The latest chapter in the Forge Group[1] collapse was an application by a creditor for pre-action discovery[2] contending Forge’s lender may be liable to it (the creditor) for misleading and deceptive conduct and as a shadow director of the Forge Group. These contentions rested upon the lender’s appointment of investigative accountants, which, according to the creditor, meant that the lender was in a position to direct, control and influence the publication and correction of the Forge Group’s ASX announcements.
Relevant facts
Prior to its collapse, the Forge Group made three ASX announcements as follows (collectively, the Announcements):
First announcement – 28 November 2013
Second announcement - 14 January 2004
Third announcement - 29 January 2014
The lender’s “support” was, it appears, subject to the satisfaction of certain conditions including the injection of equity/investors by a given date.
Prior to, and at the time each of the Announcements was made, investigative accountants were appointed to the Forge Group by the Forge Group’s lender.
Some two weeks after the third announcement, administrators and receivers and managers were appointed to the Forge Group.
Had it not been for the Announcements, the creditor says it would not have continued to do business with the Group. It said that, albeit the Announcements identified the Group was experiencing financial difficulties, the statements noting the lender’s continued support led it to believe that the financial difficulties were short-term in that there was “no imminent threat [of] …liquidation.” The creditor said that had it known the lender’s support was conditional, it would not have continued trading with the Forge Group but having done so, it suffered loss and damage; having submitted a proof of debt claiming $686,375.50.
In the application before Master Sanderson, the creditor sought extensive pre-action discovery from the lender seeking documents which would help prove up its claim. The creditor said the lender was “intricately involved in the financial affairs” of the Forge Group whether by its appointment of investigative accountants or its monitoring of the Forge Group’s facilities by its lending services division.
Predominantly, the creditor’s arguments hinged upon the knowledge of the Forge Group’s financial circumstances attributable to it via the investigative accountants. It was said that the investigative accountants were in such a position that they either had:
no involvement at all in drafting the [Announcements] and when [the lender] became aware of the content did not take the view that it was appropriate to correct any misleading impression…[Or] it was possible the [Announcements] were actually drafted in conjunction with the [lender] and rendered the [lender] through its agents a ‘de facto’ or ‘shadow’ director…
Lavan Legal comment
On this occasion, the Court did not decide the merits of the substantive claims; it was only asked to consider whether there were sufficient bases upon which the creditor could obtain pre-action discovery. Whilst seemingly sympathetic to the creditor’s circumstances, the Court declined to order pre-action discovery.
Although the creditor said it would have broken-off its trading relationship with the Forge Group had it known of the Group’s precarious financial circumstances, the contract between the parties did not include a provision allowing the creditor to terminate the contract because of insolvency (or any of its iterations). Moreover, the affidavit relied on by the creditor did not state, unequivocally, that it would have terminated the contract even if it could have. With careful scrutiny of the evidence, the Court said that in these circumstances, the creditor’s suggestion that it “elected” to continue trading with the Forge Group was misconceived. This finding suggests that even if the Court is asked to consider the substantive claims, the creditor will need to seriously reconsider whether it can prove it relied upon the Announcements as a basis for its loss. That of course, does not deal with any allegations of shadow directorship which remain to be tested against this factual matrix.
[1] Comprising Forge Group Limited and/or its subsidiary Forge Group Construction Pty Ltd
[2] Kelbush Pty Ltd v Australian & New Zealand Banking Group Ltd [2015] WASC 117.