, the Board resolved to include a going concern note in Arrium’s half-year accounts. Arrium was subsequently placed into voluntary administration in April 2016 and went into liquidation in 2019.

Lender’s complaint

Various proceedings were commenced following the failure of Arrium, including two sets of proceedings brought by two groups of banks. The lenders alleged the drawdown and rollover notices contained false representations and, if not for the false representations, the lenders would not have advanced funds to Arrium. The lenders further asserted that had they not advanced these funds, Arrium would have been placed into administration sooner “when there would have been a better return to creditors”.


In dismissing the appeal, the NSW Court of Appeal said:

  • The failure to secure the desired price of MolyCop was not a material change in Arrium’s financial position.
  • Arrium was not shown to be insolvent at the time the drawdown notices were issued. The Court distinguished between “the proof of the relevant fact” and “the prediction of the prospect of an inability to pay future debt when it falls due”. Arrium was solvent on a balance sheet analysis and its long-term debts would not mature for another 16 months.
  • Arrium did not owe the lenders a duty of care in making the representations. The lenders “had minimum vulnerability” and were able to protect themselves and “make their own informed commercial judgements”.
  • The company officers did not engage in misleading or deceptive conduct. A reader of the drawdown notices would have understood that the company officers did not make the representations personally.

What does this mean for lenders?

Ensuring the right representations and warranties are provided at the appropriate times is extremely important but needs to be coupled with a more fulsome approach to loan management. This needs to include requirements for information relevant to the lender’s assessment of the borrower being provided in a timely manner, not only at the commencement of the loan but also during the loan term. Lenders also need to ensure they have thorough processes and procedures in place to continually assess the financial position of borrowers and not just adopt a ‘tick and flick’ approach.


Emma Donaghue

Emma has over 15 years’ experience advising clients in the funds management and financial services industries.

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