AKTIESELSKABET DANSK SKIBSFINANSIERING (body corporate) v. WHEELOCK MARDEN & CO LTD AND OTHERS

1988, No. MP2625
1989, No. A1670

IN THE SUPREME COURT OF HONG KONG

HIGH COURT

MISCELLANEOUS PROCEEDINGS

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BETWEEN

CONTENTS

Summary

Summary

Wheelock Maritime International Ltd. (WMI) was the principal shipping arm of a group of companies controlled by Wheelock Marden & Co. Ltd. (WM).  WM were general managers of WMI and conducted its business through the fifth defendant (Mr. Brothers) under the supervision of WM’s two managing directors, the third defendant (Mr. Lees) and the sixth defendant (Mr. Leung).  All three were directors of both companies.

In 1979, WMI embarked on a plan to modernise its fleet.  Through various one-ship-owning subsidiaries, it contracted to buy 21 new vessels, although some were disposed of before delivery.  7 vessels, all Panamax type, were ordered from the Burmeister & Wain yard in Denmark.  Loans for these 7 vessels were provided by th Danish Ship Credit Fund or its subsidiary, the plaintiff (ADS).  The financing arrangements were complex.  WMI borrowed US$ from commercial banks.  These funds were placed on deposit in Danish kroner with Danish banks at interest rates of 17-18%.  The interest rate payable on the loans, however, was only 8%, this cheap finance being available under a Danish scheme to aid Danish shipbuilding.  The Danish Central Bank would buy bonds issued by ADS at par and absorb the loss.  The interest differential enabled WMI to acquire the vessels for a sum significantly less than their contract price

The kroner deposits formed security for the commercial banks pending delivery of the vessels.  On delivery, there was to be a swap - the banks would take a first mortgage as their principal security, to be serviced out the vessels’ earnings; ADS would get the deposits as its security.  The deposits were so structured that they would pay off each instalment of ADS’ loans as it fell due.  WMI provided its guarantee for any shortfall that might occur on default by any of its ship-owning subsidiaries.

In 1982 the shipping market, which had until then been at record levels, dropped.  Panamax vessels, which had been earning US$14000 per day, were reduced to as little as $3-4000.  Values fell commensurately.  Available earnings were hardly sufficient to pay operating costs, let alone debt.  WMI’s directors realised its plight and began formulating plans to solve its problems.  Then, in November 1982, there was a meeting of senior directors of WM.  Following that meeting, WMI began trying to reduce its cash drain - principally by the sale of vessels, the cancellation of newbuildings, and the restructuring of existing debt.

It was an issue as to whether what took place at that meeting constituted some form of commitment by WM to support WMI.

By the beginning of 1983 WMI was commercially insolvent, being unable to pay its debts as they fell due, and reliant on third party support, support which could only realistically come from WM.  The principal issue in the case was whether the defendants honestly believed that that support would be forthcoming.

Mr Brothers was primarily responsible for implementing WMI’s plans.  In February 1983, Mr. Brothers approached ADS for help in relation to the 3 vessels still pending delivery.  After negotiation, ADS agreed to defer repayment of the first 6 instalmentsof the loan on the next vessel, Sealock.  The equivalent parts of the deposits were released to the commercial bank so that its loan was reduced to an amount commensurate with the then value of the vessel.  Without that reduction, the bank would not have agreed to the swap because of the drastic drop in charter hire.  The deferred instalments were to be paid in one balloon payment at the end of the 8 1/2 year period of the ADS loan.

Sealock was delivered in April 1983.  At the end of the year, agreement was reached in relation to the other 2 vessels.  There was to be a similar arrangement for the next, Annalock, which was delivered in March 1984.  The final vessel was sold back to the yard for $1 and resold to another buyer.

Meanwhile, WMI had some success in preserving its future.  A number of older vessels were sold.  Mr. Brothers negotiated a reduction in the price of 4 vessels being built in Spain that was commensurate with the current value.  These 4 vessels and another were then sold to Iran as part of a package deal in exchange for oil which was in turn sold to Shell.  A modest loss was incurred on the sale but the debt burden was much reduced.  What Mr. Brothers did not obtain, however, was a 3 year moratorium from WMI’s bankers which WMI’s financial advisers considered essential.  The banks required support from WM but, after much hesitation, in September 1983 WM provided only a US$4m. facility.  That was some way short of the $12m. thought to be necessary at that stage to obtain the cooperation of the banks.  Further, that support was secured on shares owned by WMI in a joint venture.

Mr. Brothers also failed to refinance before delivery of Annalock 2 older vessels which would have provided much-needed cash.  Finally, another joint venture in which WMI was involved, Pacnorse, also got into cash difficulties because of the shipping market.  At the beginning of 1984, it began to make calls on WMI in respect of a shareholder’s loan, calls for which WMI had not budgeted.

Throughout, WMI was living a hand-to-mouth existence, relying heavily on the $4m. facility which it had not really expected to use to any great extent.  Also throughout, the directors had been receiving legal and financial advice.  That advice was, among other things, that WMI could continue to trade as long as the directors remained confident that WMI would be able to pay its debts in the future.

In March 1985, WM was taken over by Wharf which refused any further support for WMI.  A firm of accountants formulated a restructuring plan which achieved a measure of acceptance among creditors.  2 creditors, however, one being ADS, would not agree to the plan.  On 29th July, ADS defaulted the 2 loans for Dkr225m. and 210m.  WMI was placed in voluntary liquidation on 2nd August 1985.  A small dividend was subsequently paid.  ADS was dissatisfied with the dividend and with the way in which it felt it had been treated by WMI and its directors.  With the consent of the liquidators, ADS commenced these proceedings in 1988 against WMI’s directors.  It claimed a total of Dkr436,702,059.35.

ADS had 2 principal claims.  First, it alleged that by the time of delivery of Sealock and at all material times thereafter WMI was doomed to failure and should have been put in liquidation.  By failing to do this,  the defendants as directors of WMI had carried on or had been parties to the carrying on of WMI’s business in fraud on its creditors or for other fraudulent purposes.  The directors were therefore liable for WMI’s debts under s.275 of the Companies Ordinance.  ADS claimed that WM was a de facto alternatively a shadow director of WMI.

Second, ADS alleged that it had entered into the revised loan arrangements as a result of fraudulent or negligent misrepresentations made by WM and Mr. Brothers.  The misrepresentations were in essence that ADS had been encouraged to believe that WM would stand behind WMI; that a cashflow for newbuildings and unsecured creditors prepared in March 1983, which projected a deficit by 1991 of some US$60m., was witheld; and that WMI’s true financial position was not revealed to ADS.

 The defendants denied they had carried on WMI’s business fraudulently.  They also asserted that, even if otherwise found liable, the court did not have power under s.275 to make an order against them in favour of ADS.  WM and Mr. Brothers denied making the misrepresentations alleged.  They claimed that, even if the misrepresentations were made, they had no effect on ADS which passed responsibility for a decision about the revised arrangements to the Danish Export Credit Council (EKR) which had countered-guaranteed the loans.

Finally, the defendants allegd that the loans as revised were illegal under European Community law, the law of the contract being English law, and unenforceable.  The thrust of this allegation was that the loans constituted both an export credit and state aid to the shipyard.  The revised terms took the loans outside of the terms permitted by the Community.  The defendants asserted that the new terms should have been notified to the European Commission for consideration and, in the case of the aid, for approval.  Because this was not done, the loans became illegal.

After a trial lasting 158 days, the court held:

1.  In a case involving allegations of fraud of such gravity, the standard of proof required is indistinguishable from that in criminal proceedings.

2.  ADS failed to establish to that standard that the defendants had no honest belief that WM would ultimately support WMI, notwithstanding the finding that at the meeting in November 1982 there was no commitment by WM or anyone to support WMI, only approval of the strategy for stopping the cash drain.  The claim for fraudulent trading, including the alternative claim that the defendants had fraudulent purposes other than defrauding creditors, was dismissed.

4.  If necessary, an order would have been made in favour of ADS under s.275 of the Companies Ordinance.

5.  On the facts, WM was a de facto director of WMI; alternatively, because the line is so fine, a shadow director.

6.  WM and Mr. Brothers dishonestly witheld the newbuildings cashflow and failed to provide ADS with a true picture of WMI’s financial position.  In this they were fraudulent.

7.  ADS made its own decisions, relying on the misrepresentations, to revise the terms of the loans.

8.  The proper loss was the shortfall between the deposits when realised and the outstanding loans, an amount made good by EKR.

9.  European Community law does not declare whole contracts illegal, only those parts which infringe.  It is then for the national court to determine whether or not what remains constitutes a whole agreement of the type contemplated by the parties.  In the present case, the illegal parts of the revised loan arrangements were the deferred balloon payments.  They could be excised, leaving enforceable agreements.

10. There was judgment for ADS against WM and Mr. Brothers for Dkr188,970,200. and interest at 13%.

(Actions consolidated pursuant to the Order of Mr. Justice Jones
dated the 28th June 1991.  Originating Summons in MP2625 of 1988
issued on the 29th December 1988 and Writ in 1989 No. A1670
issued on the 31st March 1989).

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J U D G M E N T

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(Note:  there is a glossary of abbreviations at Appendix 1)

1.    INTRODUCTION

1.1    OUTLINE OF THE CASE

1.1.1 In the late 1970’s Wheelock Marden and Co. Ltd., the 1st Defendant (WM), was (and still is) a well-known public company.  It had a wide area of activity, in particular, real property and shipping.  Its shipping activities it conducted primarily through Wheelock Maritime International Ltd (WMI) a subsidiary in which it had a controlling interest.

1.1.2 WMI was also a Hong Kong public company.  It traded through a number of wholly-owned one-ship owning companies which were registered in countries such as Liberia.  The vessels owned by these companies were on long bare-boat charters which were coming to an end.  The shipping market was buoyant.  A decision was made to modernise the fleet.  Between 1979 and 1981 WMI, through its subsidiaries, contracted to buy 22 new vessels, all bulk carriers.

1.1.3 The shipping market peaked in 1981 when charter hire for Panamax type bulk carriers, of which 12 were ordered, was in the region of US$14,000.00 per day.  Unfortunately, the usual laws of nature then asserted themselves.  The shipping tide which had risen to almost unprecedented heights receded to a commensurately low level, leaving WMI holed by a reef of considerable debt.  Because, as the tide of charter rates and vessel values dropped, WMI was left with expensive newbuildings, the hire rates for which when delivered would barely cover operating expenses, let alone payments of principal and interest on the loans taken to acquire the vessels.

1.1.4 Considerable effort was made to keep WMI afloat.  Eventually it sank, overburdened by the debt, in 1985.  A dividend of 16 cents was paid.

1.1.5 In support of its subsidiaries, WMI had given guarantees to various creditors who had provided funds for the purchase of the newbuildings.  Amongst these creditors was the Plaintiff (ADS) which provided funds for vessels purchased from Burmeister and Wain (BW) of Denmark.  Two vessels, hulls 910 Sealock, and 911 Annalock, were delivered to two WMI subsidiaries upon the security, inter alia, of guarantees given by WMI.

1.1.6 The Sealock and Annalock loans were defaulted on 29th July 1985 for Dkr225,726,063 and 210,557,401 respectively. WMI went into liquidation on 2nd August 1985.  ADS was unhappy with the dividend received and also with the way in which it had been treated by WMI and its directors.  With the consent of the joint liquidators, ADS now claims against the Defendants on the ground of fraudulent trading under s. 275 of the Companies Ordinance; and against WM and the 5th Defendant (Mr. Brothers) for misrepresentation.  In essence, the issue is whether or not the Defendants were dishonest.

1.1.7 Defendants 2-11, were duly appointed directors of WMI.  Only Defendants 2-6, however, remain.  Defendants 8, 9 and 11 have died since the inception of these proceedings and are no longer pursued.  The 7th Defendant is too sick to give any instructions to his solicitors and is also not pursued.  The proceedings were discontinued against the 10th Defendant (Mr. Yuen) after he had given evidence.  ADS no doubt recognised (as was my view) that, whatever his shortcomings as a director of a public company, Mr. Yuen was plainly not dishonest.  The claim against the 12th Defendant I dismissed on Day 40 after I refused an amendment to the statement of claim against him.  The 2nd Defendant (Mr. Marden) was too ill to participate in the trial but made a witness statement which is in evidence by way of hearsay notice.

1.1.8 The claim against WM, which was not only parent but also general manager of WMI, is made on the basis that it was a shadow or de facto director.

1.2    THE STRUCTURE OF THE JUDGMENT

1.2.1 ADS' principal claim is based on fraudulent trading, in that the Defendants carried on the business of WMI with intent to defraud creditors or for some other fraudulent purpose.  The gravamen of the complaint is that at the time the loans were drawn down WMI was insolvent, being unable to pay its debts as they fell due and dependent on WM for support which support the directors could not honestly have believed would be forthcoming.

1.2.2 The claim in misrepresentation, primarily that it was fraudulent, involves allegations in the defences of WM and Mr. Brothers that the misrepresentations were not made and, in any event, did not affect any decision making by ADS which had simply deferred to another body, the Danish Export Credit Council (EKR), which in turn had been influenced at least in part by political considerations.

1.2.3 Finally, the Defendants plead that the loans made by ADS to WMI were illegal under European Community law and unenforceable in this court.  They assert this as their first line of defence because, if successful, it will not be necessary to deal with any of the substantive claims.  I prefer, however, to deal with the substantive claims first.

1.2.4 It will be appropriate, therefore, first to introduce the principal parties and explain the financial arrangements.  Then, in order to understand why ADS confidently asserts fraudulent trading, I will have to deal in some detail with WMI’s activities between 1979 and 1985.  I shall then examine the position of each of the Defendants and dispose of fraudulent trading.

1.2.5 Because of the Defendants’ case on misrepresentation, I shall go on to consider seperately how ADS and EKR behaved at the relevant time.  I can then deal with the question of which was the decision maker and the individual allegations of misrepresentation.

1.2.6 Although European Community law was dealt with as a discrete issue, its application is more easily made and understood when the factual background has already been assimilated.  Apart from quantum, which I should anyway determine, I shall, as I have already indicated, deal with illegality last.

2.    THE PARTIES AND THEIR FINANCIAL ARRANGEMENTS

2.1    THE PLAINTIFF

2.1.1 ADS is a wholly owned subsidiary of Danmarks Skibskreditfond (DSKF).  Together I will refer to them as the Fund.

2.1.2 DSKF was established by law in Denmark in 1961 because shipbuilding was so expensive that the normal banking system could not put up the liquidity.  DSKF is a self owning independent foundation without shareholders.  It finances itself by way of bonds.  Guarantee capital is subscribed by various national interests including banks, insurance companies, ship owners, shipyards and the Danish Central Bank. 

2.1.3 DSKF runs on three levels.  First, there is a board of representatives.  It consists of up to 28 members from the subscribing institutions.  It meets very rarely.  No more need be said about it for the purpose of these proceedings.  Second, the board of directors which had, at the time, nine members, four from the bankers’ association and one each from the other interests.  It meets as necessary, usually 10 to 12 times per year.  Primarily, it makes decisions as to whether or not to grant loans.  Third, the administration, which processes applications for loans before submitting a proposal to the board for a decision.  Staff for the administration are provided by the Danish Housing Mortgage Bank pursuant to a commendably brief written agreement between it and DSKF.  The mortgage Bank pays the staff.  DSKF pays a contribution to the Mortgage Bank for this service.

2.1.4 The full time staff of the administration were headed by a manager or head of department.  The manager, together with his various assistants, would consider applications for loans, carry out any necessary investigation or negotiation, prepare all relevant documentation and finally formulate a paper containing a proposal for consideration by the board.  From 1969 until November 1980, the manager was Mr. Bent Mebus.  He was succeeded by Mr. Kristian Edelmann who held the position until 31 March 1984 and who was principally involved with WMI.  Unhappily Mr. Edelmann died in about 1990 so his evidence was confined to a draft witness statement introduced by way of hearsay notice.  Mr. Edelmann was succeeded by Mr. Stig Kaare Lyngsie who had had some exposure to WMI.

2.1.5 Between the administration and the board, however, stood a person described as a managing director but who is more akin to a general manager without any directorial responsibilities.  In Denmark, commercial institutions in practice do not allow administrative staff to sit on the board and board members may not work for the institution.  This tradition is in fact enshrined in law in relation to financial institutions.  The managing director of the Mortgage Bank performed the same role for DSKF.  At all material times Mr. Henning Axel Nielsen was the managing director.  He spent between 25% and 33% of his time on work for the Fund.  His principal role was to vet proposals which had been prepared by the administration.  He would discuss these with the manager and only allow them to go to the board for consideration once he was satisfied as to their merits.  This exercise he carried out by a consideration of the proposal file itself and by way of discussion with the manager.  Over time Mr. Nielsen became so familiar with the working of the board and in turn the managers became so familiar with Mr. Nielsen that very rarely were any significant alterations made to a draft proposal and very rarely was a proposal rejected by the board.

2.1.6 Mr. Nielsen would attend board meetings and present any paper.  He would be assisted in this by the manager.  They would answer questions and discuss any proposal during board meetings.  Mr. Nielsen therefore effectively controlled the flow of work for the board and was uniquely placed to speak as to what matters would concern and be of significance both to the board and to the administration.

2.1.7 The loans themselves were made by way of bonds issued to the owner.  Such bonds, however, were not attractive upon the Danish market.  Accordingly, the Central Bank which was, of course, a subscriber to the Fund undertook to buy the bonds at par, after which it discounted them on the commercial market and absorbed the loss.  The proceeds of sale of the bonds would be transferred to the shipyard for the purchase of the vessel.  All these activities necessarily had to fall within the rules of the Organisation for Economic Co-operation and Development (OECD) and of the European Community of which Denmark was a member.  The element of subsidy was within those rules.  Crucially, the loans had to be for periods not in excess of 8½ years.

2.1.8 Initially, the loans to WMI’s subsidiaries complied with those rules.  Later, payment of some instalments was deferred.  It was the manner in which that deferral was brought about which led to this litigation.

2.1.9 The Fund provided financing for both Danish and foreign owners.  In relation to foreign owners such as WMI, the Fund’s rules required that any lending should be subject to a guarantee being granted by EKR or, in exceptional cases, another ‘cast iron’ guarantee for the whole loan amount.  Accordingly, the Fund worked in close co-operation with EKR and would as far as necessary provide it with all information to enable it to evaluate any risk involved.  Accordingly, upon an event of default in relation to any loan, if the collateral or any other guarantees obtained by the Fund fell short of covering the amount outstanding on the loan, the Fund could fall back on EKR.

2.1.10 ADS itself was formed for English ship owners building ships in Denmark to enable them to benefit from the double taxation agreement between UK and Denmark.  ADS simply borrows money from DSKF in order to provide loans to ship owners who in turn repay ADS.  ADS’ board is elected by the board of DSKF.  Loans can only be made, however, with permission of the DSKF board.  ADS’ board is therefore essentially nominal and meets only once a year.

2.1.11 ADS was therefore nothing more than a device designed to channel funds to English ship owners.  It was operated by and was to all intents and purposes DSKF.  ADS made the two loans in question because initial agreements were varied at the request of WMI to enable UK subsidiaries to take the vessels.

2.2    DANISH EXPORT CREDIT COUNCIL - EKR

2.2.1 Evidence about EKR was given by Mr. Povl Gideon who was described as the deputy managing director of this institution.  He was the equivalent of Mr. Nielsen of the Fund.  Mr. Gideon was too ill to travel from Denmark to Hong Kong in order to give evidence.  He gave his evidence by live video link, a procedure which I understand had not before been used in Hong Kong.  Although the examination of Mr. Gideon proceeded rather more slowly than would normally be the case, the procedure did not inhibit an effective cross-examination and did not pose any real problems for me in watching and assessing Mr. Gideon.

2.2.2 Although in existence before 1960 as a committee of the Ministry of Trade (sometimes referred to in the documents as the Ministry of Commerce) now the Ministry of Industry, EKR was formalized in that year by statute as part of the Danish Trade Fund.  It was known as Eksportkreditradet until 1992 when it became A/S EKR Eksportkredit.  It is an export credit guarantee institution.

2.2.3 Under the statute, EKR was established to screen applications for export credit support.  It is generally self-funding out of premium income but any shortfall will be met by the Danish Treasury.  It consists of a council supported by a secretariat.  The Queen appoints a chairman of the council.  There are about 16 other members, appointed by the Minister, representing other Government ministries and also private interests, such as banking, agriculture and fishing.  The council is responsible for deciding whether or not to grant guarantees.  It is autonomous.  However, in the case of exceptional risks, a reference would be made to the Minister by whom a direction in writing will be given.  At the time of the events in issue, the same procedure was adopted for loans which the council was being asked to guarantee, the terms of which would exceed OECD rules.  That responsibility has since been taken over by EKR.

2.2.4 According to Mr. Gideon, if the Minister’s representative expresses a strong view at a council meeting, that view would carry considerable weight.  The council would not, however, be directed by the representative.  If the council disagreed with the representative’s view, it would refer the matter to the Minister for a written order.  EKR would be obliged to follow any written direction.

2.2.5 The council’s secretariat was a government agency which, like the administration of the Fund, dealt with applications for guarantees.  A proposal would then be made to the council by the secretariat’s managing director.  To all intents and purposes, therefore, the structure and procedure of EKR was identical to that of the Fund.  Mr. Gideon dealt with the WMI problems in consultation with the managing director.  He had close contact with Mr. Mebus, Mr. Edelmann and Mr. Lyngsie of the Fund.

2.3    THE WHEELOCK MARDEN GROUP (THE WM GROUP)

History

2.3.1 WM was founded and incorporated in Shanghai in 1932 by George Marden who remained with the company until his retirement in 1960.  Initially, the company was concerned in shipping and insurance but, over the years, developed a wide range of business.  In 1960, Mr. Marden took over from his father and remained as chairman until WM was taken-over by Wharf in 1985.  Mr. Marden’s particular interests remained in shipping and insurance in which he had had a thorough training both before and after World War II.  He had less interest in property.  Apparently, he felt it was not a wise investment after his experience in Shanghai.

2.3.2 In the 1960s, Mr. John Cheung, a property developer, came on the scene.  WM floated Mr. Cheung’s company, Realty Development Corporation (RDC) in Hong Kong.  A year or so later, Mr. Cheung sold his controlling interest in RDC in exchange for a block of WM shares.  RDC thus came within the Group.  Mr. Cheung became with Mr. Marden one of the 2 major shareholders.  He joined the Board of WM although he had left it by the time of these events.  Mr. Cheung’s interests of course lay in the property side of the Group.  He had very firm views about the business.  By hard work, he had built up a property empire for himself.  He had, in the mid 1960s, just developed two tall buildings on the waterfront.  Completion, however, coincided with the Cultural Revolution in China and a banking crisis in Hong Kong so that letting the buildings was causing serious problems.  Mr. Cheung’s bankers were putting pressure on him to put more money into his projects, pressure which Mr. Cheung resisted because he felt that, just as the banks were prepared to support him when prospects were good, they should bear with him over what was essentially a short-term problem. 

2.3.3 Mr. Cheung subsequently brought this attitude to bear in relation to WMI’s problems.  He took the attitude that the shipping market would recover in due course.  In the meantime, banks had at least some security through the various vessels and should continue to support WMI by not calling in their loans, but rather deferring repayment until the market improved.  He therefore opposed providing unlimited resources from the WM Group for WMI.  Given this attitude and given Mr. Cheung’s supporters on the WM Board during the crucial time, there seems to me to be no doubt that this was a factor which significantly contributed to WMI’s failure to solve its problems. 

2.3.4 There also appears to have been an underlying tension between Mr. Marden and Mr. Cheung.  Mr. Cheung was believed to be acquiring B shares in WM which would give him cheap voting rights.  Mr. Marden was suspicious of Mr. Cheung’s motives.

2.3.5 Meanwhile, in 1962, WM merged most of its shipping interests with Sir Y.K. Pao’s World-Wide Shipping Group (WWS, an abbreviation which I shall use to include World-Wide Shipping Agency) by way of a joint-venture between subsidiaries.  WWS managed most of the vessels.  This joint-venture was dissolved in about 1970.  WM’s vessels were then transferred into WMI which was the brain-child of the 3rd Defendant (Mr.Lees).  Mr. Lees was by then one of the managing directors of WM.  He proposed putting the WM Group’s shipping into a company called Metal Industries of China Limited which had been incorporated in 1937 and whose name was changed to WMI in December 1971.  In December 1972, a new joint-venture was entered with WWS through a WMI subsidiary, Glamorgan Carriers Incorporated (Glamorgan) and a WWS subsidiary, Liberian Aurora Transports Incorporated (Aurora).  The joint-venture was called Worldwide Wheelock Shipping Incorporated (WWW).  Most of the WWW vessels were on long bare-boat charter to Japanese companies so that, as far as WMI and its vessels were concerned, it was little more than an owner and financier which received appropriate charter-hire.

2.3.6 By the mid 1970s, it became apparent that the Japanese would not be engaging in these long-term charters.  If WMI was to continue in shipping, therefore, it would have to become operational in the sense of not only owning but also fixing and managing its vessels.  Its fleet would also have to be modernized to compete in world markets.  A modernization was programmed in consultation with Mr. Marden and Mr. Cheung - a programme which they endorsed and which was followed.

2.3.7 In order to deal with chartering and management matters, in the late 1970s subsidiaries called Wheelock Marine Services Ltd. (WMS) and Wheelock Marine Chartering Ltd. (WMC) were set up.

2.3.8 Apart from WMI, WM also conducted some shipping activity through another subsidiary, Allied, and its subsidiary, Beauforte.

Management Structure

2.3.9 From about 1972, a management committee used to discuss the Group’s affairs.  The committee included Mr. Marden, the 6^th Defendant (Mr. Leung), Mr. Cheung and Mr. Lees.  There were two divisions of the committee:  an operations division and a finance and administration division, the latter headed by Mr. Leung.  Within the operations division, there were several sub-committees including one for real estate headed by Mr. Cheung, and others for shipping and for investments, both of which were headed by Mr. Lees.

2.3.10 In 1974, a three-tier structure was set up to carry out the executive and administrative functions of WM Group.  The tiers were:

(a) The policy committee

2.3.11 This consisted of Mr. Marden, Mr. Cheung and Peter Griffiths (Mr. Griffiths) who was apparently legal adviser both to WM and to Mr. Cheung.  The duties of this committee were “to lay down all policies as delegated and approved by the Board of WM”.  The committee considered the business affairs of the Group in areas such as future development and proposals for the sale or purchase of major assets.  Meetings of this committee ceased, at least on a formal basis, when Peter Scales (Mr. Scales), the senior managing director, left the Group in 1976.  Thereafter, according to Mr. Lees, Mr. Cheung, Mr. Marden and Mr. Griffiths met informally as and when required.

(b) The senior managing director and two managing directors

2.3.12 These three officers were Mr. Scales - the senior managing director, Mr. Leung and Mr. Lees.  Their duties were “to  carry out the policies laid down by the policy committee from time to time and to supervise the general administration of WM and its subsidiaries and affiliates”.  After Mr. Scales left in 1976, Mr. Leung and Mr. Lees continued as managing directors.  They no longer held formal meetings but met and discussed the Group’s affairs informally. 

2.3.13 The informality of these two tiers is easily understandable.  The Group operated as a small head office on one floor which housed all the senior executives who were able to meet, talk and exchange information every day.  Board meetings of the Group companies took place in the WM Board room, often occurring one after the other and consisting of the same core of directors.

(c)  The committee of senior management

2.3.14 This committee included Stewart Cameron - the chief financial officer (Mr. Cameron), Duncan Graham - the Group company secretary (Mr. Graham), David Walker and the 5th Defendant (Mr. Brothers), who were appointed executive managers.  Later, Ray Tipper (Mr. Tipper) was appointed to the committee.

2.3.15 The duties of the committee were  “to carry out all administrative functions delegated to them from time to time either individually or as a committee by the managing directors and to report as and when required to the managing directors or any of them”.  Apparently, after the departure of Mr. Scales in 1976, this committee combined with the managing directors and met jointly.

(d)  Later structure

2.3.16 In April 1980, the executive structure of the Group was changed again, although remaining in three tiers which were:

(1) The Board and any executive directors and/or committees;

(2) The managing directors whose duties were “to  carry out the policies laid down by the WM Board from time to time and to supervise the general administration of WM and its subsidiaries and affiliates”;

(3) The committee of senior management which included Mr. Cameron, Mr. Tipper, Mr. Graham and Mr. Brothers.  Its duties were “to  carry out all administrative functions delegated to them from time to time, either individually or as a committee by the managing directors and to report as and when required to the managing directors or any of them”.

2.3.17 According to Mr. Lees, this committee continued to function until it was reconstituted in July 1983.  It kept minutes.  These minutes are, however, unavailable - a fact for which Mr. Lees was unable to account.  It is a pity that the minutes between 1980 and 1983 are missing because, after its reconstitution, the senior management committee discussed the question of support for WMI.  It is not unreasonable to assume that this committee in its earlier composition also discussed this topic and such discussion may have shed light on the matter.

2.3.18 The management committee was reconstituted at a Board meeting of WM held on 15th July 1983.  The relevant minutes of that meeting read:

“MANAGEMENT COMMITTEE:     It was resolved that pursuant to Article 86 of the Company’s Articles of Association a Management Committee be and is hereby appointed comprising Messrs. W. J. Mr. Lees, H. W. Leung, R. J. F. Brothers, Patrick Poon, W. H. Hsu and M. M. T. Ying with full powers to manage the day to day affairs of the Company and more particularly to consider and make recommendations to the Board of Directors in respect of any and all of the following matters within or relating to the Group:-

(i) Material investments or commitments of any Company within the Group.

(ii) Movement and change of material assets and liabilities of any of the Companies within the Group.

(iii) Appointment and dismissal of Senior Executives within the Group and the terms thereof.

(iv) The adoption of new or the revision of existing management systems within the Group.

(v) Future policies to be adopted by Companies within the Group.

(vi) The appointment, replacement or addition of Directors to the Boards of Companies within the Group.

The Committee be and is hereby delegated power to obtain full information as to the activities of all Companies within the Group, and all Managing Directors and other Senior Executives within the Group shall supply information and make regular reports on their respective businesses as may be required by the Committee.

Mr. W. J. Mr. Lees be and is hereby appointed Chairman of the Committee and in his absence Mr. H. W. Leung shall act as Chairman.  The Chairman shall not have a casting vote.  Any Committee Member shall be entitled to nominate another person to be his alternate and to any such nomination and appointment the provisions of Article 88 of the Company’s Articles of Association shall apply.  Resolutions of the Committee shall only be passed on the vote of a majority of Messrs. Mr. Lees, Leung and Brothers (or their respective alternates) together with a majority of Messrs. Patrick Poon, W. H. Hsu and M. M. T. Ying (or their respective alternates).

In relation to all matters hereby delegated to the Committee, the Board shall not take any action unless the recommendation of the Committee shall have first been obtained or the Committee fails to make a recommendation because of a deadlocked vote.  The Committee shall meet not less than once each week.”

2.3.19 This committee was designed to ensure closer administrative control over the whole Group.  It also provided a balance of power between the two major shareholders: Mr. Marden, whose interests lay in shipping, and Mr. Cheung, whose interests lay in property and who had different views on long-term policy.  Mr. Lees, Mr. Leung and Mr. Brothers represented Mr. Marden while Mr. Poon, Mr. Hsu and Mr. Ying represented Mr. Cheung.  Although this committee could, if the necessary consensus was reached, only make a recommendation, Mr. Lees agreed that such a recommendation carried a mandatory force.  He said that no recommendation was ever over-ridden and he would not have expected it to be.  He said the recommendation would be acted upon by the Board of WM and its subsidiaries because directors who were not involved in the management committee would take the view that any recommendation had been considered carefully by the respective directors and therefore they were entitled to rely and act on it.  Mr. Lees was prepared to accept that the committee’s recommendations were, in effect, rubber-stamped.

2.3.20 Finally, by resolution of the WMI directors dated 28th February 1983, a shipping committee was set up.  (see para. 3.5.40).  This committee, in conjunction with WMI’s general managers and financial advisers, was to monitor appropriate measures to be taken to relieve WMI’s situation.  The committee consisted of Mr. Lees, Mr. Leung, Mr. Brothers and Mr. Tipper.  Apart from Mr. Tipper, who was Mr. Lees’ personal assistant, the other three members of the committee were directors also of WM.  Later, Mr. Tipper left the committee and Mr. Graham and Colin Campbell (Mr. Campbell) joined the committee.  Mr. Campbell was an executive of WM and a highly qualified chartered accountant.  He had been an internal auditor but, because of the difficulties which WMI were facing, he was seconded full-time to assist Mr. Brothers with preparing cash flows and other accounting matters.

(e)  General managers

2.3.21 WM were general managers of WMI and indeed of many other subsidiaries.  In the case of WMI, this function was discharged effectively through Mr. Lees, Mr. Leung and Mr. Brothers.

Directors - 1983 to March 1985

(a)  WM

2.3.22 Throughout, Mr. Marden, Mr. Lees, Mr. Brothers and Mr. Leung together with the 4th Defendant (Mr. Lee) and 7th Defendant (Mr. Poon) were directors of WM.  Also directors throughout this period were Mr. W.H. Hsu, a supporter of Mr. Cheung; and Mr. J. Ortiz-Patino and Mr. T. Takahara, supporters of Mr. Marden.  Mr. Griffiths was a director until July 1983 when he retired and was replaced by Mr. Michael Ying (who was the 11th Defendant).  Mr. Ying was a supporter of Mr. Cheung as were Irene Cheung, S.K. Lo and Petrus Tang who were also appointed in July 1983 when the management committee was reconstituted.

2.3.23 Mr. Norman Mar Fan was appointed director in October 1984.  His appointment is irrelevant to this action.

2.3.24 Until July 1983, therefore, the WM board was split 7-3 in favour of Mr. Marden; after July, 7-6 in his favour.  Crucially, however, the management committee was evenly divided and effectively dictated policy.

(b)  WMI

2.3.25 Again, Mr. Marden, Mr. Lees, Mr. Lee, Mr. Brothers, Mr. Leung and Mr. Poon were directors throughout, as also were the 8th and 9th Defendants (Mr. Hussey and Mr. Lloyd).  Mr. Yuen was director from 5th February 1983 until 31st December 1984.  The 12th Defendant (Mr. Anthony Marden) became an alternate director for Mr. Marden on 27th September 1984.

2.3.26 The 6 WM directors on WMI’s board constituted a majority at all times.  They could not, however, vote on matters affecting WMI at WM board meetings.  The split on the WM board was then in favour of Mr. Cheung.

2.4    SUPPORT

2.4.1 There is, in my view, no doubt that WM had a policy in relation to support of its subsidiaries.  WM expected its subsidiaries to be profitable in their operations and to overcome temporary financial difficulties on their own.  If, however, a subsidiary could not, after taking all reasonable measures, overcome any difficulties, WM would produce the necessary support provided it thought the subsidiary would probably return to profitability.  Mr. Lees expressed this as being prudent business practice to protect an investment in subsidiaries.

2.4.2 There are examples of such support.  Between 1964 and 1976, WM advanced HK$16 million to Southern Cross Investments Limited through which it held various companies in Australia.  In Hong Kong, between 1972 and 1976, WM injected some HK$12.5 million into and loaned at least $82 million to subsidiaries involved in computer and computer systems.  WMI itself received a capital injection of $40 mllion in 1974 and was provided in 1976 with at least one letter of comfort to enable it to refinance certain ships.

2.4.3 The comparatively generous way in which advances, guarantees or letters of comfort had been given prompted concern on the part of Mr. Cheung.  As a result, in 1976, a finance committee was set up to consider the provision of advances and guarantees to subsidiaries.  Thereafter, there developed a policy against providing guarantees although whether it was a strict policy or one that could be departed from in an appropriate case is a matter of dispute.

2.4.4 It is an article of faith with the remaining Defendants that WM would in the end come to the aid of WMI and bail it out of its difficulties.  Whether or not that faith was justified is the real issue to be decided in this case.  In order to decide that issue, it is unfortunately necessary to go, in some detail, into the events that took place between 1979 and 1985.

2.5    FINANCIAL ARRANGEMENTS

(a)  The money machine

2.5.1 The bond financing scheme was designed as a means by which assistance could be given to the Danish shipbuilding industry.  At the heart of the scheme (for foreign buyers) was what was effectively an interest rate subsidy provided by way of an arrangement whereby the buyer was able to obtain long term funding at well below the open market interest rates prevailing at the time.  This was done as follows:-

(i) DSKF agreed to make available to the buyer a fixed interest loan denominated in Danish Kroner (DKr) for 80% of the cost of the vessel.  The loan was to be repayable over 8½ years and would bear interest at the fixed rate of 8%.

(ii) The loan would be made available by DSKF issuing negotiable bearer bonds to the buyer, in this case WMI or its subsidiary.  The buyer was therefore indebted to DSKF for the nominal value of the bonds.

(iii) Danish commercial banks were prepared to acquire the DSKF bonds from the buyer at par (for a nominal commission of 0.15%) because the Central Bank of Denmark, in turn, undertook to likewise acquire the bonds at par from the commercial banks.  Thus, the DSKF bonds were effectively underwritten by the Central Bank, who could either resell the bonds in the market or hold them to maturity and receive eventual repayment on redemption of the bonds.  In practice the negotiation of the bonds with the Danish commercial banks was handled by DSKF or ADS and the cash advanced to the shipyard.

(iv) At about the same time, the buyer would obtain a US$ loan from a (non Danish) commercial bank.  The US$ proceeds were converted into Danish kroner and placed on deposit with a Danish commercial bank.  The deposit was structured in such a manner that would enable the deposit maturities to match (and extinguish) the loan repayments due to DSKF. 

(v) The interest paid by the bank on the deposit was at a rate considerably above the rate payable by the buyer to DSKF.  Because of the interest rate differential the deposit was for a lesser sum than the loan due by the buyer to DSKF (e.g. Sealock liabilities of DKr228 million were to be extinguished by a deposit of DKr129 million).

2.5.2 Thus, the buyer received interest on a deposit at commercial rates (around 17%) and paid interest on the loan at 8%.  The ability of DSKF to provide loans at an interest cost of 8% was due to the Central Bank of Denmark effectively underwriting the bonds issued by DSKF by undertaking to purchase these bonds from the commercial banks at par, which would have been at well above their market value.  The deposit rate obtained by the buyer was fixed by reference to the bonds issued by the Danish Government, which therefore effectively provided a subsidy to the extent of the interest differential (i.e. it bought bonds on which it received 8% and issued bonds on which it paid 17%).

(b)  Procedure

2.5.3 To take advantage of the money machine, the following procedure was adopted:

(i) At about the time WMI through its subsidiaries signed building contracts with BW, DSKF agreed to make a fixed rate interest subsidised loan to WMI to meet the delivery instalment (80% of the vessel’s cost at 8% per annum repayable over 8½ years).

(ii) WMI would raise a US$ loan, convert the proceeds to Danish Kroner and place the monies on deposit at a fixed rate substantially higher than that payable on the loan from DSKF (the Sealock loan was deposited at 17.8% per annum).  The deposit would be arranged in such a way that it matured in tranches which exactly matched, in timing and amount, the DSKF loan repayments and, additionally, would be sufficient to meet certain of the pre delivery instalments.

(iii) The US$ loan, which was at commercial rates, would (initially) be secured on the Danish Kroner deposits, and would be repaid in instalments (commencing after delivery of the vessel) from operating revenues.

(iv) On delivery, it was intended that the DSKF loan would be drawn down, the US$ lender would swap its security over the deposits for a first mortgage over the completed vessel and DSKF would take an assignment of the deposits and a second charge on the vessel.  However, this proposed swap was always subject to the vessel’s earnings condition in the agreement with the US$ lender being satisfied.

(v) DSKF would also receive a guarantee from BW as surety for the entire loan, and a counter guarantee from EKR for the yard’s guarantee.

(vi) Because the rate of interest payable on the DSKF loan was substantially below that earned on the deposit, the amount of the deposit was less than the amount of the loan, the shortfall being made good over the period of the loan by the excess interest being earned.  Therefore, if the borrower defaulted and DSKF chose to liquidate the deposits rather than allow them to run to maturity, they would not be sufficient to cover the loan.  DSKF normally asked for this potential security shortfall to be covered by a bank guarantee.  In the event, WMI’s guarantee was accepted.

(c)  The loans

2.5.4 The building contracts for 4 BW hulls 909-912, Rangelock, Sealock, Annalock and unnamed, were signed on 24th February 1981.  Sealock was to be purchased by Mayport with delivery on 15th March 1983; Annalock by Cape Vincent with delivery on 1^st February 1984.  The price was to be paid in 4 instalments, the 4th instalment of 80% being payable on delivery.

(e)  Sealock

2.5.5 The price was Dkr 240,500,000 (approx. US$ 41 million) of which Dkr 192,400,000 was payable on delivery.  In March 1981 DSKF offered a loan of that amount, payable over 8½ years at 8%.  Following WMI’s request that it provide the necessary shortfall guarantee, a formal offer was made on 27^th April and accepted.  On 5th May, Mayport borrowed US$20 million from MMB and placed Dkr 129,214,000 on deposit with Privatbanken at 17.8% under arrangements that enabled it to pay off the 2nd and 3rd instalments of the price, totalling 15%, and the DSKF loan.

2.5.6 The effect was that the deposit extinguished a liability of Dkr 228 million, WMI having paid the first instalment of Dkr 12 million.  The total cost to WMI, including interest capitalised on the US$20 million loan, was approximately US$26 million.  MMB had security of inter alia the deposit and a WMI guarantee.  Its loan was to be repaid by 17 semi-annual instalments commencing 6 months after delivery.  On delivery, MMB would swap the deposit for a first ship mortgage.

2.5.7 In November 1982, the price was increased by Dkr 27 million to cover the cost of additional fittings.  MMB increased its loan to enable WMI to acquire a further Dkr deposit against a further loan from DSKF.  WMI was also trying to arrange a sale and lease-back of the vessel as a means of reducing debt in a market which had by then dropped.  Such an arrangement would have enabled the new owner to benefit from UK capital tax allowances.  The scheme fell through and WMI was forced to ask DSKF for help because it could no longer meet the charter cover required by MMB.

2.5.8 After difficult negotiations, MMB agreed a 3-year moratorium on its loan upon its loan being reduced to US$15.9 million.  The reduction was achieved by DSKF agreeing to release 6 principal payments to MMB from the Dkr deposit.  DSKF also agreed to defer payment of those instalments to the end of the 8½ year period of its loan in November 1991 with interest at 13%.  These 6 instalments were no longer secured by the deposit.  So WMI’s guarantee now covered this amount and any other shortfall.

2.5.9 Agreements were signed and delivery took place on 8^th April 1983.  Adleship, a UK subsidiary of WMI, was substituted for Mayport in case it might be possible to follow up the sale and lease-back scheme in the future; and ADS rather than DSKF provided the loan.

(f)  Annalock

2.5.10 The arrangements followed much the same course as those for Sealock.  The price was Dkr 249,500,000.  Cape Vincent borrowed US$19 million from LBI to fund the 2nd and 3rd instalments and DSKF’s loan of Dkr 199,600,000, and placed Dkr 112 million on deposit at 18.47% with Handelsbank in October 1981.

2.5.11 As with Sealock, WMI needed help from DSKF.  After negotiation, agreement was reached.  The price was increased to Dkr 256m to include extras, and DSKF’s loan to Dkr 204,800,000.  LBI’s loan was reduced to US$17.5m.  To do this, Cape Vincent borrowed US$3.7m from Nordic Asia to fund principal and interest to be paid to LBI.  In turn, DSKF released 4 principal instalments from the deposit as security for Nordic.  These instalments were again to be paid in a balloon at the end of the 8½ years with interest at 13%.  DSKF was secured by WMI’s guarantee and a 2nd mortgage over WMI’s 51% shareholding in WWW.

2.5.12 Mastship, another UK subsidiary of WMI, was substituted for Cape Vincent, again with possible UK tax advantages in mind.  ADS advanced the loan.

3.    WMI BETWEEN 1979 AND 1985

3.1    1979

3.1.1 With the exception of what was said to and provided or not provided to ADS, and this I deal with in another section, there is largely no dispute about what happened at WMI during this period.  This is hardly surprising because, the events being more than a decade ago, witnesses had little actual recollection of what occurred and relied heavily upon the documents of which there is an abundance.  Disputes largely turn upon the construction or accuracy of certain of those documents, the absence of certain documents and above all, the Defendants’ knowledge and beliefs.

3.1.2 On 21st March 1979, there was a management committee meeting at which modernization of WMI’s fleet was considered.  It was decided to proceed in two ways.  First, to sell old vessels as they came off long-term hire to Japanese charterers if market conditions were right, and second, to acquire new tonnage or newbuildings.  Modern second-hand vessel prices were high while charter rates were not attractive.  New building prices, however, while also high, had been held down by competition and government subsidies.  These prices were anticipated to go higher because it was a time of high inflation.  The result was, by 1981, the acquisition through various subsidiaries of WMI of 21 new building contracts and of one vessel, Bannerlock, built in 1977.  Of the newbuildings, two contracts were transferred to Allied, three vessels were sold to Pacnorse (a joint venture, details of which are in paras. 3.3.13-15) and one to WWS.  The remaining 15 were or should have been delivered to WMI.  On 31st December 1982, WMI’s capital commitments as a percentage of net assets was 285%.

3.1.3 An enormous sum was therefore committed to modernization.  According to Mr. Lees, the policy committee always understood that further capital would have to be injected over the years, probably from rights issues underwritten by WM.  Mr. Lees accepted that if WM changed its mind about underwriting, WMI would be unable to survive.

3.1.4 Following that meeting in March 1979, Mr. Brothers set out to look for suitable purchases.  For this, he relied heavily upon Mr. Lloyd of WMC which dealt with chartering and the commercial side of operations.  Mr. Lloyd assisted in locating the right newbuildings and, once approval had been obtained, he would handle negotiations with the shipyard up to the stage where it was appropriate to provide a letter of intent or provisional contract.

3.1.5 Negotiations were begun with BW for the purchase of two economic 60,000 dwt Panamax vessels and options for four more at US$19 million each.  Having obtained approval from the managing directors, Mr. Brothers signed heads of agreement on 14th June 1979.

3.1.6 On 20th July 1979, Mr. Brothers produced the general managers’ report.  He reported that the market had been active, leading to an increase in second-hand prices and resulting in an increase in new building prices which were unlikely to fall off.  Meanwhile, pending an increase in charter-hire rates, vessels would be fixed on short- or medium-term charters so that it would be possible to take advantage of future increased rates.  This report was discussed at a WMI Board meeting on 23rd July when Mr. Brothers said that purchases would be in anticipation of an increase in future rates.

3.1.7 Meanwhile, negotiations with BW were proceeding slowly.  On 27th July, the WMI directors, by circular, authorized the general managers to negotiate the purchase of one new Panamax at a price of US$19.5 million from the Koyo yard in Japan, and one second-hand 27,000-tonne Lakes carrier built in 1977 for US$11.5 million, or alternatives of similar specifications.

3.1.8 On 11th August, WMI by Mr. Brothers made an offer to BW to buy four Panamax for delivery between December 1980 and September 1981 at prices of US$19.5 to US$20.5 million with 90% financing from DSKF over ten years.  These terms exceeded terms permitted under OECD and European Community rules and required special treatment, while BW had its own problems at the time, so that on 26th September WMI withdrew from negotiations although talks continued.

3.1.9 On 15th August, WMI, by circular, authorized the acquisition from WWS of another Japanese new building, a bulk carrier of 27,000 tonnes.

3.1.10 On 1st October, at a WM Board meeting, Mr. Brothers reported the purchase of Bannerlock, for US$11.5 million and anticipated the acquisition of two Japanese vessels.

3.1.11 The management committee on 17th October noted that the WMI Group was now committed to two new Panamax from Kasado yard for delivery in 1981.  These became the Inverlock and Fenlock.  Another vessel  was to be built at the Koyo yard and two in Osaka.  No difficulty was anticipated in arranging up to 85% financing over 8 to 10 years.  The required payments were well within WMI’s cash resources and the purchases covered WMI against the inevitable further price increases.

3.1.12 Following that meeting, Mr Brothers prepared a circular dated 19th October for WMI directors.  The circular commenced:

“An extensive investigation has been carried out to advise on how best the Company’s declared policy of modernisation might be achieved.  This has been undertaken over a period which has seen a considerable increase in general optimism over the future of the dry-cargo market with a related tendency for yard prices to harden, to a significant extent.  This increase in prices has been accelerated by the recognition that inflation is affecting Japan to a greater extent than was hitherto thought coupled by increased ordering in Japan by European owners (who are unable to build in Europe at the same price) where the number of available berths for 1980 and 1981 is now practically exhausted.  All in all, it has become apparent that unless the Group is able to crystalize its forward position at this time, it will be faced with the necessity of paying substantially higher prices in the future.”

3.1.13 The circular went on to seek ratification for the purchase of the newbuildings from the Kasado, Koyo and Osaka yards.  Ratification was provided the same day.  Details of these newbuildings were included in the general managers’ report dated 29th November which also reported a profit of HK$38 million for the first six months of 1979 and a satisfactory working of the fleet.  The report was approved by the WMI Board on 30th November.

3.1.14 In November, agreement was reached with BW for the purchase of two Panamax vessels for US$32.9 million each.  By using the Danish money machine, the effective cost was reduced to US$22.2 million with 90% finance from DSKF.  WMI gave performance guarantees for its subsidiaries taking these two vessels, Thorlock and Hydrolock.  It is to be noted that WMI reserved the right to examine BW’s financial arrangements in the light of difficulties BW was then experiencing and took steps to do so through its London solicitors, Norton Rose.  The enquiries proved satisfactory so that the agreement proceeded.  In the event, these two vessels were transferred to and taken by Allied.

3.1.15 It is also to be noted that, although all preliminary negotiations for these vessels involved finance from DSKF, the formal offer of finance came from ADS and it was to ADS that Mr. Brothers replied as director of WMI confirming a pledge to ADS of the subsidiaries’ shares as part of the arrangements.

3.2    1980

3.2.1 On 24th June 1980, Mr. Lees produced the general manager’s report for 79/80.  He said it was fortunate that WMI had placed orders for new tonnage when it did because prices had risen sharply in the previous six months reflecting strong market conditions which had encouraged owners.  The report, however, contained perhaps the first hint of trouble when it continued:

“As stated above, the shipping market has been extremely strong during the year and at the present time rates are continuing to firm.  Most charterers are however adopting a cautious attitude and it is difficult to obtain period business for over 12 months without accepting a substantial discount.  Our current policy has been to fix the older tonnage for two years thereby locking in existing very profitable trading conditions and we are seeking three to five year time-charter employment for newbuildings.  However, it is not expected that we will be able to find employment for any of these vessels until nearer delivery.  The tanker market remains very weak although its effect on the Group is only in respect of the “Straits Dahlia” which is of a size least affected.  Owners of 7 and 8 year VLCC tonnage with turbine engines are now increasingly selling these units for demolition as the chance of them ever operating profitably becomes less and less likely.”

3.2.2 The report concluded its review of shipping activities on a congratulatory note:

“The Group continues to follow its stated policy of replacing its older units with modern tonnage either newbuildings or good modern second-hand vessels.  It is unlikely however that we will be as active in the coming 12 months as we have been in the past as we do not think that the current rise can continue and there may well be a downturn in rates and prices early next year.  This will provide us with an opportunity for further acquisition.  The Group has been most successful so far in securing tonnage at advantageous prices and if we take advantage of the current strength of the market to fix as long as possible, we will be assured of a continued growth in our earnings base.  All financing arrangements in respect of these acquisitions have been concluded on terms which possibly represent as good as have ever been negotiated by any Hong Kong shipping company.  Our ability in this respect no doubt underlines the overall financial strength of the Group.”

3.2.3 The report was approved by the WMI Board on 27th June 1980.

3.2.4 On 16th July, the management committee noted that one of the Osaka hulls was to be sold to WWS while WMI would buy another Koyo at just below market price for delivery in 1982.  The arrangements were approved by the WMI directors by circular on 18th July.

3.2.5 On 16th October, Allied entered a memorandum of agreement to buy a further Panamax from BW, hull No. 886 Marilock.  Again, the offer of finance came from ADS.  The agreement was transferred to a WMI subsidiary, Newark Shipping, on 15 November.  On the same day, Mr. Brothers signed on behalf of WMI a performance guarantee of the contract by Newark.  At a Board meeting held on 5th December, WMI ratified or approved:

(1)   The acquisition of Newark’s share capital;

(2)   The execution on 15th November by Newark of the building contract; and

(3)   The loan offer and additional costs for modifications to the hull.

3.2.6 In this case, the WMI Board was ratifying, about three weeks after the events, steps which had been taken by Mr. Brothers and Mr. Lees.

3.2.7 On 5th December, in his general managers’ report, Mr. Brothers again noted the continued rise in new building prices and the consequent difficulty of finding suitable investment in new tonnage.

3.2.8 Discussions with BW had been continuing.  On 1st December, BW quoted for four more Panamax for delivery in 1983.  On 8th December, WMI was asked to confirm agreement to purchase three of these vessels.  Such confirmation was signed by Mr. Brothers.  This was superseded by a memorandum of agreement dated 13th December following a meeting at the BW yard.  Mr. Brothers signed to indicate that WMI would take all four vessels for delivery in 1983 and 1984, but with an option to cancel two of them.  On the BW side, the agreement was subject to Board approval.

3.3    1981

3.3.1 On 9th January 1981, the WMI Board approved loan arrangements for Marilock.  These involved a joint loan by MMB/LBI with which Danish Kroner deposits were purchased.  WMI was required to pledge the subsidiary’s shares to the banks and to guarantee the subsidiary’s obligations.

3.3.2 On 13th January 1981, the WMI directors were asked by circular to ratify the purchase of a 27,000-tonne bulk carrier from the Hudong yard in China for delivery in May 1983.  This hull became Manila Faith.  Ratification was given the same day.

3.3.3 On 17th February, Mr. Brothers on WM letterhead sought approval from BW for the transfer of the two Allied hulls to its subsidiary, Beauforte.  BW referred to the Fund.  Approval was given in March.

3.3.4 On 20th February, Mr. Brothers wrote to BW to say that WMI proposed signing contracts for the 4 BW hulls on 24th February.  On that day, four WMI subsidiaries signed agreements as follows:

(1) Alberton Shipping Corporation agreed to purchase hull 909, Rangelock, for delivery on 15th March 1983;

(2) Mayport Shipping Corporation agreed to purchase hull 910, Sealock, for delivery on 1st May 1983;

(3) Cape Vincent Shipping Corporation agreed to purchase hull 911, Annalock, for delivery on 1st February 1984;

(4) Cape Blanco Shipping Corporation agreed to purchase hull 912 for delivery on 1st April 1984 (the agreement for this vessel was originally with a subsidiary of Rex Shipping SA, a company owned by Mr. Marden, but was later acquired by the WMI subsidiary).

3.3.5 Also on 24th February, Mr. Brothers for WMI gave performance guarantees for the subsidiaries.  On the following day, he began to seek loans to underpin the 80% financing that would be made available by the Fund.  He plainly had some misgivings about these purchases because on 26th February he telexed Philip Brothers, charterers, about fixtures and said:

“Basic premise for us is that we will not accept any charter rate below dollar 7.50 which although still at a loss - making level is probably the present market and is bearable for a limited period.  The other factor to be taken into account that with DKR/USD rate over 6.60, each ship would probably command a premium of nearly DLR3 million more than level we contracted at three months ago.”

3.3.6 Mr. Brothers went on to propose charters at a combination of rates ranging from US$7.50 to $10.50.

3.3.7 Mr. Brothers produced the next general managers’ report on 24th March.  Apart from the BW hulls, he advised that two more subsidiaries had each contracted to buy a 27,000-tonne bulk carrier from the Dalian yard in China.  (These became simply ‘the Dalians’ - a source of trouble).  He said the bulk carrier market was extremely buoyant and the two Kasado hulls, Inverlock and Fenlock, had been fixed on good three-year time-charters.  He went on:

“Negotiations are presently also taking place with a view to securing a charter for the Koyo Hull No.1013 which is being delivered in November this year.  This is the only newbuilding being delivered this year not yet fixed.  With regard to existing tonnage on bareboat charter and in addition to the two vessels referred to above, the “ASIA FIDELITY” will be redelivered in June 1981 and “ASIA FLAMINGO” will be redelivered at the end of the year.

3.  Much of the current strength in the Panamax market can undoubtedly be attributed to the present severe congestion on the East Coast of the United States which in itself is the result of inefficiencies exacerbated by increased demand for U.S. coal as a result of strikes in Australia and Poland.  The general consensus of opinion is that this particular market, i.e. Panamax type, will weaken as the congestion difficulties are overcome and more newbuilding tonnage is delivered on to the market.  There is an undoubted truth to this although in general there does seem to exist an underlying very firm tone in the bulk market which makes it seem unlikely there will be any drastic fall back in market rates.

4.  On the newbuilding side, the sharp rise in prices experienced in the second half of 1980 has levelled off due to buyer resistance although it seems unlikely that there will be any falling back to the price levels of twelve months ago.  If chartering market rates indeed fall back during this year, there may be opportunities to acquire re-sale contracts fixed early in 1980 (but well below present yard contract prices) and this is an area to be closely watched in the future.  With inflation running at current levels and an increasing unwillingness on the part of Governments to subsidise their shipbuilding industries, it is unlikely that we shall see lower newbuilding prices in the future.”

3.3.8 The report was considered by the WMI Board on 26th March when the purchase of the Dalians was ratified, as were the four letters giving performance guarantees on the four BW hulls and another letter by which Mr. Brothers had accepted a loan offer from MMB on Sealock.

3.3.9 On 13th April, Mr. Marden was in Beijing and signed contracts for the Dalians.  The press reported this as a sale “by China Shipping Industrial Limited to the Wheelock Marden Group of Hong Kong”.

3.3.10 On 10th June, a Mr. Saul Kestenbaum of Metal Transport Corporation of New York, who were charterers and a subsidiary of Philip Brothers, wrote to Mr. Brothers.  Of the market, he said:  “It appears weakness continues on all fronts,” but Panamax were looking up.  He had acquired short time-charters of US$6-8,000.00.  He indicated his idea of rates was very different from that of Mr. Brothers and that the first BW newbuildings, Danelock and Hydrolock, were struggling in the market although proving their worth on a voyage basis.

3.3.11 Mr. Brothers replied somewhat non-committedly on 30th June.  He said of Panamax:

“Charterers are short-sighted in not full (sic) recognizing the potential for this type of vessel.  The advantage will come eventually ... ”

3.3.12 ADS asserts that the letter from Mr. Kestenbaum shows that from May the market was beginning to decline.  I am not sure that it does.  But in any event, Mr. Brothers accepted that the market began to decline by June.

3.3.13 On 2nd July, more evidence of Mr. Brothers’ indefatigable efforts emerged.  In a memo to WMI directors, he said:

“With the decreasing interest by the major Japanese time-charterers for non-Japanese tonnage, it is important that Hong Kong shipowners expand their International contacts while at the same time dealing more directly with the direct sources of the cargoes.  As far as our own Group is concerned, it is particularly important that we seek to establish overseas relationships as early as possible as we do not have the back-up experience and contacts which other local owners have been able to develop over a longer period.  We are inevitably at a disadvantage as compared with local owners when it comes to dealing with Japan but it is also clear that European and American Operators find themselves more comfortable dealing with a British Group.  Wheelock Marden wishes to limit the size of its organisation which could not be the case if we were to effectively participate in the Contract-of-Affreightment market.  It is therefore most important to link ourselves with an experienced and well respected Pool Operator specialising in this field.  In this respect we have been in negotiation for some time with A/S Kristian Jebsens Rederi, a well respected Norwegian Shipowner who operates a successful Pool business with vessels of a type similar to those owned by our Group.

The Jebsens Pool undertakes Contracts-of-Affreightment for bulk cargoes in sizes up to 40,000 tons and presently employs over 30 vessels of which 22 are owned by Jebsens.  The balance are time chartered-in to meet specific contract requirements.

Jebsens own a Bermuda based company named Pacific Norse Shipping Ltd.  Originally 50% of this company was owned by Dillingham of Hawaii.  Dillingham however were forced to sell their share due to other pressures and Jebsen are now offering us the chance of purchasing 50% of this company.  We stated that we could only contemplate such an investment if all the assets owned by PacNorse other than their eight modern 35,000 bulk-carriers were sold out of the company.  We also stated that we would like to sell into PacNorse our three Koyo Panamax vessels.  The capital assets of this company would thus be eleven ships comprising of our three Koyos and eight modern bulk-carriers.  All the vessels would be Liberian flag and would be employed in the Jebsen Bulkcarrier Pool.  Valuation of the company would be on a net asset basis with the vessels valued on current day market less 7½%.  A further vital component of this whole arrangement is access to the Pool operation which will bring with it certain benefits including the existing Pool Contracts and Equipment.  This comes without charge.

Negotiations on this whole matter has been extended over the past six months and have now been concluded subject only to WMI Board approval.”

3.3.14 Mr. Brothers noted the sale of three Koyo vessels to Pacnorse would generate a profit of about $12 million.  The cost of acquiring a half-share would be US$47 million of which $12.5 million would be by way of a shareholders’ loan.  Mr. Brothers did not think the acquisition would strain WMI’s cash resources.  He concluded:

“I believe that this presents us with an absolutely unique opportunity which will not be repeated.  We could not hope to establish the breadth of contracts and experience that has been accumulated over the years within the Jebsen bulkcarrier pool.  We are now joining a “going concern” without paying a premium and our future operation will undoubted benefit, both from the contracts that the association will bring us and the extra employment that we may expect for our wholly-owned vessels as Jebsens are themselves substantial charterers.  The association will be especially valuable in times of poor market conditions when time-charters are hard to find.  It will bring the Wheelock Maritime Group into international recognition which in itself can only lead to “spin-offs” that will be beneficial.  It would be difficult to conceive of a better investment at this moment for the WMI Group nor one which is more harmonious with its present activities and Board approval is highly recommended.”

3.3.15 There was a meeting of the WMI Board on 2nd July at which the proposal was considered.  Inter alia, Mr. Brothers “advised that the legal documents were being drafted by (Norton Rose) of London and would be signed in New York next week”.  The minutes then record:

“Mr. R.J.F. Brothers advised that he had had a meeting with Sir Yue Kong Pao that morning at which time he had outlined details of the arrangement.  Sir Yue Kong had stated that he could not recommend the joint venture.  This was primarily due to the fact that WMI would be purchasing older vessels at a price which he considered to be high.  He also referred to the fact that a Pool operation was more subject to market movements than medium term timecharters.  If WMI was worried about future employment, World-Wide would always assist in securing timecharters.  If however WMI did proceed, he suggested consideration be given to selling the Pacnorse vessels and replacing them with Newbuildings.

Mr. Brothers stated that he had promised to relay Sir Yue Kong’s advice to the Meeting.  He said that he fully accepted Sir Yue Kong’s suggestion on the replacement of the existing Pacnorse vessels and would put forward this proposal at his next meeting with Mr. Atle Jebsen.  However he still strongly considered that the merits of the joint venture outweighed any disadvantages and recommended continuation.

After further consideration, it was resolved that the participation of Pacnorse joint venture and the sale of the owning companies in respect of the three Koyo newbuildings to Pacnorse be and is hereby approved and Mr. R.J.F Brothers be authorized to sign the Agreement on behalf of the Company.”

3.3.16 The meeting was then presented with details of four further purchases by subsidiaries.  These bulk carriers were all to be built in Spain, being Sevilla hulls 260 and 261, each of 35,000 tonnes, and Sestao hulls 260 and 261, each of 44,000 tonnes.  All these purchases were ratified.

3.3.17 The Sevilla hulls cost US$26 million and were to be financed by promissory notes given by the subsidiaries acquiring the vessels.  A guarantee was to be provided by RBS for hull 260 and by HSBC for 261.  Additionally, WMI was to guarantee its subsidiaries’ obligations and pledge the subsidiaries’ shares in favour of the banks.  The Board was asked to and did ratify the guarantees and pledges already signed by Mr. Lees.

3.3.18 The Sestaos were to be guaranteed by Chemical Bank.  Again, WMI had to guarantee its two subsidiaries.  The Board authorized Mr. Lees to execute the necessary documents.

3.3.19 On 15th August, Mr. Brothers approached BNP for funding for Pacnorse to take delivery of the first Koyo hull in November.  He enclosed, inter alia, a WMI cash flow up to December 1982.  It showed 13 newbuildings (not including Manila Faith at Hudong) of which six were for delivery in 1983.  It showed a surplus cash situation at the end of 1982 of US$543,000.00 or roughly break even.  It did not take account of newbuildings coming on stream nor the possible sale of vessels.

3.3.20 The general managers’ report for the six months to June 1981 was discussed at a WMI Board meeting on 3rd September.  Apart from referring to the acquisition of Pacnorse, the two BW hulls, 911 and 912, and the four Spanish newbuildings, the report said:

“The freight market has taken a sharp down-turn during the recent summer months.  The main cause of this seems to be a limited demand for tonnage which has been exacerbated by newbuildings coming on stream.  There are varying views as to the likely duration that this situation will continue.  Our own view is that we do not expect rates to sharpen appreciatively nor do we expect rates to return, for some time, to the levels reached six months’ ago.  Nevertheless, there is a very firm underlying tone with plenty of enquiry and we do not anticipate rates becoming much softer than they are today.”

3.3.21 The meeting approved the report and noted that the net profit for the six months was HK$43 million.  The estimated profit for the year was $92 million or $123 million after extraordinary profit.

3.3.22 On 24th November, the WMI directors ratified the acquisition of shares in Giant which owned the Hudong new building, Manila Faith, agreement having been signed by Mr. Lees.

3.4    1982

3.4.1 At the beginning of 1982, on 6th January, Mr. Brothers sent a telex to Donald Freeland of Norton Rose about the BW hulls in which he said:

“Our view on the Panamax market is that it will remain at its current very low levels during most of this year.  A gradual recovery will start towards the end of this year resulting in a very strong market at the end of 1983 and during 1984 and 1985.”

3.4.2 The Koyo hull, 1015, was named Limelock on 17th February.  In a speech at the naming ceremony, Mr. Leung said:

“It is true that she comes to us at a time when the market is particularly difficult.  We do not let that dismay us because those of us who are experience in shipping know that, in the long run, what counts is not the vagaries of freight rates - the IMPORTANT thing is to build the right size ship to the right design to enable us to take advantage of upward market movements when they come.

We believe that the “LIMELOCK” with her special gear, her convenient size and her ultra-economical and efficient engines is the right ship for today’s bulk trades and I am sure that our confidence today will be amply justified in the future.”

3.4.3 Mr. Brothers produced on 22nd March 1982 the general managers’ report for the six months to December 1981.  This showed a net profit for the year of HK$85 million.  The report contained, however, a warning that the market had weakened from the 1980 conditions so as to be up to 50% lower.  After commenting on a number of factors, the report continued:

“Nevertheless, although these are positive indicators, no market commentator is forecasting an early return to 1980 conditions and although we can certainly see an increase in rates from their existing record low levels, there will not be a return to viable trading levels until the end of the recession and there will be the opportunities for purchases of further tonnage at distressed prices.”

3.4.4 The report concluded:

“In the circumstances of the present very adverse market conditions and with the earnings of the Group now more subject to fluctuations in charter rates we cannot expect that earnings will be maintained at their current levels and there will be a reduced profit in the current year from the record levels announced for 1981.”

3.4.5 The report was discussed at a Board meeting on 23rd March when the Board approved the arrangements that had been made for Marilock, which was to be sold upon delivery to Cable & Wireless in England and leased back to a subsidiary, WMI(UK) Limited.  Cable & Wireless expected to realise capital allowances permitted by English tax law (see para. 4.5).  The existing loan arrangements with ADS were to remain in place.  WMI was required to give, and gave: a guarantee of its subsidiaries’ obligations under the lease; a guarantee to ADS of the loan; a pledge in favour of ADS of WMI’s shareholding in Newark which had taken the loan; and a guarantee to HSS which was to guarantee a letter of credit in favour of Cable & Wireless on which Cable & Wireless could call if WMI(UK) was in breach of its obligations.  The benefit to WMI was a cheap interest rate of 8.43% on the lease which represented Cable & Wireless sharing its capital allowance benefits.  Such an arrangement, therefore, was a source of cheap finance. 

3.4.6 The WM Board considered WMI at a meeting on 25th May at which during Mr. Brothers’ report:

“It was noted that since the middle of last year there had been a downturn in rates and the current outlook was not encouraging.  He went on to say that the new tonnage being delivered would not fall off until mid 1983 and no improvement was anticipated until then.”

3.4.7 Also:

“The Chairman noted that as a result of the adverse shipping market and a decline in Pacnorse’s earnings Wheelock Maritime International Limited would suffer a loss in earnings which might affect its ability to maintain its current rate of dividend distribution.”

3.4.8 There was also noted a decision to trade vessels on the spot market.

3.4.9 At about the same time, it appears that there was a proposal, probably formulated by Mr. Brothers, that Allied should sell its ships and newbuildings to WMI in exchange for shares.  Unencumbered assets worth US$12.5 million could then be sold to reduce WMI’s debt and improve its liquidity.  This proposal seems to have been prompted by a note (now unavailable) from Mr.  Cameron to Mr. Brothers which suggested WMI would have a cash requirement due to adverse market conditions.  In a memo dated 28th June, Mr. Brothers wrote to Mr. Cameron commenting on the proposal and concluded:

“I feel that present market conditions (i.e. a low shipping market combined with a low market price for WMI shares) create ideal conditions for us to proceed and it is important for WMI to maintain its liquidity.”

3.4.10 A few days earlier, on 21st June, Mr. Yuen, who was in charge of WMS, had written to Mr. Brothers saying:

“With the very bleak and low shipping market in front of us which may last until 1984/85, I try to see how to save some money by taking advantage of the poor shipping market together with the very new Hong Kong Government depreciation tax allowance of 55% for machinery/fixed assets initial installation and 15% for the first year.”

3.4.11 Mr. Yuen’s scheme in essence was for some of the newbuildings to be taken by otherwise profitable Hong Kong companies which could offset those profits against the vessels because “no  Hong Kong profit tax will be payable because of the foreseeable poor shipping market”.  Then, said Mr. Yuen:  “After 2/3 years, when the shipping market recovers, the ships will be sold to WMI’s subsidiaries or any ship holding company within the Group”.

3.4.12 There is disagreement between Mr. Brothers and Mr. Yuen about when the market was likely to recover, Mr. Brothers anticipating an upward trend in 1984.  It is clear, however, that by this time the depressed market was causing WMI’s executives concern.  A cash flow problem was in the offing.  Nothing it may be noted came of either of these proposals.

3.4.13 Mr. Brothers produced the next general managers’ report on 16th September.  He reported a net profit of HK$12 million for the first six months compared with a profit of HK$41 million for the same period in 1981.  He said:

“The fall in profits can almost entirely be attributed to the very adverse trading conditions that we are presently experiencing in the international shipping market.  The benefit of a strong U.S. dollar has been negated by the high level of interest prevailing during the period under review.  Borrowings of the Group have risen from HK$777,447,495 to HK$1,551,813,879 with Fixed Assets growing from HK$840,499,433 to HK$1,259,132,815.  Turning to the principal activities of the Group:-

Shipping

The first six months have been characterised by a steady slide in rates to distress levels in all sectors, and particularly in respect of the larger bulk carriers.  Present rates are barely sufficient to cover operating costs and in some instances have been below operating costs.  Inevitably the earnings of the Group have been badly affected.  In the case of the “Manila Spirit” ex “Jaylock” a trading loss of just under $6 million has been incurred.”

3.4.14 Mr. Brothers also reported on the sale and lease-back of Marilock, saying a cash surplus of US$5 million had been realized.  It was hoped to make similar arrangements for Rangelock, Sealock and the two Sestao hulls due for delivery in 1983.  On Pacnorse, Mr. Brothers reported that the adverse market conditions had had an effect and that a provision of HK$8 million had been made in the Group’s accounts for their share of Pacnorse’s losses.  The loss, however, had been inflated by the sale by Pacnorse to Carrian of eight of its vessels and their charter-back at relatively high rates.  Mr. Brothers concluded:

“The continuation of a stagnant world economy and the increase of newbuilding tonnage on to the market makes it unlikely that any significant improvement in shipping market conditions can be realised during the rest of the year.  Rates are however at such a level that many Owners are preferring to lay up their vessels rather than continue trading.  There have been significant deferments of newbuilding tonnage.  The current fall in interest rates will be of assistance and may also help to revive the economy.  The immediate outlook however is very bleak and although every effort is being made to ensure that earnings are maximised there is very little that one can do to ‘buck’ the trend and a policy of continuing to trade on the short term market to await a turn-around in trading conditions will be followed.”

3.4.15 The report was considered by the WMI Board on 16th September at a gloomy meeting.  The minutes record:

“Mr. R.J.F. Brothers advised that the state of the shipping market was self-evident from the results for the six months ended 30th June 1982 and the market which was worse than it had been in 1975 was showing little sign of improvement at the present time.  This had, he said, had an effect on shipowners all over the world and had led to a number of vessels being laid up, especially in Europe.  He went on to say that an increase in the level of the world’s economic activity could lead to an improvement and that one interesting point was that the Russians were currently coming into the market through third parties.”

3.4.16 In relation to Pacnorse, the minutes said:

“It was noted that Pacnorse’s profits were being affected by the bareboat charter rate of US$8,000 per day guaranteed to Carrian as part of the package for the sale of 8 “B” Class vessels to them.  Pacnorse was currently earning between US$4,000 - US$6,000 on each of those vessels.

Mr. W.J. Lees noted that by the end of this year Pacnorse would have run out of the ability to absorb the loss on those charter hires because by that time they would have used up the profits brought forward and questioned what Pacnorse’s policy would be.  He further questioned how this would affect the Company.  In reply Mr. Brothers advised that he required notice of the question and would investigate the implications.”

3.4.17 Later, discussion turned to the shipping market:

“In answer to a question from the Chairman, Mr. P.C. Lee advised that it was not possible to predict the prospects for the world-wide shipping market and that it would take some time for the market to improve.

It was noted that the current depressed market was affecting charterers and that some owners had been approached by charterers for a reduction in rates.  It was further noted that a number of leading Japanese shipping companies had decided not to pay interim dividends because of their poor results.

Mr. C.B.M. Lloyd advised that owners were currently experiencing the worst market he could remember and with the number of newbuildings coming on to the market reaching its peak over the next 9 months, there was little chance of any improvement for at least 12 months.  He went on to say that almost all ships all over the world were currently slow steaming.  He anticipated that the market would go lower in the short term and stated that there was little likelihood of a solid improvement before 1984.”

3.4.18 Upon considering the accounts for six months, it is recorded:

“Mr. W.J. Lees queried whether with the present downturn in the shipping market the Group had sufficient cash to meet payments on newbuildings and in reply Mr. Cameron reported that a cash flow had just been completed which looked bad.  He added however that he wished to discuss the cash flow with Mr. Brothers.

Mr. Lees queried how it was proposed the Group cover the deficiency in its cash flow and Mr. Brothers advised that sale and lease back arrangements similar to that concluded in respect of m.v. “Marilock” could improve the cash flow.  Mr. Lees agreed that whilst this could possibly improve the cash flow during the current year, he required to know what steps would be taken to meet the substantial cash requirements for the Group’s newbuilding programme in 1983.  Mr. Brothers advised that negotiations were currently being held with Banque Nationale de Paris for a loan to cover the Group’s cash flow requirements, with final discussions now centering on the terms of the loan and security to be provided.

In conclusion, Mr. Lees reiterated his concern that the sizeable amounts of cash necessitated by the Company’s newbuilding programme and requested that steps be taken to ensure that the Group had sufficient cash at its disposal to satisfy all its requirements.”

3.4.19 It should be noted that Mr. Brothers, in evidence, said that his answers to Mr. Lees’ two questions have probably been transposed.

3.4.20 The cash flow referred to had been prepared by the accounts department under Mr. Cameron on about 9th September.  It covered the period September 1982 to December 1984 and showed a cash shortfall rising from US$11 million in December 1982 to $95 million in December 1983 and to $143 million in December 1984.  It was, however, undoubtedly a rather crude piece of work, no doubt exacerbated by the fact that Mr. Brothers was in hospital at the time and unable to correct some of its defects.  It was, however, enough to send shivers down the collective WMI spine.  A summary of this cashflow, with major assumptions and an illustration in graph form, is at App. 2/1.

3.4.21 Mr. Cameron subsequently sent this document to the two managing directors on 21st September under cover of a memorandum in which he said:

“Obvious observations that can be made on the Projections are:-

1)  The need to reduce the total shortfalls by:

a)  New lines of borrowings on debt free vessels, and as advised by RJFB he has asked BNP for a US$10.0 million line.

b)  Disposal of either some vessels in the present fleet or newbuildings

c)  The generation of cash from sale and lease back proposals

d)  Obtaining new money market lines of revolving credit

2)  As the current levels of income are being severely affected by the available charter rates and thus the ability to service debt requirements (principal repayments and interest), operation costs and dividends etc. is limited by this reduced cash inflow.

3)   To meet its commitments it has recently been necessary for WMI to borrow US$ from WM & S after we had checked that WM & S could spare such funds for the temporary needs of WMI.  As the position will not improve in the immediate future and unless the BNP facility is agreed soon, a crisis will be reached.  I will not approve any borrowings from WM & Co. without the prior consent of HWL/WJL.  Meanwhile, I have requested American Express and Sun Hung Kai Bank each to provide lines of US$2.0m.  American Express should revert late next week and I am following up with SHKB.”

3.4.22 The cash flow was also accompanied by a note which Mr. Lloyd had prepared on 12th September in relation to earnings projections.  He said:

“Extremely depressed conditions prevail in all trades and all sizes.  Rates on major trades (and consequently time-charter) are as low as I can ever remember them.  Tonnage supply is plentiful and cargoes scarce.  The Pacific is probably the worst area and the Atlantic the best.

The severity of the current shipping slump has taken most observers by surprise.  It has followed, predictably, the world-wide recession which is lasting longer and proving more severe, and damaging, than had been forecast.  A recovery of sorts is now expected, and the world is watching and waiting for the United States to lead the way.  Shipping markets traditionally start to recover 6/12 months after an up-swing in world trade.  Therefore, in my opinion, we have face a full year, though hopefully not two years, of depressed conditions.

Whilst shipping must be principally influenced by world trade conditions, other factors can also play an important part - factors such as port congestion and slow-steaming - international tensions and their effect upon stock piling policies - lay up levels affecting tonnage supply - a vigorous scrap market (which in turn will reflect a good demand for steel).  These factors are all on the positive side but the spectre of newbuildings flowing from the shipyards of the world every day through 1983 makes progress an up-hill fight, though some relief may result from cancellations, postponements and substitutions.  Also the deepening of the Suez Canal has come at the worst possible time and now permits transits by fully laden vessels of 150,000 tons as compared with about 75000, which hits the major bulk trades of iron ore and bauxite, as well as oil.

Traditionally, medium to long-term time charter (say 3/7 years) provides a much lower, but more secure, earnings base as compared with the single voyage or time charter trip markets, and for decades operators have made money by chartering in long and chartering out short term.  A measure of the unrealistic levels of todays rates is seen by the willingness of charterers to pay, in some cases, double todays rates for longer periods - this is particularly so in the Panamax trades.

For a B & W panamax, say the Marilock, a single voyage today may yield around US$2,000 per day or less (as compared with US$20,000 at the top of the market some two years ago) - current period time charter rates for the B & W are likely to be as follows

6 months	1 year	3 years*
$3000 daily	$4000	$6000

*probably 2 years with charterers option 1 more year.

6 months	1 year	3 years
$3000 daily	$3300	$4500

Thus earnings projections must take into account the options open to owners of either running the market in the hope of improving conditions in the voyage market, or cutting losses and fixing for medium to long term.

Of course for longer term, charterers want the best ships thus new vessels are relatively easy to place on time charters.  Older vessels are less attractive.....”

3.4.23 The Pacnorse Board met the following day.  It had before it a lengthy paper containing a detailed analysis of the shipping market and of Pacnorse problems.  The paper provided various forecasts.  It also contained some glimmers of light.  It referred to a revenue forecast based on a bulk shipping model designed by the Norwegian School of Economics and Business Administration and stated:

“Using consensus values of OECD demand, and Clarkson values of vessel supply growth the model predicts a mild rate recovery in 1983 followed by a strong recovery in the 1984/1985 time frame.  Optimistic recovery GNP growth figures, more consistent with prior cyclic recovery patterns, yield on even a more rapid rate recovery of even greater intensity.  On the other hand if growth remains sluggish, indicating a more permanent economic structural change, rate levels will rise slowly throughout the planning period but never achieve levels adequate to service vessel debts.”

3.4.24 The paper also referred to a forecast by Clarksons which was “cautiously optimistic for a market revival in 1983 and beyond” and stated:

“Despite present difficulties a moderate upturn is anticipated by Clarkson for 1983, resulting in some expansion of seaborne bulk trade movements.  Some recent developments may have understandably reinforced scepticism as to the timing and extent of economic recovery, but Clarkson feels that there is now some justification for taking a reasonably optimistic view.  In their view, the main factor causing and prolonging the present recession has been the need to reduce inflation rates worldwide to an acceptable level.  Corrective measures in many countries, particularly in the United States, are now achieving success, although it remains to be seen whether this improvement can be sustained.  Nevertheless, signs are emerging that there has been at least a partial lowering of the inflationary expectations which had become deeply entrenched during the mid to late 1970s.  If this trend can be maintained, then prospects for economic growth are very good.”

3.4.25 Also on 16th September, WMI issued an interim statement.  In reviewing prospects, the chairman, Mr. Marden said:

“I indicated in my Statement accompanying the 1981 Accounts that the earnings of the Group would become more subject to fluctuations in charter rates and accordingly a lower level of profits was anticipated for the current year.  Nevertheless it was expected the same rate of distribution could be maintained.  Charter rates in the bulk cargo section of the shipping market have since worsened to unprecedented depressed levels.

The severity of the current shipping slump has taken most observers by surprise.  It has followed the world-wide recession which is lasting longer and proving deeper and more damaging than had been forecast.  There is, as yet, no significant improvement in the world economic climate and the newbuilding tonnage now coming onto an already depressed market makes it extremely doubtful that there will be an early recovery in the shipping market.

In the light of circumstances prevailing at the present time it is unlikely the Group will achieve a profit for the current financial year.  The present shipping slump is expected to last well into 1983 with some improvement emerging in the latter half.  Whilst the Group’s shipping earnings are being seriously affected by current market conditions and heavy interest charges associated with newbuildings the programme of fleet modernisation will place the Group in a more competitive position.”

3.4.26 On 5th October, there was instituted on a regular weekly basis what had to date been informal meetings among senior WMI directors to discuss its problems.  They were called shipping meetings.  At the first meeting, it was agreed to produce a revised cash flow.  Mr. Lees asked if the fleet’s cash position was healthy.  Mr. Brothers said he was negotiating a US$10 million loan from BNP using three ships as security.

3.4.27 At this time, Mr. Brothers did two things to try and ease WMI’s position.  First, he approached the Spanish yards proposing that 90%, instead of 5%, of the contract price be payable on delivery of which 85% would be a buyer credit to be made available by a loan from a Spanish bank whose interest rates were lower than prevailing commercial rates.  At the same time, the buying subsidiaries would obtain a loan from Chemical Bank which would be used to purchase U.S. dollar bonds to match payments due to the Spanish bank which would thus be secured.  Chemical Bank would take a first mortgage on the ships.

3.4.28 Second, he went to the Dalian yard to try and obtain a deferment of 24 months on the delivery of the two hulls.  The minutes of the meeting note that Mr. Brothers made the approach with extreme reluctance and that:

“He could not over-emphasize how bad was the state of the Shipping Market.  These terrible conditions would lead to the bankruptcies of many shipowners and as Bankers had seen the values of their security decimated, they had stopped shipping loans.  Some owners had put their berths on the market at low prices thereby effecting the Yard’s own marketing efforts.  He realistically could not see the market improve until the end of 1984 and rather than face the embarrassment of coming back to the Yard a second time, the only meaningful deferment would be 24 months.”

3.4.29 Also Mr. Brothers:

“Emphasized that Wheelock Maritime valued its association with China and that it regarded itself as being a long-term customer for ships to be built in China.  In times of difficulty, both sides should do their best to assist each other and it was certainly WMI’s intention and wish that the relationship with CSTC should be a long one beneficial to both sides.”

3.4.30 A deputy director of the yard said such a delay was almost unthinkable but agreed that both sides should try and work to a solution.  A possibility was to lay up after delivery but that would require Bank of China assistance.

3.4.31 On 11th October, Mr. Brothers had a meeting with CSTC at which it was agreed that CSTC would examine the matter thoroughly and discuss it again later on.

3.4.32 On 14th October, a further cash flow was produced.  This assumed, inter alia, 80% loans for the three Chinese newbuildings; that Rangelock, Sealock and the two Sestao newbuildings would be sold and leased back; and that a facility of US$10 million would be available in November 1982.  There was a projected cash deficit of US$26 million in December 1983. This cash flow was discussed at the next shipping meeting on 15^th October.  Proposals for meeting the deficit were:

“a)  the sale of Pacnorse to Allied

b)  the sale of Pacnorse to an outside buyer

c)  the sale of WMI vessels on the market

d)  the deferment/rejection of the China newbuildings”

3.4.33 On 20th October, BNP offered to make a loan through WMF of US$10 million over five years secured on three ships, Regent Pimpernel, Golden Lotus and Golden Orchid.  The offer was accepted.

3.4.34 On 22nd October, another cash flow was prepared.  The assumptions now included postponement of delivery of the Dalians and two Sevilla newbuildings until December 1984; the loan on delivery of Manila Faith would be only 60% of the price; the final dividend payable by WMI for 1982 would be reduced from US$2.5 million to $600,000.00; and future charter-hire rates on both a high and low basis.  Deficits of US$22.2 million and $24 million were projected by December 1983.

3.4.35 This cash flow was discussed at a shipping meeting on 22nd October at which Mr. Leung:

“Stated that it was very important that a solution be found to this problem now rather than allowing the situation to continue and be faced with a crisis.  Further discussion took place on how best this deficit could be covered.  RJFB suggested that one immediate step that could be taken was the sale of Wheelock Marden & Stewart to Wheelock Marden.  WJL stated that he would be completely against this move and that in any event Wheelock Marden did not have the cash for the acquisition.”

3.4.36 To help meet the position, it was proposed that Allied should sell its four vessels and buy Fenlock and Inverlock from WMI.  It was also noted that WWS had approached Hudong yard on behalf of WMI about deferring delivery of Manila Faith, a similar approach having been made in respect of a sister vessel to be acquired by WWW.  Mr. Brothers

“Stated his concern on the difficulty of financing this vessel due to the fall in values and the general malaise over the shipping industry.  The contract would, in his opinion, be one which the Company should try to sell.”

3.4.37 A new cash flow was prepared which extended the projection to December 1984 to take into account the sale of two ships to Allied for US$40 million.  Without that sale, there was a deficit of US$52 million.  With the sale, the deficit would be $40 million.  This was discussed at a shipping meeting on 5th November where Mr. Campbell said the deficits in December 1983 would be $11.5 million or $20.5 million respectively.  There was no progress on the sales to be reported, while the market for Panamax vessels had dropped about 15% to US$15/16 million.

3.4.38 On 10th November, WM agreed to give a letter of comfort to West LB for a credit facility of US$5 million for WMI.  In the event, the offer was withdrawn although not for any reason connected with WMI.

3.4.39 Another cash flow was produced on about 12th November for the period October 1982 to December 1984.  Five different bases were used and they produced deficits ranging from US$13.5 million to $35 million.  There was a shipping meeting on the same day at which Mr. Brothers reported that documentation for the sale and lease-back of Sealock to Orion Royal Pacific Ltd., the leasing arm of RBC, was virtually complete, while the Spanish yards had offered a one-year moratorium on the payment of principal and US$4 million credit against costs arising out of any deferment of deliveries.  Negotiations were continuing.  At the next meeting, on 19th November, Mr. Brothers outlined a proposal for the sale and charter-back of Rangelock, with an option to purchase.  Negotiations were to take place in Denmark.

3.4.40 There was a WM Board meeting on 26th November at which it was noted that WMI forecast a loss of HK$8 million for 1983.  Mr. Lee “advised that there appeared to be little prospect of an improvement in the shipping market until 1984 or possibly 1985”.

3.4.41 Following this meeting, there were informal meetings between Mr. Marden, Mr. Lees, Mr. Leung, Mr. Griffiths and Mr. Ortiz-Patino, an independent director who came from Switzerland for any WM business.  Discussion concerned what to do about WMI.  Consensus appears to have been reached on what action should be taken.  On 29th November, at another informal meeting, Mr. Brothers was told about this consensus and asked to reduce it into writing.  This Mr. Brothers did in a memorandum dated 8th December (the December memorandum) and which is at App. 3/1.

3.4.42 Neither what I will call the November consensus nor the December memorandum were to be mentioned again, at least not directly.  Why not is a matter for me to determine.

3.4.43 On 19th November, Grindlays had offered to convert existing facilities in favour of WMF, amounting to US$19 million, into a term-loan of $17 million, $2 million being repayable by 28th December.  The facilities had been used by various WMI subsidiaries for the purchase of vessels.  Grindlays required a letter of comfort from WM as follows:

“We hereby represent and confirm that:-

(a)  We are aware of and have no objection to the terms on which this facility is being provided.

(b)  We will maintain the equity structure mentioned above during the loan period and will discuss with you if we intend to reduce or dispose of a material portion of our equity interest.

(c)  We will use our best endeavours to ensure that W.M.F. is maintained in a position to meet its financial obligations.

(d)  Should this company guarantee the financial obligations of W.M.F. or W.M.I. to another bank/s that extend or may extend facilities on a secured basis and, if in the opinion of the bank the facility is in default, or capable or being declared in default, then we shall also guarantee the facility without prejudice to your rights under the agreements.”

3.4.44 Ultimately, on 24th December, WM provided a letter substantially in terms of paras. (a), (b) and (c) but which omitted para. (d) and concluded:

“For the avoidance of doubt it should be noted that this letter should not be construed as a guarantee.”

3.4.45 On 23rd December, Mr. Brothers asked WWS to approach Hudong for delivery of Manila Faith to be delayed six months and offered to pay US$100,000.00 per month as expenses.  Shortly after, on 28th December, Orient Leasing (Asia) Limited made an offer for the sale and lease-back of the vessel at a price of US$17 million.  Orient Leasing required, inter alia, a letter of comfort from WM.  A letter of comfort in a form previously used was offered by WM on 5th January 1983, but in the event, WM did not provide one.  Financing was ultimately provided by WWW.

3.5    1983

3.5.1 Rangelock was due for delivery and was delivered on 13th January 1983.  A few days before delivery, a problem arose because there was no three-year charter in place as required under the conditions on which LBI had made the loan of US$20 million to fund the purchase of Danish Kroner.  Mr. Brothers offered earnings from other older vessels which were refused because the vessels were trading on the spot market.  He telexed Mr. Marden, Mr. Lees and Mr. Leung on 10th January about the difficulties, saying:

“We are very limited in our room to manoeuvre in that we have neither assets nor additional income to offer.”

3.5.2 The solution devised (by whom is not clear but probably by Mr. Marden, Mr. Lees and Mr. Brothers) was for Rangelock to be chartered to a WMI(UK) subsidiary, Aquaship Ltd., at US$11,250.00 per day, that being the required rate.  As Rangelock would have to be traded on the spot market at US$5-6,000.00 per day, WM provided LBI with a performance guarantee on behalf of Aquaship.  In return, Glamorgan, at the request of WMI, pledged its 250 shares in WWW to WM as security.

3.5.3 Mr. Brothers was called upon to explain the background to Rangelock by Mr. Lees and Mr. Leung.  He did this in a memo of 22 January, copied to Mr. Marden and Mr. Griffiths.  He said the original plan for a sale and leaseback to a Danish company, DIFCO, had fallen through in December, after which LBI would not agree to a waiver of the earnings covenant.  But for the eventual solution, “an event of default would have occurred which would have had extremely wide-ranging repercussions.”

3.5.4 On or about 10th January, another cash flow was prepared for the period January 1983 to December 1985.  On the basis of contractual obligations, it showed a cash deficit of US$107 million in December 1985.  Assuming the sale of 10 vessels; the postponement of the two Sevillas and the Dalians; the sale and lease-back of Manila Faith, the Osaka new building, Manila Spirit, and the three BWs; and the sale of Fenlock and Inverlock, the deficit would be US$26 million.  Other assumptions, including cancellation of the Dalians and all Spanish hulls, produced results ranging from a deficit of US$20m to a surplus of US$10.8m.  Summaries will be found at App. 2/2-5.

3.5.5 On 11th January, RBC produced a draft form of guarantee and indemnity agreement required in relation to the proposed sale and lease-back of Sealock.  One condition was the provision of a letter of awareness from WM which was to contain a declaration, inter alia:

“It is our policy to ensure that [WMI(UK)] and [WMI] are maintained in a position to meet their financial obligations.”

3.5.6 In the event, the proposed arrangements were abandoned in March because, in the crisis which then prevailed, it would have been pointless for WMI to ask WM for such a letter.

3.5.7 On 12th January, Mr. Yuen addressed the masters of WMI ships and in his speech emphasised the very depressed market and the cost and difficulties of operating.  He pointed out that operating costs were US$10,000 per day, while hire was only about US$3,000, leaving a shortfall of $7,000.

3.5.8 During January, between the 16th and 18th, Mr. Brothers was in Spain negotiating over the four Spanish newbuildings.  The yards were not prepared to agree to cancellation but would lay up Sevilla 260 until February 1984 and would consider a reduction in the price of vessels.

3.5.9 On 21st January, Allied made available to WMI a loan of US$2 million for a period of six months to enable WMI to pay Grindlays in respect of its term-loan.  WMI had anticipated paying this amount out of the proceeds of its proposed sale to WM of its 60% shareholding in WM&S.  This sale had been put in hand because of WMI’s cash flow projections but had not yet taken place.

3.5.10 Also on 21st January, CSTC advised keel-laying of Dalian hull B 270-7 had been carried out on 7 January but the 2nd instalment of US$2.25 million had not yet been received.

3.5.11 On 26th January, there was a WM Board meeting at which the chairman, Mr. Marden, reported the arrangements which had been made for Rangelock.  The Board approved these arrangements and authorized the signing of the guarantee to be given by WM.  The minutes then record:

“POLICY IN RELATION TO THE ASSUMPTION OF LIABILITIES:

Mr. J. L. Marden proposed that it be resolved that it remains the strict policy of this Company not to assume liabilities of any of the subsidiaries or associates, either by way of guarantee or by assuming primary liability.  Further that if any situation arises in which substantial liabilities have arisen or might arise which might jeopardize the financial position of any subsidiary or associate, a full report should be given immediately to all the Members of the Board of this Company.

The Resolution was seconded by Mr. P.J. Griffiths and carried unanimously.

Mr. P.J. Griffiths advised that he had been asked by a major shareholder for an assurance from the Managing Directors that there was no existing circumstance which might result in a liability involvement by (WM).

Mr. W.J. Lees and Mr. H.W. Leung confirmed that there was no existing circumstance which might result in a liability involvement by (WM).

Mr. Patrick Poon queried the Company’s present policy with regard to the issue of Letters of Comfort and Letters of Awareness in respect of loans, obligations, liabilities etc. of subsidiary and associated companies.  In reply, Mr. R.J.F. Brothers advised that all Letters of Comfort and Letters of Awareness issued by the Company had been carefully vetted by Messrs. Johnson, Stokes & Master and the issue of all such letters were formally approved by the Board.  He went on to say that one loan was currently being negotiated by (WMI) which would call for a Letter of Comfort to be given by the Company.

It was resolved that all Letters of Comfort or Letter of Awareness must follow the form of the attached Comfort Letter given to Grindlays Asia Limited dated 24th December 1982 and that any variations to that standard form must be approved by Messrs. Johnson, Stokes & Master.  It was further resolved that all Letters of Comfort and Letters of Awareness must be formally approved by the Board.

It was further agreed that all such letters should make it quite clear that such letters were not to be construed as a guarantee.”

3.5.12 It is not in dispute that this resolution was brought about by Mr. Cheung, whose interests were represented by Mr. Griffiths, because he was angry that he had not been consulted about the Aquaship guarantee.  From this point on, Mr. Cheung took a much closer interest in WMI’s affairs.  Shortly after, on 29th January, Mr. Griffiths suggested to Mr. Marden and Mr. Leung that Mr. Shaw, a solicitor of JSM/Norton Rose, should be instructed.  At the same time, he arranged that there should be regular progress reports about the WMI situation.

3.5.13 On 18th January, Manila Faith had been launched and a payment of 25% of the purchase price became due on 28^th January.  WMI’s subsidiary, Giant, was unable to pay because the sale and lease-back with Orient Leasing had not been completed.  Payment was deferred until 31st January and arrangements were made for a loan of US$3.47 million from WWW which would be repaid from the proceeds of the sale and lease-back.  On 31st January, by circular, the WMI directors approved these arrangements.

3.5.14 On 4th February, WM made available to WMI US$850,000.00 as an advance on the purchase price for WM&S.

3.5.15 Also at the beginning of February, Mr. Brothers prepared two papers.  One, dated 5th February, was for the managing directors of WM as general managers of Allied.  Notwithstanding that “the outlook for the shipping industry appears bleak”, the paper recommended the purchase by Allied of Fenlock and Inverlock, the cost of which would be offset by the sale of Allied’s four existing older vessels.

3.5.16 The second paper, dated 8th February, was to WMI directors.  It reported the results of further negotiations by Mr. Brothers and Mr. Lee with the Dalian yard.  Delivery scheduled for May and September 1983 was to be deferred to January 1985.  CSSC would arrange finance of 50% or 60% of the price on delivery at 9%.  Compensation of US$55,000.00 per month per vessel would be payable pending delivery.  The effect was a substantial saving of funding.  The memo went on:

“Directors’ attention is drawn to the fact that WMI have not given any Performance Guarantee in respect of the subsidiaries holding the contracts.  It is also apparent that under present market conditions, there is a paramount need to preserve the Group’s cash resources to whatever extent possible.  We are advised that should the Group at some time in the future wish to negotiate with its bankers for a deferment on principal repayments, the existence of future commitments of this nature may be seriously questioned by the Bankers involved to such extent that they may insist on either making no further payments or additional equity for shareholders.  The prices of the contracts were relatively low at the time they were placed although at today’s market level the contracts could be repeated in the region of US$11 million each.  Nevertheless, it is my belief that failure to perform under these contracts would have far-reaching consequences not just in respect of the credibility of WMI as a shipowner but also the Parent Company Wheelock Marden and Co. Ltd., as I have no doubt that it is with the Parent that CSSC considers, rightly or wrongly, they are dealing.”

3.5.17 These two matters and many others were discussed at a lengthy WMI Board meeting on 9th February.  First, the chairman reported the WMI Group “was facing serious cash flow difficulties”.  It was resolved to appoint Schroders & Chartered Limited as financial advisers to WMI.  Paul Banner (Mr. Banner) of S&C joined the meeting.

3.5.18 Next, the meeting agreed to sell the shareholding in WM&S to a subsidiary of HKR for HK$48 million, although WMI had had it valued at $54.6 million.  The reduction was felt reasonable because a buy-back provision was to be deleted and because

“If WMS were extensively marketed it could also take some time before a buyer was located and it was essential that the sale take place for cash with the least possible delay.  Accordingly in view of the Company’s urgent cash needs it was considered in the Company’s best interests to conclude the sale to Realty as soon as possible at the price of HK$48,000,000.”

3.5.19 The meeting then went on to approve the sale of Fenlock and Inverlock to Beauforte at valuations of US$20.5 million and $20 million, a sale which would produce 8 to 9 months’ additional liquidity.  The meeting also agreed to sell another vessel, Manila Spirit, whose earnings were insufficient to cover debt repayments.  A price of US$10 million would almost wipe out the outstanding loan of US$10.1 million.

3.5.20 The meeting went on to consider a graph of the WMI Group’s cash flow forecasts.  With the sale of WM&S and two vessels, there would be a cash deficit by June 1983 descending to US$83 million by December 1985.  If cancellation of two BW, two Dalian and two Sevilla newbuildings was included, together with a moratorium on principal repayments of the loans, there would be a deficit by August 1984 which would reach US$14 million by December 1985.  (Summaries are at App. 2/6-7.)  Mr. Banner then

“advised that it appeared that the Group’s bankers would have to be approached for a rescheduling of the Company’s loans and they would undoubtedly ask the shareholders to inject additional cash.  If the shareholders agreed the banks could be expected to co-operate, he said, but if the shareholders declined, then the banks would look at the cashflow forecasts and realise that by mid 1984 interest payments which up to then had been paid could no longer be made.

The banks' attitude would, he said, be to ask the Group to reduce its cash outflows, to sell ships to reduce its debt and to negotiate cancellations, where feasible.”

3.5.21 Mr. Banner re-emphasised this when the meeting then discussed Mr. Brothers’ memo on the Dalians.  According to the minutes, he said:

“If an approach were to be made in the future to bankers for a moratorium on repayment of principal, then they would look very carefully at any further cash payments out for anything other than reduction in loan principal.  They may, he felt, only agree to further payments on the Dalian newbuildings on the basis that additional cash funds were injected and especially so because the contract price could not be justified in present market terms.”

3.5.22 Mr. Brothers then explained the arrangements for the Manila Faith.  He said arrangements for the sale and lease-back to Orient Leasing had been concluded subject to a letter of comfort from WM.  There would be a cash inflow of US$4.5 million on delivery.  It would therefore be advantageous to take delivery as scheduled in April.  As to the Dalians, Mr. Brothers said the deferment he had negotiated “would not only give the Group breathing space but would also maintain its credibility with CSSC”.  After discussion, the Board approved the Dalian arrangements.

3.5.23 At a board meeting later the same day, WM’s directors resolved that a subsidiary acquire WM&S.  WM advanced HK$32 million to WMI against the sale.

3.5.24 At this time, WMI was being pressed for US$520,000.00 payable on the launch of Sevilla 260.  In a telex dated 11th February to Mr. Freeland in London, Mr. Brothers expressed the view that it would be appropriate to defer payment pending an overall settlement, although there was a long way to go before an agreement would be in sight.

3.5.25 Between 16th and 18th February, there was a meeting or meetings between Mr. Marden, Mr. Griffiths, Mr. Lees, Mr. Leung, Mr. Poon and Mr. Brothers, Mr. Shaw and Mr. Nicholson of Norton Rose, and Mr. Banner of S&C.  Mr. Nicholson prepared a note of the meeting almost immediately.  Later, on 26th February he sent to Mr. Tipper a “memorandum setting out certain advice given” by JSM at the meetings.  There are differences between these 2 documents.  I do not attach any significance to this.  The documents fulfil different functions.

3.5.26 Paragraph 1 of the note reads:

“Peter Griffiths questioned whether WMI could dispose of a major asset when technically insolvent.  If the sale proceeded and the sale proceeds were disbursed to pay immediate creditors, he wondered whether WMI could be accused both of trading insolvently and fraudulent preference.  If WMI was to survive, it had to approach its bankers to agree a rescheduling of its loans and accordingly this approach should be made immediately and in any event prior to the proposed sale of the “M.V. Fenlock” and “M.V. Inverlock”.”

3.5.27 That paragraph is not included in the memorandum.  Both documents then record that Beauforte’s resources were reported to be insufficient for the commitments.  The note adds a concern that if Allied got into financial difficulties, its directors might be accused of breach of duty.  The note and memorandum continued:

“4.  David Shaw said that, when the sale of the ships had originally been suggested, it formed the second part of a series of measures that if implemented would allow WMI to continue until September, 1983.  Although this period had subsequently been shortened until July, 1983 the sale of the vessels could have been justified on the grounds that it permitted WMI to continue trading during the period in which it was negotiating a long term solution with its bankers and the directors were of the view that there was a reasonable prospect of meeting all the company’s obligations if time were given by the bankers.  Now, however in the light of Wardley’s advice, it appeared that the sale of only one vessel might be possible and that the proceeds of this sale would only allow WMI to pay its creditors as they fall due for a further period of three or four weeks.  Further difficulties which had emerged were that two of WMI’s bankers were unsecured and that it seemed unlikely that those banks that were well-secured on vessels would release their vessel’s income to make interest payments to unsecured banks when capital repayments in respect of their own loans were outstanding.

5.  As had been discussed at the meeting on the previous day WMI’s Directors could properly sell one or both vessels despite WMI’s present technical involvency if they believed there was a reasonable chance that agreement could be reached with the banks and the long-term future of the Company secured.  However, in view of the potential difficulty with the unsecured banks and the fact that the sale of one vessel would only allow WMI to continue for a few more weeks, it was Mr. Shaw’s advice that the banks should be approached immediately and that the sale of the vessels should not proceed until such approach had been made.  In any event any sale proceeds should be retained and not disbursed in the payment of any one bank.”

3.5.28 Mr. Griffiths then squashed any idea of a sale to Allied.  Mr. Brothers drew attention to the payment of principal due to BNP.  It was suggested BNP be asked to defer payment while S&C completed their rescheduling proposals.  Both documents then record:

“9.  Mr. Shaw said that BNP should not be misled into believing that a payment was likely at the end of the deferment period.  The risk of approaching BNP at this stage was that the other banks might hear of WMI’s difficulties before they themselves were approached directly.

10.  Mr. Leung asked what WMI should do in the event that it was agreed that no ships were sold.  Mr. Shaw advised that it was then essential that every transaction to be entered into by WMI be considered carefully.  In particular no new credit should be incurred unless it was absolutely essential to preserve the assets (and there was a reasonable prospect of such credit being met).

3.5.29 The parentheses do not appear in the memorandum.  After discussion about approaching the banks and the need for a public announcement, the note continued:

“13.  Mr. Griffiths asked what WMI’s response would be if the banks asked whether Wheelock Marden was prepared to give the Company any support.  It was stated that Wheelock Marden’s attitude was that it was not prepared to inject further funds into such a partly-owned company, and that it had always been made clear that WMI was an independent company.

14.  Mr. Shaw said that, if it was now decided not to sell a vessel and to approach the banks within the next few days and if this led to the company getting into a liquidation situation at an early stage, there was a considerable risk that the return of advance payment by Wheelock Marden to WMI in respect of the sale of Wheelock Marden & Stewart would be challenged.  The sum of $32 million had been repaid to Wheelock Marden out of the $48 million received from Hongkong Realty.  Inevitably a liquidator or creditors of WMI would argue that the sale had been made solely for the purpose of repaying an amount due to Wheelock Marden.  Mr. Shaw asked whether the advance payment by Wheelock Marden could properly be regarded as having been taken over by, and thus credited to, Hongkong Realty and that Hongkong Realty make the necessary reimbursement.  Mr. Leung replied that the payment by Wheelock Marden had, in fact, been repaid directly by WMI as it had been a genuine prepayment and that this could be supported by internal memoranda and other evidence.  He was confident that although creditors might challenge the payment they would not be successful in establishing that WMI’s motive in making the repayment was in any way incorrect.”

3.5.30 Para. 13 does not appear in the memorandum.  As to para. 14, the details of the WM&S sale are not important.  What is important in that last paragraph, as far as ADS is concerned, are the references to liquidation and creditors.

3.5.31 A week later, on 25th February, Mr. Brothers telexed Mr. Edelmann to pursue the draw down of the loan on Sealock, which was still due for delivery on 17th March.  He said a moratorium of principal in respect of Marilock and Rangelock would be “a vital ingredient in providing the funds to enable us to draw down the credit for (Sealock)”.

3.5.32 On 18th February, Mr. Brothers had two meetings with the National Westminster Bank in Hong Kong which he hoped would advise and assist over WMI’s existing facility with the National Bank of North America (a subsidiary of Nat West), US$2 million of which was due for renewal.  In the course of discussions, Mr. Brothers

“stated that he was under very strict instructions that it should not be considered as part of any plan that there would be support from the Parent Company.  Very definitely, WMI had to survive on its own resources.”

3.5.33 On 23rd February, Mr. Banner of S&C wrote to Mr. Tipper at WM to review the position in relation to WMI which had been code-named “Warbler”.  He said:

“2.  As agreed at our meeting on Monday evening, revised cash flows are being prepared on the basis of assumptions agreed by the Warbler Committee which reflect the most likely circumstances facing the Company.  In particular key assumptions were made relating to the cancellation or rescheduling of newbuildings, without further cost to Warbler, and also the treatment of the outstanding loan to PacNorse.  On the basis of these assumptions it was agreed that cash flows would be prepared reflecting two differing financial scenarios.  The first and more optimistic scenario assumes a three year moratorium on loan principal repayments to banks.  The second scenario assumes that lending banks will require all surplus income (after operating costs) to be applied to debt servicing liabilities.  It was felt that the figures, particularly the second set, would give the Committee a real feel for the extent and timing of the “problem” and a basis for considering how the Company might trade its way out of the current situation.  This in turn will provide the basis for discussions with banks.”

3.5.34 Mr. Banner then referred to a draft letter to be sent to WMI’s bankers and to various matters including the fundamental importance of the newbuildings.  He continued:

“Presentation of adjusted Warbler balance sheet

This subject was discussed by the Committee on Monday evening and, in particular, WJL’s concern over presentation of this statement was noted.  Unfortunately, and notwithstanding the fact that our whole approach to the banks will be slanted to cash flow considerations, the banks will require an adjusted asset statement.  Accordingly may I suggest its preparation be a matter for consideration by the Committee.  In this context, the treatment of newbuildings and PacNorse - which together constitute the overwhelming “negative” adjustment - is of great importance.  I understand from David Shaw that the existence of such a pro-forma adjusted statement would not require directors to consider “shutting the door” but does requires them to be ultra-sensitive when seeking new or extended credit.”

and later

“Warbler parent’s support

It has been made clear that our policy is that financial support is not available to Warbler from its parent.  However, this will inevitably become an issue with the banks particularly those who feel they have any recourse, albeit intangible by, say, a comfort letter, to the parent.  Accordingly I think it is important that the Company is well versed on its parent’s attitude.  It would be most useful to have details of the intra-Group links that do exist such as provision of management, operating services and of course loans, guarantees or other contingent liabilities.”

3.5.35 The draft letter for bankers contained the sentence:

“Furthermore, the Directors of WMI have been informed by WMI’s parent company, which is also a public company with responsibilities to its own public shareholders, that WMI should not consider that there can be any financial support for WMI from its parent company.”

3.5.36 This sentence was deleted from the final version.

3.5.37 The draft also referred to an adjusted statement or balance sheet as at 31st December 1982 which showed net assets on a book-value basis as HK$571 million.  On a market value basis, however, there was a net deficiency of HK$50 million.  This was accounted for: by a reduction of approximately HK$77 million in the valuation of vessels; by removing the value of vessels under construction, amounting to $347 million; and by revaluing Pacnorse from $173 million to a liability of $76 million.  Reference to this statement was, however, also omitted from the final letter.

3.5.38 In the meantime, the delivery date for Sealock on 15th March was approaching.  Mr. Brothers had been endeavouring to arrange a sale and lease-back with Orion.  On 25th February, negotiations finally fell through.  One reason was that Orion required a categorical assurance that WMI would remain in the business of shipping for the foreseeable future and be able to meet its commitments and indemnities.  In his telex that day to RBC and Orion, Mr. Brothers said:

“This is to confirm our telephone conversation last night when we agreed that with the time constraints on us it would be unfair to hold the March end lessors and that we therefore had no option but to abandon the lease.  We are all naturally very sorry and disappointed at this turn of events.  If possible, and for obvious reasons, we would ask that the primary reason stated publicly is our need to trade the vessel under non-British flag, i.e. charterer requires to trade into Argentina.”

3.5.39 On the same day, Orient Leasing, which was considering the sale and lease-back of Manila Faith, telexed WM with a draft of a letter of comfort in which it required WM to confirm:

“A.  We are aware of and have no objection to the terms on which the said facility is being provided.

B.    It is our intention to maintain the corporate existence of ‘WMI’ under the laws of Hong Kong whereby it can conduct its business substantially as now being conducted.

C.    It is our intention through wholly owned subsidiary Wheelocks (Hong Kong) Ltd. to hold voting control of WMI during the period of the lease transaction.

It should be noted that this letter should not be construed as a guarantee.”

3.5.40 On 28th February, a circular was sent to WMI directors proposing the setting up of what became called the shipping committee:

“28th February 1983

CIRCULAR TO DIRECTORS:

In view of the problems currently being experienced by the Company as a result of the slump in the world shipping market and its consequential serious effects on cash flow, it is considered appropriate to appoint a Committee of the Board to monitor, in conjunction with the Company’s General Managers and Financial Advisers, appropriate measures to be taken to relieve the Company’s situation.

Accordingly, it is proposed to appoint a Committee of the Board in accordance with Article 85 of the Company’s Articles of Association comprising Messrs. W. J. Lees, H. W. Leung, R. J. F. Brothers and R. P. Tipper and Directors are requested to signify their approval by signing the attached Resolution in Writing where indicated.”

3.5.41 The resolution was signed the same day.  The shipping committee held its first meeting on 2nd March at which Mr. Brothers reported that both BNP and Nat West had indicated they might help if outside or financial support was available.  On the sale and lease-back arrangements for Sealock with Orion, Mr. Brothers said:

“it would be necessary to give them absolute assurances now of the continued existence of the Company.  As the Company’s bankers were about to be approached formally with refinancing proposals it was not considered possible to give such assurances until after the bankers responses had been ascertained and therefore it had been agreed that the proposed lease arrangements should be abandoned.”

3.5.42 Mr. Brothers also said he would shortly be approaching the banks about a moratorium on the repayment of principal.  In the meantime, the Manila Spirit was to be sold for a net price of US$9.9 million leaving a shortfall of US$325,000.00 on the outstanding loan.

3.5.43 At the end of the month, WMI produced a cash flow and graph for the period 1983 to 1992.  These documents do not exactly match.  The graph dated 28th February (App. 2/8) showed the results of projections both with and without a moratorium.  With a moratorium, the maximum deficit would be US$25 million in January 1990 and a surplus of $2 million by December 1992.  Without a three-year moratorium on repayments of principal, the maximum deficit was US$69 million in August 1989 falling to $17 million by December 1992.  The cash flow dated 1^st March headed “secured creditors without financing” showed a surplus of US$81,000.00 in December 1992.  A further cash flow was prepared on 3^rd March for the period March 1983 to December 1992.  It covered only secured creditors.  With a three-year moratorium, the maximum deficit was US$4 million up to December 1985 after which the deficit increased to $22 million in January 1989 returning to a surplus of $10 million by December 1992.  Without a moratorium, there would be a maximum deficit of US$60 million by April 1988 but a surplus of $3 million by December 1992.  Summaries of the 3rd March cash flows are at App. 2/9-12.

3.5.44 On 4th March, WMI sent out letters to its six secured bankers, BNP, Grindlays and Bank of Nova Scotia, Orion (otherwise RBC), Bank of America and LBI.  Mr. Brothers had meetings with Grindlays, Orion, BOA and LBI on the same day.  The letters stated:

“On 8th February, 1983 I forwarded you a cash flow statement for Wheelock Maritime Finance International Limited (“WMI”) that was based on the assumption that Wheelock Marden & Stewart Limited and the vessels, m.v. “Manila Spirit”, the m.v. “Inverlock” and the m.v. “Fenlock”, were to be sold by the beginning of March 1983.  Although we have sold Wheelock Marden & Stewart Limited and the “Manila Spirit”, the sales of the “Inverlock” and the “Fenlock” have not materialized and, as a result, WMI is now facing an immediate cash flow short-fall.

Under these circumstances and with no early improvement in the shipping market in sight, it is necessary for us to ask our eight lenders secured on vessels to re-finance their existing credit facilities. ....

We have devised a proposal for debt re-financing which we consider is in the interest of the lenders as a whole, the success of which is not dependent on any sales of vessels.  We are confident that with the support of our Bankers and on our conservative assumptions regarding future charter rates, we will be able to continue our business throughout this period of depressed market conditions and at the same time be able to retain the ability to benefit from the revival in the shipping market in the future.

In essence, our proposal is as follows:-

1. All loan capital repayments are deferred for an agreed period.  We would suggest this period should be fixed for three years and during this period, lenders will not seek to enforce repayment unless a material event of default occurs.  All other rights of the lenders will otherwise be preserved against their respective borrowers and guarantors.

2. All lenders receive interest in full throughout.

3. In respect of newbuilding commitments and unsecured creditors, it is intended that separate and specific financing arrangements will be made.

4. During the three year re-financing period, the Company may wish to take advantage of market movements to sell some of its existing vessels.  It is also recognized that it is more difficult for lenders secured by older tonnage to accept a re-financing period of three years than for those secured by new vessels and we will consequently consult with lenders as to the appropriate time for disposal of such older tonnage.

This proposal is being put to all mortgagees whose full and unanimous support, as well as the support of relevant creditors, is required for its successful implementation.  Taking into account the serious cash position of WMI referred to earlier, we are advised that it would be inappropriate to make further payments to our Bankers.  Nevertheless we do intend to continue with the payments of interest as and when they fall due pending successful outcome of our discussions.”

3.5.45 The letter then referred to the cash flow and graph dated 3rd March and pointed out that these excluded newbuildings and unsecured lenders.  It also enclosed a valuation of WMI vessels on both with-charter and charter-free basis.  In contrast with a book-value of US$145 million, the with-charter-value was $132 million while a charter-free valuation was $100 million.  Outstanding commitments on the vessels totalled US$111 million.

3.5.46 The WMI letter commented on the valuations:

“Although we have prepared these valuations for your information, I believe it to be more appropriate to consider our proposal on a cash flow basis as the asset values are severely distorted by the currently depressed market.”

3.5.47 The meetings held the same day were all friendly and gave WMI grounds for hope.  However, LBI made it clear that a demonstration of parent support would be necessary.  Orion enquired about parent support.  Grindlays reminded Mr. Brothers that he had previously advised them no such support would be forthcoming and enquired if the position remained the same.  A note of this meeting prepared by Mr. Brothers records that he:

“stated that the intention was still to find a solution to the problems without Parent Company support.  He considered that the real problem however lay in arranging the financing for the newbuilding and unsecured creditors and he did not rule out that possibly some support might be forthcoming in that area if it was essential.”

3.5.48 At further meetings with some of these creditors over the next few days the emphasis was on support.

3.5.49 Mr. Brothers reported to the shipping committee on 16th March.  He said generally all banks were indicating a need for parent support and that Wayfoong had told him that the HSBC, which had made certain unsecured facilities available to WMI in relation to Marilock, would not agree to the refinancing unless WM was prepared to support WMI.  The HSBC position was further confirmed by telephone on 17th March when Mr. Brothers was told the bank wanted to see WM support and would then only support a one-year moratorium subject to review.

3.5.50 The shipping committee held meetings frequently.  This was not difficult because the members’ offices were in close proximity.  The committee had met earlier on 9th March when Mr. Brothers reported on Pacnorse:

“Jebsens had approached Amex with a proposal for Pacnorse to repurchase the vessels it had previously sold to and was now chartering from Grand Marine Holdings.  The charterhires, in todays terms, were very high and accordingly it was in Pacnorse’s interests to acquire the vessels.  Pacnorse’s proposal was to purchase at a price equal to the debt due on the vessels by Grand Marine to its bankers (Amex, Midland Bank and National Bank of North America) by taking over these loans but on the basis that no repayments of principal would be made for three years.  Amex, as the lead banker, had been conducting the negotiations with Jebsens and were proving to be extremely inflexible, so much so that Jebsens had had to advise Amex that unless they took a more realistic approach there would be no alternative but to put Pacnorse into liquidation as the charters were jeopardising the company’s continued existence.  Amex’s response was now awaited.”

3.5.51 Next day, Mr. Brothers in the course of his efforts to secure delivery of Sealock, wrote to BW.  In his telex he said:

“Our primary intention is and has always been to fulfil our overall contractual commitments.  You must have no doubt on this score.  However the market is continuing on such a depressed level that basically we are not able to demonstrate to our bankers at this particular moment that we will be able to comply with their loan terms and conditions.  This is not so much a matter of asset value as the banks appreciate (and so I hope does DSKF) that the present very low values are only a product of the actively depressed market conditions prevailing but one of cash flow.  We cannot demonstrate today that we have other sources of earnings to meet the estimated DLR3.5 million shortfall in the first year’s operation and similarly frightening although hopefully lower amounts in years 2 + 3.  This is why it is so critical for DSKF to be prepared in addition to granting a moratorium also to allow the cash so saved to be released to our bankers.  I had thought I made this clear to [Mr. Edelmann] in my letter of 2nd March.”

3.5.52 Later he said a WM guarantee was impossible and that

“The crisis caused by the market is much greater than perhaps is generally appreciated and unfortunately the remedies accordingly have to be much more drastic.”

3.5.53 WMI had contracted for cranes to be installed as extras on Sealock.  For this a loan of £1.76 million had been arranged in 1981 with MMB.  This was repayable on 17th March 1983.  On 14th March MMB agreed to extend the period to 24th March because WMI had indicated it could not pay on the due date.

3.5.54 On 18th March, the secured banks were sent a graph and cash flow covering newbuildings and unsecured creditors for the period March 1983 to December 1992.  (App. 2/13-14).  It complemented the earlier cash flow of 3rd March.  The new cash flow assumed:

(1) Repayment of unsecured creditors by ten equal semi-annual instalments;

(2) The Spanish newbuildings could be excluded;

(3) DSKF would agree a 3½ year deferment on principal for Sealock, Annalock and hull 912 and the U.S. dollar lenders would receive equivalent Danish Kroner deposits;

(4) The Dalians would be deferred to January 1985;

(5) The Manila Faith would be sold and leased back over ten years.

3.5.55 Before interest was applied, a deficit of US$18 million was projected for December 1992.  After providing for interest on the deficit from time to time, the deficit at that date would be $57 million, having reached $60 million the year before.  It is this cash flow which ADS say was not provided and which, had they seen it, would have materially affected their attitude.

3.5.56 Also on 18 March Mr. Brothers wrote to Mr. Tipper asking him to deal with Manila Faith loan documentation while he was away.  He concluded by saying:

“Generally, subject to what David Shaw may say, I see no reason why we should not enter into this agreement with WWW provided we have disclosed to them the fact that the Company is in negotiations with its bankers for a re-financing arrangement.  I have disclosed this fact to them at my meeting in World-Wide Offices and I also make it very clear to all present that we would not be able to sign the agreement with Orient Leasing until the re-financing arrangements had been concluded.  If they advise, as they have done, that they still wish to go ahead with the arrangements then we have surely fulfilled our duty.”

3.5.57 On 19th March, on the way to London for negotiations over the BW newbuildings, Mr. Brothers saw Mr. Ortiz-Patino in Switzerland.  He brought Mr. Ortiz-Patino up-to-date on WMI’s position.  This prompted a startling telex from Mr. Ortiz-Patino a few days later (para. 3.5.68).

3.5.58 While Mr. Brothers was away, Mr. Tipper corresponded with Mr. Banner about a difficulty being raised by BNP which had two outstanding loans.  One was secured on Fenlock and gave no problem.  The other loan for US$10 million was secured on three vessels, Golden Lotus, Golden Orchid and Regent Pimpernel, which were valued at US$10.4 million on a with-charter basis.  The vessels would, however, come off hire between 1984 and 1986.  Their without-charter valuation was only $6.6 million, so if there was a three-year moratorium, the BNP security would not cover the loan.  Mr. Brothers had proposed selling Regent Pimpernel so as to reduce the loan to US$6 million.  On 22nd March, Mr. Banner wrote to Mr. Tipper saying:

“One thing we want to avoid is immediate sales of most of Warbler’s existing fleet since a fundamental part of our proposal is that Warbler is viable and can trade out of its present difficulties.  With this in mind, I have suggested two slight changes to the draft letter such that your commitment to sell the vessel is effective some time during the refinancing period.  Since, for success, our proposals depend on a upturn in the shipping market during the refinancing period, to give this undertaking to BNP is not a major concession on Warbler’s part.”

3.5.59 Mr. Banner suggested, instead, simply agreeing to sell Regent Pimpernel at some time.  He also suggested that any proposal by BNP to cross collateralise Fenlock should be resisted because the equity which still remained in Fenlock might be useful in negotiating with the unsecured lenders.

3.5.60 On 23rd March, Mr. Tipper was advised by HSBC that it would agree a three-year moratorium provided WM injected sufficient cash to enable WMI to meet its estimated deficit over the three-year period, that is about US$24 million.  Any surplus over actual requirements would be used to repay banks.  If the amount injected proved insufficient, WM would be required to continue to support WMI as a going concern.  Mr. Tipper reported this to the shipping committee the next day.

3.5.61 On 24th March, Mr. Tipper wrote to Mr. Shaw for advice about Manila Faith which was now to be financed by a temporary loan of US$3.47 million from WWW, to be repaid when the sale and lease-back with Orient Leasing was concluded.  Mr. Tipper said he had told WWS that arrangements for that sale and lease-back had had to be put on hold until rescheduling had been agreed by the bankers.  He asked Mr. Shaw to advise, inter alia:

“that WMI/Giant can safely enter into these loan documents notwithstanding that the loan constitutes new credit (albeit that the commitment dated back to 8th February and orally before) provided that the lender makes the loan with the knowledge of WMI’s circumstances.”

3.5.62 Mr. Shaw replied later.  However, on 6th April, Mr. Brothers submitted a memo about Manila Faith to the shipping committee.  He said:

“This vessel is due for delivery end April.  The documentation for a 10 year lease with Orient Leasing Corporation is presently being prepared.  This is subject to a Letter of Comfort being given by Wheelock Marden which letter although it specifically states that it should not be construed as a guarantee does state that it is the intention of Wheelock Marden that Wheelock Maritime should continue in existence.  There is a WMI performance guarantee to World-Wide of the performance of its subsidiary.

Some $5 million surplus will be generated by the lease as the vessel is being acquired by OCL for $17 million and a substantial amount has already been paid under the contract.  Accordingly, although the effect of the delivery will be positive cash-wise, this seems a very good opportunity to investigate the possibility of keeping the vessel off the balance sheet and thereby avoid initially heavy depreciation charges.”

3.5.63 In the interim, on 29th March, a measure of concern was generated at WMI upon receipt of a letter from Grindlays declaring an event of default upon the admission by WMI in its earlier letter to its bankers, in which it proposed a three-year moratorium, of its inability to pay its debts as they matured.  Fortunately, it was withdrawn once it was pointed out to Grindlays that it would trigger off defaults on other loans to the WMI Group.

3.5.64 So many events were now happening so fast it is surprising that anyone was able to keep track.  Mr. Brothers had been moving heaven and earth to solve the Sealock problem (see Part 6).  As a precaution, however, he also asked WMI’s solicitors, Norton Rose, about cancellation of the four Spanish and three BW hulls.  In relation to the Spanish ships, he produced a list of defects in relation to Sestao 260 Odinlock as a possible basis for rejection.  These defects struck the solicitors as of a minor nature requiring technical consultation to see if they would entitle the buyer to reject.  As to the BW ships, advice from Danish lawyers indicated, unsurprisingly, that BW would be entitled to compensation for all direct expenses.  Additionally, on 30 March Mr. Nicholson asked Mr. Freeland of Norton Rose for his views on cancellation of these newbuildings.

3.5.65 On 30th March, Mr. Brothers produced for the shipping committee a review of WMI’s current status.  (App. 3/3).  He emphasised the urgency of the situation and the need for WM support which he suggested be a 12 month credit line of US$5m.

3.5.66 On 30th March, Mr. Tipper wrote to Mr. Reynolds of S&C with a draft letter for the secured banks which indicated that the request for a moratorium would now be for 12 months.  The draft letter continued

“Wheelock Marden & Co. Ltd. have confirmed that they will provide support to enable the WMI Group to meet their anticipated US$7 million shortfall to 31st March 1984 as indicated in the ‘blue’ and ‘green’ cash flow forecasts previously supplied to you.  This support is conditional upon the WMI Group being able to reach simultaneous agreement with both secured and unsecured creditors that the refinancing proposals are acceptable to all parties.”

3.5.67 That paragraph was an unwarranted assumption.  Nonetheless, it is an insight into the thinking of someone who was close to the centre of things.  It is “how” or “when” rather than “if”.

3.5.68 At the end of March, Mr. Ortiz-Patino came to Hong Kong where he met and was briefed by Mr. Marden, Mr. Lees and Mr. Leung on WMI.  He was concerned about progress and the apparent lack of control being exercised over Mr. Brothers.  On 31st March, Mr. Leung and Mr. Lees received a telex from Mr. Ortiz-Patino which set out in strong and forthright terms his concern for the situation and the steps he thought should be taken (App. 3/5).

3.5.69 Mr. Brothers responded on 6th April at some length (App. 3/8).  He refuted the accusations and appeared on the last page to refer to the November consensus.

3.5.70 Meanwhile, on 31st March, S&C were asked to prepare for the WMI Board a report reviewing the situation and advising on alternative courses of action available to WMI.  This would assist the Board in considering what request to make to WM for support.  A number of drafts were prepared.  The final report was submitted on about 8th April.  There is a summary at App. 3/18.

3.5.71 Some passages from the report should be reproduced.  On the basis of the cash flow, the report concluded:

“23.   Whilst the cash flow projections indicate that there is no cash requirement for the next three years on the basis that the lenders support the moratorium on principal loan repayments, the monthly cash balances fall close to nil.  Bearing in mind the difficulty in making projections of this kind, we consider it important for WMI to negotiate a stand-by facility of, say, US$2 million which can be called upon in need.  This will not be possible with a commercial bank and accordingly WMI should seek such a facility from its parent company.”

3.5.72 After examining the internal solutions being considered by WMI, the report dealt with the rescheduling proposal and commented:

“27.   There are at present in Hong Kong rescheduling proposals in respect of many companies before banks, some that have been made public but many that have not.  In most if not all such cases the controlling shareholders and management do not have the confidence of the banks, either because of suspected misconduct or mismanagement.  The position of WMI is completely different in that WMI is part of the Wheelock Marden Group, whose reputation is long-established, and because there is no suggestion of mismanagement.  WMI is clearly seen to be caught in a severe downturn in the shipping cycle of which banks are generally aware.  Nevertheless, however sympathetic and keen to support a member of the Wheelock Marden Group the banks may be, they are likely to withhold support for rescheduling proposals unless the proposals in some way improve their security.

28.   The proposals put before lenders call for a three year moratorium of repayments of loan principal.  This is a long period to ask for and banks will be reluctant to commit themselves for so long a period.  An alternative is to seek a shorter moratorium (with a minimum of one year) which would be easier to negotiate with the banks but would not be as advantageous to WMI.”

3.5.73 Of parent company support the report said:

“30. We therefore consider that the banks will not support the rescheduling proposals without parent company support and yet we also believe that in the absence of such support, particularly in view of the group of companies of which WMI is part, they could take no direct action so long as interest is kept current.

31. This uncertainty is, however, extremely damaging for WMI.  It is difficult to see how it could properly function and continue operations.  All its borrowings would be not only immediately repayable but also in default.  Its secured lenders would be in a position to take over all its ships immediately at any time.  Ordinary trade creditors would be reluctant to extend further credit and any new financing would not be possible.  Depending on the fluctuating values of its ships it would have a negative net worth.  Whether or not it could continue trading as a going concern is uncertain.  Shareholders would need to be informed and trading in its shares would have to be suspended.  Consequently we consider that it is essential for WMI to seek immediate parent company support in order to secure a binding agreement with its lenders for as long a period of time as possible so that it can continue with its normal business.”

3.5.74 The report then suggested four ways in which support could be given:

1) Immediate cash injection,

2) Guarantee of any shortfall on loans,

3) A binding letter of comfort to inject sufficient funds to enable WMI to meet its obligations,

4) A non-binding letter of comfort.

3.5.75 After examining the merits of each method, the report concluded:

“41. (i) WMI requires an immediate stand-by facility of, say, US$2 million which cannot be provided commercially and therefore will have to be provided by the parent company;

(ii)  based on the cash flow projections contained in this report, WMI requires its lenders to support a rescheduling proposal such as the one already discussed with them;

 (iii) We do not believe that support for such a rescheduling proposal from the lenders will be forthcoming without certain support from WMI’s parent company; and

 (iv) the most appropriate form of support would be a legally-binding comfort letter from Wheelock Marden whereby Wheelock Marden would undertake to inject sufficient funds into WMI to enable WMI to meet its loan obligations (after lenders have enforced such security as they hold for their loans).  Based on the currently prevailing ship values, this would involve no payments in respect of loans owed to secured lenders and, so long as WMI continues to have a positive net worth, no payments to unsecured lenders.  In any event any possible payments would not be required until 1986.”

3.5.76 On 7th April, the WMI directors were circulated with resolutions:

1) To guarantee HSS for a loan of US$1.1 million to a subsidiary, Liberian Spear, (the owner of Asia Culture);

2) To approve arrangements for the Sealock.

3.5.77 All directors except Mr. Poon signed on or about 7th April.  Mr. Brothers had sent Mr. Poon a copy of the S&C’s report on 9th April.  On 12th April, Mr. Poon wrote to WMI’s secretary that in the light of the report he could not approve the guarantee in favour of HSS and returned the resolution unsigned.

3.5.78 Meanwhile, on 8th April, Sealock was delivered to Adleship and ADS advanced Dkr214 million to that company in the form of bonds.

3.5.79 On 12th April, Mr. Brothers received a telex from Mr. Griffiths, which is at App. 3/20.  It seems at least to suggest that there was never any agreement, informal or otherwise, to support WMI.

3.5.80 On the same day, WMI directors signed a resolution which had the effect of confirming WMI (UK)’s participation in the Sealock arrangements.  Mr. Poon wrote “noted” over his signature.

3.5.81 On the following day, WMI received a telex from WWS advising that Giant had not paid in full the third instalment of 25% in respect of Manila Faith due on 31st January.  The yard, however, was now prepared to extend payment of the balance of US$3.47 million with interest at 14% up to delivery.

3.5.82 On 14th April, Grindlays advised that BNS, their co-lender of the loan on World Rainbow, was unwilling to agree to a three-year moratorium.

3.5.83 On the same day, Mr. Tipper wrote to WWS about the proposed loan by WWW to finance the third instalment on Manila Faith.  He said that on legal advice WMI should not enter the proposed arrangement, at least not as borrower.  If the loan was to Giant, with WMI as guarantor, that would overcome the legal difficulties advised by Mr. Shaw.  Then on 18th April, Mr. Cameron wrote to Mr. Shaw for advice on the letter of awareness required by Orient Leasing in relation to Manila Faith.

3.5.84 On 20th April, Mr. Cameron produced a cash forecast for the period 13th to 30th April which showed a cash shortage of US$165,650.00 even after omitting payments of principal.  He noted

“If the payments to WMS ($362,500) and World-Wide ($54,000) are temporarily deferred, the amount available to pay Crewing fees ($335,623), NRBR (Legal fees - $27,200) and interest to Allied ($19,209) and Grindlays ($419,688) will amount to $251,075 - i.e. after payment today (20/4) to MMB ($20,294) and Turnbull Scott ($25,000) and including the interest receivable on 21/4 from Grindlays.

Thus the timing of the expected receipt of the Asia Rindo freight of $856,301 is critical.  I am instructed by RJFB that if this is not received in time I am to pay Grindlays as much as possible and advise them of the pending receipt of this hire.  There is also another sum of $126,000 over due to Grindlays in respect of currency differential as only one half of the due sum was paid earlier this month.”

3.5.85 The sums there mentioned are all US$.

3.5.86 On the same day, the WMI directors met and considered the S&C report.  In the course of discussion

“Mr. Patrick Poon queried what the company’s next move would be if support was not forthcoming and in reply, Mr. Reynolds advised that it was important to look at paragraph 34 showing the lenders who expected to get a comfort letter from the parent company.  In Mr. Reynold’s opinion, shipping values were of critical importance and although there was little concern about shipping values in aggregate it would be a different matter if shipping values were to fall.

Mr. Reynolds went on to say that if a legally binding comfort letter were not forthcoming from the parent company and there appeared to be no third party available to provide equity funding or support then the only alternative was to approach lenders to advise that support would not be forthcoming because the parent company had the interests of its own shareholders to consider.  He suggested that such a statement should be supported by a resolution of the Directors of the parent company to demonstrate that the matter had been duly considered.  Lenders would then be requested to reschedule the loans but it was unlikely, he said, they would agree to reschedule for as long as 3 years.

General discussions then followed on the chances of the success of such an approach to lenders and it was noted that lenders were currently under a lot of pressure from rescheduling proposals and it was unlikely they would be willing to agree to any moratorium proposals unless there was an opportunity for them to improve their position.

After general discussion, Mr. W. J. Lees proposed that a formal approach be made to the parent company on the basis of the four conclusions reached in S&C’s report referring specifically however to the fact that the legally binding comfort letter would refer to deficiency.  Mr. Shaw pointed out that the form of the comfort letter to be given by the parent company was important in that it was in the nature of “top up” was significant in that lenders would have to exhaust all their other alternatives before calling upon the parent company.”  (The sense of this awkward passage is clear)

“Mr. Shaw went on to say that the ability of the Group to continue trading depended on there being a reasonable prospect of resolving the cash flow problems and being able to meet all its debts and obligations at some time in the future.  The discussions to date had indicated that some form of agreement could be reached with lenders and accordingly there could be said to be such reasonable prospect.  If however, he said, the company did not get support from whatever source and lenders refused to reschedule the company’s loans then the Board would have to reconsider the overall position since if there ceased to be such a reasonable prospect the Company would not be able to incur new credit.  Timing was of the essence.  The market was awaiting the announcement of the Group’s 1982 results and if no agreement were reached with lenders in the immediate future, Directors would be under an obligation to announce to shareholders the extent of the Group’s problems and the attitude of its lenders.  Such an announcement would, in his opinion, be most damaging to the Group.

After general discussion, it was agreed that a formal approach be made to the parent company immediately with a view to convening a further Board Meeting as soon as the parent company has responded, hopefully early the following week.”

3.5.87 Mr. Lees then advised the meeting that it was not possible to proceed with the proposed sale and lease of Manila Faith because Orient Leasing required a letter of comfort stating that WMI would be maintained in its present form.  Instead, the possibility of WWW making finance available was being explored.

3.5.88 On the same day, a formal letter signed by Mr. Brothers was sent to WM enquiring whether WM was prepared to support WMI in the manner recommended by S&C.  The letter emphasised that the letter of comfort would be in the nature of a “top up” and concluded:

“You will note that in the context of paragraph 41(iv), Schroders and Chartered anticipate that “any possible payments (under the comfort letter) would not be required until 1986”.

You will readily appreciate that it is imperative that we receive your response to this request as soon as possible and accordingly we should be grateful if you would advise us of your position as a matter urgency.”

3.5.89 Meanwhile, it seems that behind-the-scenes moves to solve WMI’s problems were taking place.  Mr. Marden was contemplating the purchase of the WMI shares from WM.  This appears rather cryptically in telexes dated 20th April from the managing directors to Mr. Griffiths (which was never sent, Mr. Griffiths was advised by telephone) and to Mr. Ortiz-Patino advising that a proposal to support WMI would be considered at the WM Board meeting the following week.  The telex to Mr. Ortiz-Patino said:

“3. Syndicate to purchase 35 percent interest in WMI from WM seems probable but still awaiting final confirmation subject to details which expect to have finalized prior to board meeting.

4. Schroders and Chartered have advised they willing to act to advise WM on sale of WMI shares to syndicate and state they have no conflict of interest.  Accordingly intend Schroders and Chartered should be so appointed.”

3.5.90 S&C, who were retained to advise WM on this matter, went to the length of preparing a time-table dated 26th April.  However, events overtook this proposal which was replaced, no doubt after discussion between Mr. Marden and Mr. Cheung, by a proposal that HKR would invest up to US$12 million in WMI.  Consequently, the WM Board meeting on 27th April, at which WMI’s request was the main item for consideration, was relatively short.  Mr. Marden as Chairman said:

“The position of Wheelock Maritime was, he said, clearly critical and in the light of this situation a decision as to whether or not further support should be given was urgently needed.  During the course of discussions over the last 2 days it had, however, emerged, he said, that the Hongkong Realty & Trust Company, Limited Group (“Hongkong Realty”) might be interested in making an investment in Wheelock Maritime and committing funds for that purpose.  In those circumstances, it would seem appropriate, the Chairman said, to have immediate discussions with Hongkong Realty to see what it might be prepared to do.”

3.5.91 Mr. Cheung was present at this meeting as alternate director for Mr. Poon, and Mr. Hsu was also alternate for Mr. Griffiths.  Mr. Griffiths apparently had given instructions that Mr. Hsu should vote against any measure for giving assistance to WMI (see para. 3.5.110).

3.5.92 The Board approved a proposal to initiate such discussions and to appoint Wardley Limited as WM’s advisers in relation to any specific proposals made by HKR.

3.5.93 In the meantime, on 21st April, WWS offered help with Manila Faith by way of a loan from WWW to Giant for the balance of the purchase price plus interest, repayable by 12 monthly instalments commencing one month after delivery.  Glamorgan and WMI would be guarantors.  The terms and conditions, however, proved unacceptable.  Mr. Brothers telexed WWS on 27th April to confirm WMI would seek alternative arrangements and on 28th April confirmed that Giant would pay the third instalment.  The idea of a sale and lease-back with Orient Leasing was revived.  Following a telephone call by Mr. Cameron on 28th April, following up his letter of 18th April, Mr. Nicholson of JSM replied on 29th April.  In his letter, Mr. Nicholson said:

“(1) Given the recent discussions concerning Wheelock Maritime International Limited (“WMI”) and in particular the likely decision of the WM Board not to support WMI, I cannot see how WM can state that it intends to “maintain the corporate existence of WMI .... whereby it can conduct its business substantially as now being conducted”.

(2) Similarly the fact that there is now some prospect that WM may relinquish control of WMI almost certainly precludes it from stating that it intends “to hold voting control of WMI during the period of the lease transaction”.”

3.5.94 Hardly surprisingly, Mr. Cameron on 3rd May advised the shipping committee he could not process the matter further with Orient Leasing.  He said he had spoken to Mr. Nicholson who had emphasised that, apart from misrepresentation, there might be “other more serious offences - e.g. fraudulent obtaining of funds etc.”

3.5.95 On 2nd May, the HKR Board met to consider the possibility of an investment in WMI.  Amongst others, Mr. Marden, Mr. Lees, Mr. Leung, Mr. Cheung, Mr. Poon and Mr. Tipper were present.  A committee of four, including Mr. Tipper and Mr. Cheung, was appointed to deal with the proposal, conduct any negotiations and make any arrangements necessary.  EAW were appointed as financial advisers.  The minutes finally recorded:

“INVESTMENT IN GROUP COMPANY:

It was resolved that there was no objection as a matter of policy to the Company considering or making any investment in another company controlled by Wheelock Marden & Company Limited, provided that the investment was appropriate on normal commercial criteria and considered to be in the interests of the shareholders of the Company, taken as a whole.”

3.5.96 On 6th May, the shipping committee met and approved a formal letter to be sent to HKR about the proposed investment and a letter to be sent to secured lenders seeking agreement in principle to a three-year moratorium.  The letter to lenders was sent out that day.  It stated that following discussions with HKR

“an understanding has been reached.  HK Realty is now considering making an equity related cash investment of up to US$12 million in WMI over a period of three years.  In addition to certain other conditions this investment is subject to the WMI Group’s lenders agreeing to the rescheduling proposals in a form acceptable to HK Realty whereby no principal would be repayable over the next three years.  Since the terms presently being discussed between ourselves and HK Realty may involve the issue of new equity, the proposals will also need to be conditional on WMI shareholders approving this cash injection at an Extraordinary General Meeting to be convened once documentation is finalized.”

3.5.97 HKR learnt of this letter and took exception to the wording “an understanding has been reached”.  They required WMI to send all recipients a copy of WMI’s formal letter to HKR which read:

“It should be made clear that the above does not represent any legal obligation and that HK Realty and WMI would only become legally bound as and when formal legal documentation is agreed and executed and all necessary approvals are obtained.  It follows therefore that creditors should not act in reliance on this letter.”

3.5.98 On the same day, Mr. Brothers held a further round of meetings with the banks to discuss the letter he had sent them.  He began with BNP.  His note of the meeting records that Miss Tse of BNP

“suggested that these arrangements still looked to her very similar to the proposals that Wardley had put to the GMH (Grand Marine Holdings) creditors.  It was unfair to expect all creditors to be treated in the same way.  RJFB responded that whereas it was true that the plan by Wardley for GMH had failed on this point, if the banks could not reached (sic) agreement then liquidation was inevitable and surely this was also not something that BNP would want to see happen.  He felt that by approaching the banks with a very straight-forward scheme whereby the banks preserved all their rights and merely assisted the WMI Group over a difficult period, there was the greatest chance of a successful outcome.  If in fact the banks could not agree on this straight-forward approach then clearly a meeting would be necessary.

In all events, RJFB felt that it was most important to try to obtain “agreement in principle” by the end of next week in order to avoid the company incurring damaging publicity.”

3.5.99 Next, Mr. Brothers met Wayfoong and Grindlays.  At the latter meeting, he learned BNS were still being negative and there was emphasised to him:

“the importance that the US$12 million be a firm commitment for any of the Banks to be prepared to go along with the proposals.”

3.5.100 BOA indicated that they preferred a rescheduling of only 12 months even if it meant a smaller equity injection.  Next day, Orion were negative about a three-year moratorium because part of their security was in the form of a good charter.

3.5.101 On 9th May, Mr. Brothers wrote to the two unsecured creditors, NBNA and RBS, setting out the position in relation to HKR and the secured creditors and asking these two banks to term out their existing facilities but with no repayment of principal for 36 months.

3.5.102 On 10th May, at the shipping committee, Mr. Brothers reported on negotiations for the sale of three older vessels to Iran at US$2.4 million net each.  In fact, agreements were signed on 16th May.  The sales took place between May and August 1983 and netted US$2.4 million per vessel which was applied in reducing Grindlays’ facilities.

3.5.103 Because of WMI’s problems and the steps being contemplated, it was accepted that a press announcement was necessary.  Following a shipping committee meeting on 11th May, Mr. Brothers approached the secured banks seeking their approval for saying “broad agreement in principle” to a moratorium had been indicated.  BOA would only agree to words “positive discussions” or similar.  Mr. Brothers’ note then records that he:

“felt that the manner in which Bank of America were approaching the issue would inevitably lead to a crisis position.  He cited the bank’s suggestion of a Trust Fund, the proposal for Creditors’ Meetings and the insistance for outside money to come into the Group.  RJFB stated that it may well be that such a course was inevitable but in finding the solution WMI could well be torn to shreds.  Bank of America accepted that this was the case but could see no alternative.  They were in a good position in that they had both asset and earnings cover and they did not see why this should be utilised for the benefit of other creditors.”

3.5.104 BOA also enquired if WM would give a guarantee for a shorter period of one year.  Mr. Brothers said it was out of the question at which BOA

“remarked on the inequality of being asked to support the Group if the Parent Company itself did not have sufficient confidence to invest.”

3.5.105 Wayfoong indicated it would also prefer “discussions”.  Grindlays simply advised that BNS, its joint lender, would not consider any rescheduling but in the light of the proposed sale of three ships and the reduction in debt they themselves might pay principal to BNS when due.

3.5.106 On the same day, WWS were asked to approached the Hudong yard and seek to defer delivery for one month while financial arrangements were made.  The request was refused on 16th May.

3.5.107 The shipping committee met again on 16th May.  It considered a memorandum of agreement of the revised terms for the Dalians which Mr. Brothers had negotiated.  It agreed it would not be possible to sign for the time being.  It also discussed Manila Faith and noted that the Orient Leasing sale and lease-back could not be finalized until loan rescheduling was complete so that WMI could not take delivery.  It agreed to make alternative proposals to the Hudong yard.

3.5.108 These proposals were made at a meeting on 18th May between Mr. Brothers, Mr. Lee and a representative of the yard at which Mr. Brothers explained the Group’s “illiquid position” and that rescheduling could take up to three months.  The proposals were to defer delivery for up to three months with compensation; or for delivery to take place against temporary financing by the yard which would receive the earnings of the vessel, a first mortgage and a WMI guarantee.

3.5.109 On 19th May, WMI(UK) wrote to Mr. Cameron to remind him that on 13th July US$1.8 million and interest of US$887,000.00 was payable to LBI on the Rangelock loan, a sum which could not be paid by WMI(UK) out of charter-hire.

3.5.110 On the same day, Mr. Lees received a telex from Mr. Griffiths which read:

“I refer to my telex to Ray Tipper dated 12th April last.  Subsequently I agreed that a board decision was inevitable as being in the best interests of the Group at the time.  Apparently a board meeting was held to consider a request from WMI for assistance.  I understand that no decision was taken neither was the meeting adjourned + presumably therefore the matter remains open.

In view of the time that has elapsed  the events that have occured + the obligations of WMI to disclose its results + affairs I revert to the view that any support by the parent must be referred to an egm of its shareholders + the board cannot properly enter into any committment in favour of WMI without the approval of a members resolution.

I had as you know asked my proxy to vote against any measure to provide the assistance requested by WMI + given my reasons.  I have today telexed my proxy requesting him that if any measure to provide assistance to WMI comes before the parent board to vote against it + to ‘propose that the matter should be referred to an extraordinary meeting of shareholders.”

3.5.111 Again on 19th May, Mr. Brothers produced the general managers’ report.  He reported a net loss for the Group of HK$863,246.00 for 1982 compared with a profit of HK$85 million for the previous year.  After including all items there was a profit of HK$15 million against HK$147 million for 1981.  He attributed this to very low charter rates and also high interest rates.  However, there had been a general increase in charter rates of some 20% since the end of 1982.  But although there were some positive indications “a complete return to profitability will still be some way off”.

3.5.112 The report said WMI was operating 19 vessels.  Three more were to be delivered in 1983, i.e. Rangelock, Sealock (these had already been delivered) and Manila Faith.  The Dalians were to be deferred to 1985 while discussions over cancellation of the four Spanish vessels were taking place.  The report also stated that second-hand prices had risen by up to 50% and newbuildings prices had also risen.   On Pacnorse, Mr. Brothers reported a loss of US$4.7 million against a profit of US$7 million the previous year.  Steps were being taken to protect this investment and improve liquidity.  In particular, Pacnorse would repurchase eight bulk-carriers sold to Grand Marine, which was in liquidation, at prices equal to the outstanding debt totalling US$96 million.  There would be minimal repayments of principal for two years.  The cancellation of the charters would improve cash flow.

3.5.113 Finally, Mr. Brothers reported that because of the problems an application had been made to WM for “ a deficiency guarantee in an amount of US$10 million”.  He concluded:

“ In the meantime, the Group is maintaining sufficient liquidity to fund its operations although pending completion of its re-scheduling arrangements it has stopped making principal repayments on its outstanding loans.  Subject to these arrangements being concluded, the Group will be well placed to benefit from any up-turn in the shipping market.”

3.5.114 The report was considered at a WMI Board meeting the following day.  Mr. Brothers brought the Board up-to-date in respect of the Spanish vessels.  Sestao 260 would be cancelled, as the latest delivery date of 14th April 1983 had not been met (although according to a telex and letter of 4^th May to AESA, the owner of the Spanish yards, sent by the owner Hillwood and signed by Mr. Brothers, in which Hillwood gave notice of an intention to reject, the last day for delivery was 3rd May).  It was hoped to cancel Sestao 261.  There were no grounds for cancelling the Sevillas and no funds available to take delivery. 

3.5.115 The meeting then discussed the audited accounts for 1982 and

“ Mr. Cameron also read out the audit report and the qualifications in the report were noted.

In answer to a question from Mr. Patrick Poon, Mr. Cameron advised that the total outstanding capital commitment at 31st December 1982 was HK$1.73 billion if all vessels were taken into account.  Following a question from Mr. W. J. Lees, Mr. Brothers advised that some $661.6 million of that amount related to the Spanish vessels, $55 million having already been paid on those vessels.  After further general discussion on the accounts, Mr. W. J. Lees proposed that efforts should also be made to remove the phrase “ excess of current liabilities over current assets” from the Auditors’ Report.  In this context, Long Term notes amounting to $169,558,907 were scheduled to be sold following discontinuation of the original leasing proposal and could possibly be reclassified as Current Assets if necessary to achieve the amendment in the Auditors’ Report.

After general discussion on the accounts it was resolved that the Report of the Directors and audited accounts for the year ended 31st December 1982 be and are hereby approved.  It was further resolved that the transfer of $15 million to Fleet Reserve be and is hereby approved.”

3.5.116 The auditor’s draft report read:

“ The accounts set out on pages       to       have been prepared in conformity with accounting principles applicable to a going concern.  However, in view of the loss incurred for the year, the excess of current liabilities over current assets, the Group’s loan commitments on vessels and the present uncertain state of the shipping market, the applicability of these principles is wholly dependent on retaining third party financial support by the rescheduling of loan liabilities payable to the Group’s bankers as more fully described in Note.”

3.5.117 An announcement was made to the press on the same day.  After reporting the financial results, it read:

“ As a result of the severe decline in vessels’ earnings due to the extremely depressed state of the shipping market, the Group has encountered liquidity problems.  The Directors are considering appropriate methods for alleviating these problems.  In this context, discussions have been initiated with Hongkong Realty and Trust Company Limited (“ HK Realty”) as to a possible commitment by HK Realty of up to US$12,000,000 to the Group over a period of three years.  In addition to certain other conditions, the proposals would be conditional on certain of the Group’s lenders agreeing to a deferment of existing loan repayments.  The Company is in discussion with these lenders regarding such arrangements.  The discussions with HK Realty are at present at a preliminary stage but a further announcement will be made if and when agreement is reached on detailed terms.  The Company is being advised by Schroders & Chartered Limited.”

3.5.118 Also on 20th May WMI received a letter from Mr. Shaw advising on the propriety of WMI giving guarantees for loans.  After dealing with the form of such guarantees Mr. Shaw said:

“ There remains the question of whether, in current circumstances it is proper for WMI to enter into such guarantees.  As previously advised, WMI may only continue trading if there is a reasonable prospect that it will at some future date be able to meet all its obligations.  At present, proposals are under consideration, and discussions are taking place with bankers, designed to lead to a situation where WMI will be able to meet its immediate obligations and to put itself in a position where there is a reasonable prospect that it will be able to meet all obligations at some future date.  It is our understanding that, based on the information available to the Directors of WMI, there is a reasonable prospect of agreement with bankers and others being reached on the above lines.  On that basis, WMI may continue to trade and incur fresh credit.  However, care must be taken in incurring fresh credit, not least because in the case of substantial new borrowings or other commitments it would be wrong to mislead any lender as to WMI Group’s current financial position.  In the case of Wayfoong Shipping Services Limited and Marine Midland Bank N.A. we understand that both banks are, as stated above, aware of the WMI group’s present difficulties but are nevertheless prepared to extend loan facilities.  Accordingly, we do not see how such banks could complain as to the propriety of WMI giving guarantees and generally we consider that it is proper for WMI to enter into such guarantees, provided that the Directors of WMI continue to take the view that there is a reasonable prospect that it will at some future date be able to meet all its obligations.”

3.5.119 This letter was copied to Mr. Poon who had been concerned about the guarantee to HSS (para. 3.5.77).  Based upon Mr. Shaw’s advice, Mr. Poon on 24th May signed the resolution which he had earlier declined to do.

3.5.120 In the days following the WMI announcement, there was heavy press coverage.  It was reported that minority shareholders in HKR were concerned about using HKR’s cash to help sick affiliates and would be taking the matter up at a general meeting.  The AGM of HKR was held on 25th May at which minority shareholders did raise their concerns.  The meeting was chaired by Mr. Marden who confirmed that an EGM would be convened to consider the proposal to invest US$12 million in WMI.  A solicitor for some minorities asked for an assurance that WM Group shares would not be voted and that directors of WM and WMI on the HKR Board would not vote.  Mr. Marden declined to give an assurance.  There was considerable press comment which did not reflect well on HKR’s Board.

3.5.121 Earlier, on 21st May, there was a WM Board meeting at which it was agreed upon the recommendation of its solicitors, Simmons and Simmons, to appoint financial advisers in connection with WMI’s problems.  Rothschilds were appointed on 24th May.

3.5.122 The shipping committee met on 23rd May and noted that there had been discussions with WWW which had agreed to lend WMI sufficient to take delivery of Manila Faith pending WMI making its own arrangements.  The loan would be repayable three months after draw down, WWW having declined a request for six months.  WMI was to guarantee the loan on behalf of Giant upon which legal advice was being taken.  As collateral, Glamorgan’s dividend for 1982 would when paid be applied to reduce the loan then outstanding.  Delivery would take place on 31st May.  On the same day as the meeting, WWW advised Mr. Brothers that they had telexed CSTC for confirmation that US$12.19 million would be payable on delivery.  In fact, the final amount was confirmed as $12.27 million.

3.5.123 The following day, CSTC sent a reminder that the second instalment on the Dalians had not been paid.

3.5.124 The shipping committee met again on 26th May, further to discuss Manila Faith and the legal implications for the company and directors in taking the WWW loan.  WMI’s guarantee would require full disclosure which would pose difficulties in view of on-going negotiations with lenders and the yard.  Further, the agreement for WMI to purchase the shares in Giant from WWW had never been signed although the shares had subsequently been transferred to WMI.  It was agreed to take advice.

3.5.125 Norton Rose gave written advice on 27th May.  They advised that, whether the agreement contained a guarantee or indemnity, it was probably enforceable by WWW against WMI in the event of default by Giant of its obligations under the ship-building contract.  Nonetheless, they felt that the proposed arrangement for WMI to give a guarantee for the WWW loan and to assign the Glamorgan dividend was justifiable.  They concluded:

“A final caveat must however here be raised.  This is that the directors of WMI must be satisfied that in entering into the guarantee or assigning the (WWW) dividend WMI is not carrying on business with intent to defrand its creditors or for any fraudulent purpose, otherwise they run the risk of being personally liable for the debts of WMI under Section 275 of the Companies Ordinance.  If the directors genuinely believe that WMI will at some time be able to satisfy its creditors then the risk of a successful attack for fraudulent trading is unlikely.”

3.5.126 The WMI Board met on 28th May and considered the advice.  They resolved that the proposed arrangements were commercially viable and that the necessary documents be executed.  They also resolved that an interim letter of disclosure drafted by the solicitors be sent to WWW.  Delivery then took place on 31st May.

3.5.127 Also on 31st May, Norton Rose on behalf of WMI gave notice rejecting Sestao 260 and requiring repayment of the deposit of US$2.9 million and interest.  Later, on 22 June, notice cancelling 261 was given.  However, efforts continued to try and resolve the position in relation to all the Spanish vessels without any cancellations.  Advice was taken from the brokers Clarksons who had negotiated between WMI and AESA and who on 3rd June advised that, having regard to current newbuilding prices, replacement costs for Sestao and Sevilla vessels would be US$17 million and 14.5 million respectively, and that:

“ Our opinion of possible cash on delivery resale price for your vessels would be approx USD14.5 and USD12.5 million (44,000/35,000 tdw types respectively)

(Best) price would no doubt be obtained by “ quiet” marketing to govt or govt sponsored buyers such as Indian or Iranian.  Sale prospects and price could also be improved if attractive credit terms could be offered.”

3.5.128 At about the same time, Mr. Brothers had discussions with Norton Rose as a result of which the solicitors sought advice from counsel in London about rejection of the other three Spanish vessels.  Advice was obtained on about 14th June.  It was complex but in essence indicated that the other Sestao vessel could probably be rejected but not the Sevilla vessels.  Counsel suggested the companies purchasing the Sevilla vessels might be liquidated.  However, Mr. Brothers was putting in a great deal of work behind the scenes and, on the basis of the valuations obtained, there was a hope that rather than cancellation a substantial reduction in price of all four vessels might be negotiated.

3.5.129 Meanwhile, on 31st May, advice was sought from Mr. Shaw about the Dalians and the request for the second instalment.  Mr. Shaw drafted a reply to emphasise that WMI’s subsidiary, Lombardy, was the owner with which CSTC was dealing.  After setting out WMI’s recent press announcement, the draft reply concluded:

“ Regrettably Lombardy Shipping Limited is suffering liquidity problems.  Lombardy is seeking to obtain additional finance to enable it to fund its newbuilding commitments to you and on such finance being obtained Lombardy will then effect payment of the overdue instalment.  Lombardy would be grateful for your sympathetic understanding in this regard.”

3.5.130 Such a reply was in fact sent on 10th June.

3.5.131 On 7th June, following discussion between them, Mr. Shaw provided Mr. Reynolds of S&C with details of a pooling scheme for secured lenders.  However, it seems to have become refined into a straightforward retention account whereby for three years each secured lender would receive the earnings of the vessel constituting its security, release operating expenses and, after deducting interest and principal, release any balance to WMI. 

3.5.132 Mr. Reynolds and his team began a round of meetings to discuss the new scheme with secured and unsecured lenders on 9th June.  The secured banks were generally receptive.  The unsecured banks were to have interest kept current and to have loans termed out.

3.5.133 The shipping committee met on 18th June to discuss Rangelock.  Mr. Brothers advised that WMI would have difficulty in paying interest due to LBI on 13th July out of its own resources, the hire payable by Aquaship to WMI (UK) having been returned to WMI for general use.  It was agreed to take no action but wait for WM to pay under its guarantee and call on WMI under the counter-guarantee.  Before or after this meeting, because the letter was undated, Mr. Graham received from Mr. Thorne of Norton Rose a draft letter to be sent to WM warning it of the problem and suggesting that it would be in everyone’s interest for WM simply to advance the necessary hire to Aquaship rather than to allow LBI to make a call under the guarantee.

3.5.134 On 20th June, Mr. Cameron wrote to PMM about the 1982 annual accounts.  In order to remove the requirement that WM financial support for subsidiaries be minuted, he specified subsidiaries where one way or another existing support would effectively be written off.  He concluded:

“.... unless there are very special circumstances, it will be the policy of “ WM” not to pledge continued financial support for any subsidiaries.  Accordingly, it would be appreciated if prior discussion could be held with us in respect of any companies where you would have previously sought indication of such support, before their accounts are finalised.”

3.5.135 Next day, the WMI directors received a circular for approving a letter of comfort to be given by WMI, as shareholder in Pacnorse, to BNP for a new schedule of principal payments.  The letter of comfort required confirmation by WMI “ that it is our intention to ensure payment by the borrower ... ”.  Legal advice, however, was that WMI should not give such a letter.  Instead, Mr. Shaw approved a letter containing the wording “ it would be our intention insofar as we are able to assist to ensure the payment by the borrower ...”, which would on conclusion of rescheduling be substituted by the original wording.

3.5.136 On 24th June, S&C followed up their earlier meetings with the secured banks with a letter formally setting out their pooling or retention proposal which they recommended to commence on 1st July.  Those banks which had already been retaining earnings were asked to return earnings which represented principal payments in order to ensure equality of treatment.  S&C then met the various banks on 29th and 30th June.  Wayfoong made clear:  that there must first be an injection of cash by HKR, which should not be repayable within three years and only then if WMI’s financial position would not be imperilled; that all banks must join in; and that there must be no further acquisitions.

3.5.137 BNP, which was well covered, agreed in principle provided that it could retain all earnings and subject to a guarantee by WM to secure the outstanding loan, or an injection of US$12 million as permanent working capital.  Orion appeared to be non-committal.  BOA required tangible shareholders’ support otherwise it would liquidate the vessel.  It was not prepared to return earnings retained so far and thought the scheme should operate from year to year.  Grindlays indicated US$12 million was a necessary condition and even then doubted if it could agree to a three-year scheme.  Further, BNS would not join the scheme and Grindlays were not prepared to take them over.  Grindlays would, however, ask BNS to defer the payment due on 7th July and said they would like to see World Rainbow sold soon, meanwhile using excess hire against the loan.

3.5.138 The shipping committee met on 1st July.  Mr. Banner reported on his meetings with the banks.  Mr. Brothers felt that possibly the banks had not understood the scheme and proposed a simplified version be put to them to regain their goodwill.  He tabled a paper.  This seems to have varied what S&C had told the banks about pre-retention account earnings.  Mr. Brothers said these could be retained and applied in reduction of outstanding loans.

3.5.139 Mr. Brothers and Mr. Banner met BNP on 4th July, with some success.  BNP accepted the scheme in principle but emphasised the importance of WM Group support.  Mr. Brothers reported he had no information on the proposed injection of US$12 million cash.  But on 5th July, BOA confirmed by letter that the proposal contained in the letter of 24th June was unacceptable.  It offered three proposals for a one-year moratorium, the basis of each proposal essentially being the provision of security in the sum of US$4 million.  And in a letter to Mr. Brothers that day Mr. Banner reviewed the position of the banks and concluded:

“ Although this could be construed as an initial negotiating position derived from the fact that the banks know the balance sheet strength of Wheelock Marden and Hong Kong Realty, there is no doubt in my mind that we will not obtain the approval of all banks to the restructuring scheme without some shareholder support.  I believe my meetings with the banks reaffirm one of the conclusions in Schroders & Chartered’s report to WMI’s Board dated April 1983.  This conclusion, contained in paragraph 41 (iii) of that report, stated “ we do not believe that support for such a rescheduling proposal from the lenders will be forthcoming without certain support from WMI’s parent company”

3.5.140 On 4th July WMI received a reminder from WMI(UK) that LBI was expecting payment of US$1.88 million on 13th July while Lombardy reminded CSTC that it could not proceed with its Dalian without funds from WMI.  And by circular resolution of the same day, Mr. A. Marden and David Edwards were appointed to the shipping committee.

3.5.141 Also on 4th July, Rothschilds produced what they termed a discussion paper for WM’s directors.  In their covering letter of 5th July, Rothschilds said:

“ The discussion paper is predicated on the basis that no action should be taken by the Board until a proposal has been formulated by HK Realty and its financial advisers, East Asia Warburg Limited.  If however this proposal proves to be unacceptable, the Board of Wheelock Marden will have to consider whether to support WMI, at least in the shorter term.  The consequences of Wheelock Marden not providing support for its financially troubled subsidiary could be very damaging commercially in terms of the withdrawal of credit lines, loss of future contracts and generally more onerous terms and conditions of trade.  The adverse publicity which such a move would attract should also not be forgotten particularly in view of Wheelock Marden’s role as general manager of WMI.  Support has already been given by Wheelock Marden to WMI in the form of a performance guarantee and it could be argued that Wheelock Marden has also accepted publicly the principle of group support as a result of the announcement by its subsidiary, HK Realty, that it was considering a commitment to WMI.

In our opinion, the only circumstances in which Wheelock Marden could reasonably withhold support for WMI would be where the Board were to take the view that the case against a significant recovery in charter rates and the value of the fleet vessels was overwhelming in terms of the financial impact on the group.”

3.5.142 Rothschilds said they would examine support from three viewpoints:

1) S&C rescheduling,

2) The short-term funding requirement for newbuildings,

3) The long term funding requirement.

3.5.143 They went on:

“ We believe that Wheelock Marden should consider the provision of short-term support by way of a comfort letter which would in effect be a committed facility to WMI, but which would be limited both as to amount and as to duration.  This is likely to be the minimum required to permit the rescheduling of WMI’s debts under the S&C proposal and it would also enable any modest short-term financing requirements to be met.  The short-term committed facility could take the form of an inter-company current account at a commercial rate of interest, possibly with some kind of equity sweetener.  Such a commitment may be considered to be a small price to pay for Wheelock Marden protecting its investment in the short-term and might in fact not be a much greater concession than the performance guarantee given in respect of the Rangelock financing.

With a short-term committed facility in place, some breathing space could be gained to consider in greater depth and away from public scrutiny the long-term solutions to the liquidity problems of WMI.  We do not consider a permanent refinancing solution, such as a rights issue of equity or loan stock by WMI, to be appropriate at the present time since substantial cash outflows are not expected within the next two years under the cash flow forecasts presented to us.  It would be far better for Wheelock Marden to determine the form and size of a funding solution when the long-term financing requirements of WMI can be better ascertained.  The minority shareholders of WMI would be expected to contribute their share.  Failing this, they would of course see their equity interest diluted.  The long-term solution could also be examined by the Board in the context of a possible fundamental restructuring of the Wheelock Marden group at that time.”

3.5.144 In their discussion paper, Rothschilds reviewed the current situation.  Of the S&C rescheduling proposal they noted:

“ At this stage it is uncertain whether the proposal will find favour with all the secured lenders, particularly since no support or commitment from the Wheelock Marden group has yet materialised.”

3.5.145 Rothschilds also noted that the April cash flows used by S&C showed not only an immediate cash shortfall but a shortfall after two years significantly in excess of the amount of US$12 million being considered by HKR.  They said:

“ Even if the rescheduling proposals are adopted, we believe that the amount of US$12 million, which is the potential commitment from HK Realty, is in fact misleading in that the funding requirement varies considerably over the next few years and we have therefore not attached any significance to this amount.”

3.5.146 Rothschilds said that their overriding principle was to find a short-term solution with minimal financial commitment from the WM Group and to provide a “ breathing space” for WMI to find a long-term solution.  They discussed the possibility of a legally binding letter of comfort or guarantee for secured lenders and remarked:

“ We believe that the Board of Wheelock Marden has little option other than to concede the principle of a comfort letter or guarantee, now that precedent has been set by the performance guarantee given by Wheelock Marden in respect of the Rangelock financing.  We would however recommend to the Board that the extent and duration of the comfort letter or guarantee be fixed from the outset, to be superseded eventually by a longer-term funding solution.”

3.5.147 In relation to the short-term funding requirement, Rothschilds noted that providing funds from within the Group was “ likely to create the same difficulties as HKR has experienced”.  They therefore disregarded such sources and suggested it should come from WM.  The paper went on to discuss long-term funding, for example a rights issue, and concluded:

“6. RATIONALE FOR SUPPORT

6.1 Finally, it is as well to consider the justification for support of WMI by its parent company, Wheelock Marden.  There may be no legal obligation on the part of the directors of a parent company to provide or arrange financial support for its subsidiary, the directors’ only responsibility being to take whatever action is in the best interests of the parent company.  But the ramifications of withholding support for a subsidiary could be far-reaching for a parent company with the damaging effects on its reputation possibly reflected in withdrawal of credit lines, loss of future contracts, not to mention the adverse publicity which such a move would attract.

6.2   The position of Wheelock Marden and WMI is further complicated by the fact that Wheelock Marden is not only the parent company but also the general manager of WMI, for which it receives an annual commission.  The onus is therefore on the directors to consider carefully the benefits and drawbacks of withholding support.

6.3   In deciding whether to extend support to WMI the directors of Wheelock Marden are likely to also have regard to the prospects of recovery in the shipping market.  It is always difficult to predict more than two or three years in advance but this is particularly so in the case of the dry bulk carrier shipping market where until the beginning of this year charter rates had fallen steeply over a two-year period, reflecting the considerable oversupply of vessels and the downturn in trade.  Some comfort can be gained however by the economic upturn in the United States and the signs of an improvement (albeit slow) in freight rates.  Perhaps the recent bids for P & O and Straits Steamship may be seen as another pointer to the start of a recovery.

6.4   It may be viewed by some that the principle of parent company support for its subsidiary may have been accepted already by Wheelock Marden because of the discussions which are taking place between HK Realty and WMI.  Creditors of WMI are probably continuing to finance the company on the expectation that the discussions will give rise to a solution to the problems of WMI.  If these discussions do not give rise to specific proposals acceptable to all the parties concerned, it would in our view be very damaging for Wheelock Marden then to withhold support for WMI.”

3.5.148 On 6th July, Mr. Banner wrote to Mr. Brothers in response to a request by Mr. Brothers to consider what security might be given to unsecured lenders in order to obtain their support for the “ proposed restructuring scheme”.  He suggested new charges, possibly by way of floating charge, but felt much would depend on shareholders’ support and the form of such support.  A floating charge might give away too much if there was a substantial cash injection.  He concluded therefore that it was better to keep options open and to tell the two unsecured lenders that until shareholders’ support was clarified, perhaps by the end of July, it was difficult to determine the nature of suitable security.

3.5.149 The shipping committee met on 6th July.  Mr. Brothers reported on the S&C scheme for secured lenders and said “ all lenders were emphatic that support must be demonstrated to be forthcoming from the WM Group”.  He went on to say that it was intended to put the scheme into effect whether or not lenders gave formal agreement.  Then, outstanding trade creditors including WM would be paid off over six months out of operating expenses.  Trade creditors were estimated to be in the region of US$6 million of which US$2 million was due to WM.

3.5.150 The meeting considered a three-year cash flow dated 5th July  (which Rothschilds had referred to in their paper).  This cash flow took into account the proposed S&C rescheduling, the two BW and Dalian newbuildings, Manila Faith and ship sales.  It forecast a deficit of US$7 million by June 1986.  However, “ to establish the real position for the future, a ten-year cash flow would be required”.

3.5.151 Mr. Brothers brought the committee up-to-date on the Spanish vessels.  He said discussions were underway for the prices to be reduced to current market prices and for credit to be given for amounts already paid.  The contract prices for the Sestao vessels were US$27.7 million and for the Sevillas US$26 million.  Market prices for immediate delivery were US$14.5 million and US$12.5 million respectively.  The bankers, RBS and Wayfoong, were prepared to provide finance on this basis rather than face litigation.  In the meantime, every effort would be made to sell the vessels before delivery.

3.5.152 As to the Dalians, Mr. Brothers advised that payment of US$1.5 million per vessel due in 1983 had not been made.  He said if the Dalian yard was prepared to accept the situation, a decision could be made later whether or not to proceed.  The minutes of the meeting then record:

“ Mr. Lees felt strongly that we should cancel the ships to avoid further commitment and losses on operating them.  Mr. Brothers stated that a cancellation would have far-reaching effects for what was in itself very small amounts of money relative to the Group as a whole and he hoped that some accommodation could be reached.  Mr. Marden stated that the Chinese in their minds did not differentiate between Wheelock Marden & Co. Ltd. and WMI.

It was noted that the Company’s lenders could require that steps be taken to cancel the Dalien vessels as one of the pre-conditions of them giving their agreement to the proposed rescheduling arrangements.  This would certainly give the Company grounds for cancellation although it did not solve the wider issue of whether or not support in such circumstances should be given by the Parent Company.”

3.5.153 The shipping committee resolved that no more money be spent on the Dalians until a specific direction was received from the WMI Board.  No such direction was in fact ever given.

3.5.154 Discussion turned to the BW vessels where interest payments of approximately US$900,000.00 each in respect of Rangelock, Annalock and hull 912 were due to LBI and Midland Bank in the middle of the month.  Mr. Brothers felt a tough line should be taken.  It was agreed that this serious situation would have to be monitored carefully.

3.5.155 The committee noted that the market had gone down a month before but had then levelled out. Mr. Brothers reported that negotiations were continuing with Orient Leasing in relation to Manila Faith and that it had been suggested the advance be reduced to US$13 million without a WM letter of comfort.  Another company, Nam Fung, was prepared to offer US$10.5 million.

3.5.156 The WM Board met the following day.  Mr. Cheung was present.  Mr. Tipper said EAW were still collecting information and their report for HKR might be ready towards the end of July.  Mr. Brothers then reported that the WMI Group was “ going through a very difficult period”.  He explained what was being done.  The minutes of the meeting continued:

“ Mr. Brothers advised that provided the US$12 million commitment were forthcoming this should see the Wheelock Maritime Group through its difficulties for at least the next three years.  In this connection he tabled the attached cashflow which showed a total requirement of US$7 million in 1985 excluding the Spanish vessels and the unpaid trade creditors.

Mr. P. J. Griffiths queried how the proposed commitment of US$12 million to be made by HK Realty had been arrived at and in reply Mr. Brothers advised that it was an amount which was considered sufficient to satisfy WMI’s secured lenders on the question of Group support.

Mr. P. J. Griffiths then questioned the current situation with regard to the performance guarantee given by the company in respect of Aquaship’s performance on its charter of the m.v. “ Rangelock”.  He pointed out that at the time the performance guarantee had been given the Board had been assured that plans were in hand to immediately re-finance the vessel.  He enquired why the re-financing had not taken place.  In reply Mr. Brothers advised that it had subsequently been decided that it would not be feasible to sell two of WMI’s vessels to the Allied Group as had originally been planned and once that it was obvious that that proposal could not be proceeded with, WMI had been faced with insolvency with the result that it had become unable to take on new credit and had therefore had to cancel the re-financing of the “ Rangelock”, the lease of the “ Sealock” and also the re-financing of Hudong Hull No. 1126.  Mr. Brothers went on to say that once matters have been satisfactorily re-arranged the question of the re-financing of the “ Rangelock” would be reactivated.”

3.5.157 The directors were given a copy of the Rothschilds paper.

3.5.158 The WM AGM was held next day at which minority shareholders raised the position of WM directors who were also directors of HKR voting on the proposed investment in WMI.  Mr. Marden said there was no legal reason why they should not vote but they would vote on what was in the best interests of the company.

3.5.159 On 9th July, Mr. Yuen advised Mr. Brothers that certain crew wages and other trade creditors amounting to US$835,325.00 were due for payment.

3.5.160 On the same day, Mr. Brothers asked Mr. Shaw to confirm that, under the Dalian agreements, no claim would arise against WMI in the event that the ship-owning subsidiaries cancelled or defaulted.  The reply on 18th July said WMI might be liable under the performance guarantees provided for in the letter of intent although not executed when building contracts were signed.

3.5.161 On 11th July, Grindlays formally notified WMI that it reserved its rights for non-payment of principal of Yen 167 million on 7th July.  On the same day, LBI confirmed to WMI(UK) that it had renewed the balance of the Rangelock loan so that US$1 million and interest due on 13th July became due on 13th January 1984 while US$18 million was renewed until 13th July 1984 when principal of US$1 million and interest would be due.  The following day, in relation to BW 912, Midland Bank deferred interest of US$852,000.00 from 13th July to 13th October and said non-payment on that date would be an event of default.  On the same day, WMI(UK) made a formal demand on WM for non-payment by Aquaship of hire of US$337,500.00 due on 13th June and US$348,750.00 due on 13th July, hire which Aquaship had said it would be unable to pay.  WM telexed funds next day.  Directors were circulated with the information.

3.5.162 On 12th July, Chemical Bank produced a proposal for finance of up to US$12.5 million for Sestao 260.  Inter alia, the bank required an unconditional guarantee from WMI.  Noted by Mr. Brothers in the margin of this document is “ legally estopped from giving guarantee unless monies”.

3.5.163 The shipping committee met next day and reviewed the situation noting, inter alia, that WMI would not make the first payment of principal due on Rangelock but both LBI and Midland Bank had rolled up for three months the interest now due on their loans for Annalock and BW 912.  Mr. Brothers then tabled a memo from Mr. Yuen detailing trade payments due amounting to some US$835,000, £23,000 and Yen 75 million, and said:

“ that he would like to have it on record that WMI was in an extremely tight cash position and that the position would clearly deteriorate unless something was done.”

3.5.164 Because payments such as these were not incorporated in existing cash flows, which were designed to show trends over longer periods incorporating average expenses, it was agreed that it was essential to have up-to-date short-term cash requirements and to have funds to satisfy creditors who might otherwise arrest a vessel.  Mr. Brothers said he was not relying upon US$12 million from within the Group for short-term commitments for which the best hope was refinancing of World Rainbow.  Then, the minutes of the meeting record that he said:

“ he had been advised by S&C that they felt that because of the delay experienced by WMI in obtaining a commitment from HKR, S&C had lost impetus in negotiations with Banks and they therefore intended to write to the Chairman of WMI expressing their opinion that in the absence of any firm proposal from HKR the matter of support should be raised again with WM.”

3.5.165 Mr. Brothers reported on negotiations in Spain and said there were hopes of selling three ships to Iran where Mr. Lloyd had been negotiating.  This was the first indication of what became the “ ships for oil deal”.

3.5.166 On 14th July, WMI was advised by the Dalian yard that hull 270-7 would be launched on 25th July; while WMI sent financial information about Manila Faith to Orient Leasing, including a 10 year cash flow showing a net shortfall of US$1.45 million over that period.

3.5.167 15th July was a busy day.  Mr. Brothers signed heads of agreement with AESA for delivery of the four Spanish vessels between August 1983 and February 1984 at substantially reduced prices of US$15.4 million for the Sestaos and US$14 and US$14.6 million for the two Sevillas.

3.5.168 Grindlays wrote to S&C saying, subject to approval by its credit committee, it was broadly in agreement with the restructuring scheme.  But agreement was subject to conditions including: confirmation of US$12 million from HKR; confirmation by WMI of its intention to sell the six charged vessels by the end of 1984; satisfactory arrangements with the unsecured creditors and for newbuildings; the Pacnorse loan would not be repaid during the three years; and agreement by all lenders.  Grindlays said BNS also agreed but only operating costs were to be released from World Rainbow’s earnings until all existing obligations were provided for.  If this vessel was not sold by 30th June 1984, BNS would re-evaluate its position.

3.5.169 S&C wrote to Mr. Marden emphasizing that the secured banks required shareholders’ support.  They said the credibility of their attempts to get support from the banks was being undermined by the delay in learning the terms of HKR’s possible commitment.  They advised expedition.

3.5.170 Finally, there was an adjourned meeting of the WM Board at which it resolved to set up the management committee referred to in para. 2.3.18.

3.5.171 At this time, Mr. Griffiths resigned as a director and Mr. Ying, Irene Cheung, Petrus Tang and Lo Siu Kee were appointed.

3.5.172 On 19th July, LBI declared an event of default for non-payment on 13th July of interest on the Annalock loan and for non-payment of principal on Rangelock loan.  These seem to have been formalities preserving LBI’s position.  On the same day, WWS wrote to WM to say the Manila Faith charter-hire fell short of the interest payment due on 29th July by some US$59,000.00.  They asked for a remittance.

3.5.173 The shipping committee met on 20th July.  From the minutes, it was a long meeting at which WMI’s position was scrutinized but no particular decisions taken.  Mr. Brothers said he would have to take further legal advice on whether WMI might be exposed to any liability in respect of the Dalians.  He also reported he was negotiating arrangements for Annalock and BW 912 similar to those for Sealock.  Mr. Brothers said that NBNA, one of two unsecured creditors, had been told WMI “ could not make even a token repayment at this time”.

3.5.174 Heads of agreement for the Spanish vessels were discussed and were to be referred to the Board for adoption.  Finally, Mr. Brothers said it would be desirable to have the EAW report for HKR before WMI’s AGM on 12th August.  The minutes of the meeting concluded with Mr. Leung saying:

“ that consideration should be given now to the possible courses of action open to WMI in the event that EAW recommended against any commitment by HKR.  He broached the  idea that WMI might consider a rights issue if both HKR and WM declined to provide direct support and requested RJFB to co­nsult with S&C on the feasibility of a rights issue.”

3.5.175 On 21st July, WMI gave BNP a letter of comfort on behalf of Pacnorse containing the commitment referred to in para. 3.5.135.  The substituted commitment was, of course, never given.

3.5.176 On 22nd July, the management committee met.  It instituted certain reporting requirements whereby shipping committee minutes were to be submitted to the management committee.  It was to receive monthly management accounts of all Group companies and also papers for important matters to be raised with the WM Board.

3.5.177 On the same day, S&C informed WMI’s secured and unsecured banks of the arrangements for the Spanish vessels indicating that, if three vessels were sold for their valuation, a surplus of US$4 million would be realized.  Also Mr. Brothers wrote to EAW with information which had been required.  He enclosed a note entitled “ the role of WMI in the future”.  He said that in 1986 the WMI Group fleet would consist of ten bulk-carriers and that

“ It is possible to say with some certainty that at that time Wheelock Maritime’s fleet will rank among the most modern and up-to-date in the world, well positioned to compete with any.”

3.5.178 The note went on to outline the advantages of association with the Jebsen Group, and of being Philippine registered.  It then said that ten-year projections did not envisage a return to 1980 market levels until 1989, using reasonable assumptions, but

“ What in my view is more likely to happen is that we will experience a much sharper increase in rates than projected - probably in 1985 - followed by just as sharp an increase in values gradually moving upwards in any event with inflation.  The money in shipping is not in trading but in astute purchases and sales and strategic and well-timed sales in the future will be essential for the long-term success of the Group.  The fleet listed earlier has a market value today of about $150 million.  Three years ago, for vessels of that size and relative modernity the value would have been $245 million.  The shortfalls in the long-term cash flow will disappear very rapidly.”

3.5.179 On 26th July, Mr. Brothers wrote to Mr. Leung about a possible sale of Asia Heron to Allied which he had discussed with Mr. Reynolds.  This would reduce the outstanding Allied loan of US$2 million by US$1 million and produce US$2 million cash to help liquidity.  Mr. Brothers said that Mr. Reynolds would like to sell Asia Rindo as a package at the same time which would overcome the problem of making a preferred payment to Allied and would not require the agreement of other creditors.

3.5.180 On the same day, by circular, WMI directors resolved to accept the lending banks’ terms of the interest payments on Annalock and BW 912 which were to be deferred to 13 October, and to acknowledge the event of default on Rangelock.

3.5.181 On 27th July, there was a meeting of the shipping committee.  There was considerable discussion about the Spanish vessels.  Mr. Brothers was able to report a reduced price for all four vessels and would be circulating directors for approval of the arrangements.  He said it was hoped to sell three of these vessels and Manila Faith to Iran in exchange for oil.  The committee noted that attempts would be made to delay delivery of the three Spanish vessels until the sale was consummated.  Failing such sale, Mr. Brothers said the vessels would have to be traded and at US$6,000.00 per day would be virtually self-supporting, although it was later noted that there would be a deficit of $1,000 per day.  Mr. Brothers said the cash drain would not be major particularly if a buyer was found within six months.  Mr. Brothers then reminded the committee:

“that the Company was currently in an exceedingly tight liquidity position and whatever might result from the application to the parent company for support, it was going to take time and time was something the Company was rapidly running out of.  The question therefore, he said, was how could the Company raise sufficient funds to keep going in the interim.”

3.5.182 Apart from refinancing World Rainbow, Mr. Brothers explained that Orion had an outstanding loan of US$5.25 million on Asia Heron which had been valued at $8.6 million.  There was a good charter for three years which would enable US$4 million to be repaid so that Allied would get a useful return and a saleable ship.  At the same time, Allied had loaned WMI US$2 million secured on Asia Rindo worth only US$1.5 million.  Of the proceeds of sale of Asia Heron, US$1 million could be applied to reducing that loan and put it on a sound basis.  The balance of the proceeds of sale after transfer of the outstanding Asia Heron loan to Allied would be US$2 million which WMI urgently needed.  US$900,000.00 would be used for the Sealock interest payment on 8th August and the balance would see WMI through until September, when US$12 million support should have been finalized.  Therefore, Mr. Brothers

“ put forward a formal proposal that application be made to the Wheelock Marden & Co. Ltd. Management Committee for the sale of the “ Asia Heron” inter Group to Allied Investors at Clarkson’s valuation of US$8.6 million which would besides releasing much needed cash would remove one creditor altogether and regularise the Allied loan.

HWL noted that there was no doubt even if there were a favourable response to the proposal that for the purposes of the deliberations the Shipping Committee would require an up to date cashflow.  He went on to say that such a cashflow should be tabled at each Shipping Committee Meeting, in order that all of the Members of the Committee might be aware of the Company’s up to date financial position.”

3.5.183 It was then agreed that a three-month cash flow should be prepared, updated every Friday and circulated to the committee.  Meanwhile, Mr. Graham was to discuss the sale of Asia Heron with the legal advisers to see if there was any obstacle.

3.5.184 On the same day, Mr. Brothers met LBI and agreed upon the sale to and lease by LBI of Rangelock at a price equal to the outstanding loan.  Payments would be over 8½ years at rates ranging from US$250,000.00 to US$505,660.00 per month, with one final payment of US$2 million.

3.5.185 On 28th July, there was a meeting with Mr. Reynolds of S&C, part of whose note reads:

“ In the event that the proposal with HK Realty, for whatever reason, did not proceed Wheelock Marden would underwrite an equity rights issue for US$12 million, conditional on the banks supporting the S&C scheme.  Reynolds and Shaw agreed that this change in the proposal could not be put to the banks until the Wheelock Marden Board had formally committed themselves to it.  The Wheelock Marden group’s credibility with the banks was already suffering and could not withstand a second change of plan.

No rights issue prospectus should be issued until all banks and other lenders to WMI had committed themselves to the S&C scheme and formally signed the scheme documentation.”

3.5.186 And on the same day, Orient Leasing wrote to say Manila Faith was valued at US$11.1 million because operating losses for such vessels were estimated at US$1.5-2 million per year till 1985 and because similar vessels built in China were now up for sale at about US$9 million.  They asked whether WMI would accept a reduction of US$2 million or more from the figure of US$13 million which had been discussed.  Also CSSC informed that Dalian hull 270-7 had been launched on 27th July and asked for the third instalment.  The owner, Denny Shipping, replied on 1st August to say it depended entirely on WMI, that a cash injection was expected shortly and expressed the hope that CSSC would bear with them.

3.5.187 On 29th July, Mr. Brothers circulated WMI directors as to the position in relation to the Spanish vessels.  On the same day, the directors confirmed and ratified the heads of agreement which Mr. Brothers had signed earlier.

3.5.188 On 1st August, Mr. Marden received a letter from Sir Y.K. Pao asking for the WWW loan on Manila Faith to be repaid on time.  This was channelled to Mr. Brothers via Mr. Leung who noted on the letter:

“ we must do something before then and that’s what you promised.”

3.5.189 Somewhat plaintively Mr. Brothers noted

“ That what I am doing along with four new loans, the reschedulings, one refinancing and one loan transfer.  Spare a thought for the workers.”

3.5.190 On 2nd August, Rothschilds produced a further paper for discussion by WM.  Rothschilds said:

“ Following the submission of our discussion paper to the Board of Wheelock Marden we have considered in greater depth the alternative forms of support in the event that HK Realty is unable to provide a commitment to Wheelock Maritime acceptable to all parties.  It is now our understanding that Wheelock Marden is seeking to strengthen the financial base of Wheelock Maritime by means of the provision of long-term funding support, which should expedite the rescheduling of the secured loans to Wheelock Maritime.  We have therefore excluded from consideration the possibility of a short-term committed facility being provided to Wheelock Maritime by Wheelock Marden and instead carried out a more detailed review of the implications of debt and/or equity injections into Wheelock Maritime.  The results of our review are set out in the following paragraphs.  For the purpose of the review we have assumed the funding requirement to be in the region of US$12 million i.e. the maximum commitment under discussion between HK Realty and Wheelock Maritime.  We have also assumed that receipt of the full proceeds of any issue of debt or equity would be guaranteed by way of an underwriting commitment to be given by Wheelock Marden.”

3.5.191 They went on to discuss the methods and timing of an issue.  Although there seems to have been a meeting to discuss the paper there is no record or evidence of the discussion.

3.5.192 The shipping committee met on 3rd August.  They learnt that the management committee had endorsed the sale of Asia Heron to Allied.  The price of US$8.6 million based on Clarkson’s valuation was discussed.  It was felt Allied might have difficulty in justifying the price on an arm’s length basis and that US$8.3 million might be more acceptable.  This would have implications for WMI because of the condition that US$1 million of Allied’s US$2 million loan was to be retired.  It was agreed to ask Mr. Shaw for advice on this, in addition to the advice already sought, and also on whether the consent of all lenders was necessary.  Mr. Shaw provided advice by letter next day.

3.5.193 Also discussed at the meeting was refinancing of Manila Faith where a value of US$11.5 million had been agreed with Orient Leasing, with US$10.5 million from Nam Fung as a fallback.

3.5.194 Mr. Brothers reported that LBI had proposed a sale and lease-back of Rangelock instead of rescheduling.  If this proceeded, if the Orion loan was transferred to Allied on sale of Asia Heron and if the Grindlays loan was paid down, only three secured banks would be left to deal with.

3.5.195 Mr. Shaw’s advice set out the basis on which the sale was to be made.  He went on:

“ We understand that the Directors of your Company would wish to accept this offer, because there is a very urgent need for additional cash funds within the group to meet outgoings.  The present liquidity problem has arisen because negotiations with bankers, as well as the negotiations for a possible injection of additional capital by Hongkong Realty, have taken considerably longer than envisaged and, pending resolution of these matters, the banks are not releasing charterhire.  There is therefore an immediate problem which must be solved if the group is to meet its outgoings and to continue operating its vessels.  Apart from this urgent requirement, the Directors consider that the price offered is a fair price, i.e. equal to the full amount of valuation and if the vessel were offered generally on the market it is likely that it would take some time to effect a sale at a comparable price, and that would not meet the Company’s immediate requirements for additional cash funds.”

3.5.196 Later, Mr. Shaw said:

“ You have asked us to comment on whether this transaction could be open to attack as a fraudulent preference.”

3.5.197 He explained the provisions of s. 266 of the Companies Ordinance and the essence of a fraudulent preference, and said the main factor is motive.  He advised that if the dominant motive of the directors was to raise urgently needed cash, not available from another source, the transaction should fall outside s. 266.  Mr. Shaw also advised that the transaction could not be regarded as “ compounding” and indicated, whatever the legal requirements might be, it might be prudent to keep other lenders informed.

3.5.198 On the same day, Mr. Brothers asked MMB to roll over interest of US$937,000.00 due on Sealock on 8th August until 17th August pending sale of Asia Heron.

3.5.199 Next day, Orient Leasing advised it was suspending its commitment to finance Manila Faith pending a commitment by HKR.

3.5.200 The management committee also met and inter alia

“ Agreed that agenda for Board Meetings of all public companies and resolutions of all Group companies dealing with the six specific matters set out in the Wheelock Marden resolution of 15/7/83 should be subject to the Committee’s prior review.  Otherwise Group company board resolutions would be submitted to the Committee at the discretion of the Managing Directors of Wheelock Marden, who henceforth should see all minutes whether or not they are Directors of such companies.”

3.5.201 The committee also approved the sale of Asia Heron at US$8.6 million.

3.5.202 On 8th August, CSTC advised Denny that payments on Dalian 270-7 would be postponed provided all payments due and interest were made by 31st August.

3.5.203 Also on 8th August, Mr. Brothers wrote to S&C about the Rothschilds’ recommendation that WM should support WMI by way of a loan issue should the HKR commitment not materialize.  Mr. Brothers said the proposal was for HK$85 million unsecured loan stock underwritten by WM.  He enclosed a Rothschilds time-table which included

19th August - EAW advises unofficially it cannot endorse commitment by HKR on acceptable terms.

22nd August - Secured and unsecured lenders agreed rescheduling.

3.5.204 Mr. Brothers observed that the latter date was impractical.

3.5.205 On 9th August, Mr. Brothers wrote to Mr. Shaw about the advice given on 18th July concerning the possible liability for the Dalians.  He suggested counsel’s advice be obtained.

3.5.206 The shipping committee met on 10th August and reviewed the position in relation to various vessels and newbuildings.  They agreed Manila Faith and three Spanish vessels be sold to Iran if a good price could be obtained.  Meanwhile, Mr. Brothers advised he was pursuing negotiations with Orient Leasing for the sale and lease-back of Manila Faith.  A sub-committee of Mr. Brothers, Mr. Campbell and a representative of WMC was set up to update cash flow assumptions each month.

3.5.207 Next day, Mr. Brothers wrote to Orient Leasing to keep them informed.  In the letter he said of HKR and the anticipated report from EAW:

“ We do not have as yet any indication of the findings of the study.  However for your private information, should the Hong Kong Realty commitment fail to materialise, we do have other proposals in mind to raise the equivalent amount of money for WMI and these would be put in hand without delay.”

3.5.208 On 15th August, by circular to WMI directors in which Mr. Brothers said:

“ the Company is in urgent need of funds to enable it to meet its day-to-day financial commitments.  ...”

directors were asked to agree to the sale of Asia Heron at US$8.6 million.  They did so.

3.5.209 The shipping committee met again on 17th August.  Mr. Brothers reported, inter alia, that although there were a number of possibilities for refinancing Manila Faith, the primary difficulty was that support of US$12 million was not yet finalized.  A recent valuation was US$11.8 million and as, for example, Grindlays would probably not advance more than 70%, US$2 million would be needed from WMI’s resources which appeared impossible without a cash injection.  It was agreed that Mr. Brothers should actively pursue financing.

3.5.210 On 18th August, LBI wrote to WMI(UK) formally to propose the sale and lease-back of Rangelock, the vessel to be purchased by Severn Shipping Limited, a company within the LBI Group, for US$20 million and leased back to WMI(UK).  The proposal was approved by WMI directors by circular on 24th August.

3.5.211 On the same day, Mr. Brothers wrote to NBNA about the two Sestao vessels.  He proposed a joint loan by NBNA and Chemical Bank of US$12.5 million on each vessel, based on a Clarkson valuation of US$14.5 million and an expectation of selling at that level shortly.  He continued:

“ In the meantime we can trade the vessel in excess of USD6,000 per day.  The proposed USD12m commitment from the Wheelock Group has not been earmarked for any purpose and the Group thus can be expected to have adequate working capital to meet its commitments.”

3.5.212 On 22nd August, Mr. Brothers in a memorandum to the management committee made an alternative proposal for financing Manila Faith in case Orient Leasing should fall through.  In essence, a new company of which Beauforte would own 50% would purchase the vessel for US$12 million and charter back to WMI.  In setting out the background, Mr. Brothers said:

“ The Contract cost was US$19M.  Finance for US$17M had been arranged through Orient Leasing but this was subject to a Wheelock Marden Comfort Letter.  With the liquidity problems for WMI announced earlier this year, it was impractical to request this Comfort Letter and consequently the finance from Orient Leasing was not available.  World-Wide agreed therefore to provide temporary financing of US$10.5M to enable WMI to take delivery.  This financing was to be repaid on August 26th by which time it was expected that the arrangements with regard to shareholder support and consequently the loan rescheduling would have been completed.”

3.5.213 In fact, on 24th August, Orient Leasing wrote to confirm it would make US$11.5 million available by way of lease facility on condition that first, HKR commit US$12 million and second, bankers agreed to rescheduling.

3.5.214 Meanwhile, on 23rd August, S&C produced draft documentation for a rights issue of HK$85 million.  This was prepared at the instigation of Mr. Brothers who, shortly after the Rothschilds discussion paper of 2nd August, had been told by Mr. Leung that support from HKR was becoming less likely.  If HKR failed to make a commitment there would then be ready an alternative method of support by WM.  This documentation was discussed the following day when Mr. Brothers met S&C.  Mr. Brothers explained that HKR was looking negative and that “ WMI’s decision was to go ahead with the alternative of obtaining support from WM”.  He said negotiation with WM and the banks should be completed by 15th September.  Mr. Reynolds said this would be impossible as negotiation with the banks would take much longer and emphasised that he needed a definite proposal from WM to take to the banks.  He also said Pacnorse would have to be included in the rescheduling scheme if it was to be assumed the loan would not be called.  Finally, Mr. Brothers asked whether a credit facility or deficiency guarantee could be explored because WMI did not need a lot of money up front.  Mr. Reynolds said WM had two choices - inject cash or not.

3.5.215 Also on 24th August, the shipping committee met.  Mr. Brothers reported that the Spanish vessels should all be financed within two weeks and that negotiations were continuing with Iran.  Of more concern was the Pacnorse loan and the need to ensure that there would be no call by Pacnorse.  Mr. Brothers said Pacnorse cash flows showed that it had no need to call for funds and that there was an informal understanding with Jebsens who were also short of cash.  It was agreed that it was important to get something in writing from Pacnorse and Jebsens.

3.5.216 In respect of Manila Faith, it was agreed to approach WWS for agreement to extend the loan for six weeks while a sale to Beauforte was examined.  Mr. Brothers wrote to WWS next day.  He said WMI had a confirmed commitment from Orient Leasing but

“ Such commitment is however subject to the company having completed its rescheduling arrangments with its bankers and a USD12m commitment from within the Wheelock Marden Group.  These arrangements, although in hand, have been delayed due to the preparation of an independent financial report which is now anticipated within the next 10 days.  Thereafter we expect matters to move swiftly and the rescheduling and commitment will be finalized within six weeks.”

3.5.217 Mr. Brothers requested a reduced facility of US$10.5 million until 15th October.  US$10.6 million was in fact due on 30th August.  WWS replied on the same day pointing out:

“ The reasons for requesting an extension duplicate those given at the time of the loan negotiations and you can really no (sic) say with certainty that the situation will be different in 6 weeks’ time.”

WWS also enquired about charter-hire which they had not received and expressed the hope that it was due to non-payment by the charterer.  The WWS position was reserved, but on 31 August they declared an event of default.

3.5.218 Next day, Mr. Brothers instructed Mr. Cameron to pay US$152,000.00 to WWS, being charter-hire and ballast bonus, and said no payment now needed to be made on 30th August because “ its hire will cover the interest and some principal”.  But on the same day, WWS wrote formally to WMI rejecting WMI’s proposal and putting WMI on notice that should the loan not be repaid on the due date enforcement by way of arrest of sister ships within the WMI Group might be effected.  This letter was signed by Mr. Lee as director of WWS.  There was an exchange of telexes between Mr. Brothers and WWS in which on 31st August WWS again insisted on repayment, and sought details of Manila Faith to enable them to take enforcement action.

3.5.219 Also on 26th August, Mr. Stuart of Rothschilds and Mr. Sun and Mr. Reynolds of S&C met.  The note of this meeting records that Mr. Stuart of Rothschilds:

“ reported that he had a meeting with the Wheelock Marden Board yesterday and that they thought a short-term solution was better than any structured solution.  The Wheelock Marden Board was basically considering a committed credit facility for a period of 3 years and of an amount to be determined based on the revised cash flow.  Stuart said that Wheelock Marden would like to see commitment from the banks to the rescheduling scheme before agreeing to the granting of the facility.

JRR replied that this would not work and he was certain that we had to go back to the bank with a firm proposal.  However the resolution could be subject to the bank’s granting to the rescheduling scheme.  JRR said that the loan should be subordinated to the banks and should be non-interest bearing.  Stuart indicated that there was a reluctance within the Wheelock Marden Board to commit themselves and he wanted to explore other alternatives whereby Wheelock Marden’s commitment would not be necessary for the banks to agree to the scheme.  However, JRR replied that a board resolution was the only alternative.”

3.5.220 The next shipping committee meeting was 31st August.  The committee noted a Pacnorse cash flow included interest at 10% on the shareholders loan but no principal repayments, that there was nothing to report on World Rainbow but Nam Fung was prepared to enter a sale and lease-back with WMI on Manila Faith for US$9 million (on which vessel US$10.5 million was still outstanding to WWW).

3.5.221 On 1st September, pursuant to an informal retention account, Mr. Brothers asked BNP for US$90,000 as operating expenses for Inverlock in September.

3.5.222 The Pacnorse Board met in Hong Kong on 2nd September.  It noted a cash surplus projected for December 1983 of US$5.6 million declining to deficits of US$3.5 million and US$1.1 million respectively in November and December 1984 but that

“ this projection was based on the fact that there would be no increase in the levels of income during the period and it was agreed that provided interest on shareholders’ loans could be paid if necessary in advance of the year end, there would be no requirement during this period to call back any portion of shareholders’ loans.”

3.5.223 On 5th September, Mr. Brothers in a memo to Mr. Leung and Mr. Lees reported on a meeting he had had with Dr. Helmut Sohmen of WWS about Manila Faith.  WWW would take no action before the ship arrived in Japan on 11th September and then, against an undertaking from WM, would give WMI an extension of another four weeks, effectively the six-week period WMI had been seeking.  Mr. Brothers continued:

“ Assuming the decision to commit $12 million to WMI is taken this week, my main concern would be that we can complete the documentation in time, particularly as our commitment cannot be viewed as “ firm” by Orient Leasing in that it is subject to the Banks agreeing to their rescheduling and the timing of their acceptance is beyond our control.  My own preference would be to work on Orient Leasing whereby at the time we announce the $12 million commitment, in exchange for OLC agreeing an immediate drawdown, ie. before all the details are finalised, Wheelock Marden give OLC a Comfort Letter which will be returned once the rescheduling arrangements are completed.”

3.5.224 On 6th September, Mr. Campbell sent Rothschilds a three-year cash flow which assumed flat spot rates and delivery of the Dalians.  By August 1986 the deficit would be US$36 million.  Assuming the Dalians were not delivered and no penalty was payable, the deficit would be US$26 million.  This was a worst case scenario, however, and did not reflect WMC thinking on charter rates.

3.5.225 On the same day, S&C drafted a letter to WMI bankers on the basis that HKR had rejected WMI’s request for US$12 million but that WM had agreed to a subordinated credit facility of like amount.  The WM commitment would, however, be subject to bankers’ agreement to the S&C proposal for retention accounts.

3.5.226 The shipping committee met again on 7th September.  Mr. Brothers reported developments, in particular his discussions with WWS about Manila Faith.  The minutes record that Mr. Brothers:

“ expressed the opinion that World-Wide were moving to a situation whereby they could justify arresting the vessel on the basis they had given the Group every opportunity to resolve the matter.  RJFB went on to say that he had undertaken to revert to Helmut Sohmen after discussing the matter internally.  He noted that it would be necessary to re-fix the vessel to ensure it continued to earn charter hires but that this would not be possible without World-Wide’s agreement if there were a danger of the vessel being arrested.

General discussion then followed on the two remaining avenues for the refinancing of the vessel - a sale and lease-back either with Nam Fung or Orient Leasing.  It was noted that Orient Leasing’s terms were more attractive but that the arrangement could not be concluded unless there was confirmation that the $12 million commitment was forthcoming and unless WMI’s Bankers had agreed the proposed rescheduling scheme.  RJFB suggested that one way around this was to offer OLC the Group’s standard comfort letter as an ‘ interim’ arrangement on the understanding that this would be returned to Wheelocks once all the other arrangements had been completed.  This had the advantage, he said, of removing all deadlines.  WJL and HWL expressed the view that this arrangement would be unacceptable to WM.”

3.5.227 It was noted that WMI was in no position to take delivery of the Dalians and “ that steps will have to be taken in due course to arrange for their cancellation or otherwise”.  It was also noted that WMI’s three-year cash flow was to be updated each month.  There was nothing to report on World Rainbow.

3.5.228 On 8th September, Rothschilds wrote to the WM Board to advise on a course of action if WMI’s approach to HKR was unsuccessful.  They concluded that WM should consider short-term support by way of a stand-by facility.  They based their opinion on a cash flow of 1st September which, with retention accounts, showed no deficit until May 1986 but a deficit limited to US$3 million by August 1986.  A projection of 5th September showed that thereafter the deficit slipped to US$69 million by the end of 1990 but improved to US$53 million by the end of 1992.  (App. 2/17-18)

3.5.229 Rothschild drew attention to sensitive assumptions which could have a significant impact on the cash flow:

“1. Charter hire rates rise as predicted.

2. Cancellation of the Dalian newbuildings at no cost.

3. The timing and value of the sale of the four Spanish newbuildings.

4. Interest rate movements.

5. No call on the US$12.5 million loan from Pacific Norse Shipping Limited.

6. No future financing requirement by World-Wide Wheelock Shipping, Inc.”

3.5.230 After drawing attention to the relatively small short-term deficit of US$3 million in 1986 compared to WM’s existing investment, Rothschilds continued:

“ In addition, the consequences of Wheelock Marden not providing some limited support for its financially troubled subsidiary could be very damaging commercially in terms of the withdrawal of credit lines, loss of future contracts and generally more onerous terms and conditions of trade.  The adverse publicity which such a move would attract should also not be forgotten.  Support has already been given by Wheelock Marden to WMI in the form of a performance guarantee and it could be argued that Wheelock Marden has also accepted publicly the principle of group support as a result of the announcement by its subsidiary, HK Realty, that it was considering a commitment to WMI.

In our opinion, the only circumstances in which Wheelock Marden could reasonably withhold support for WMI would be where the Board were to take the view that the case against a significant recovery in charter rates and the value of the fleet vessels was overwhelming in terms of the financial impact on the group.

We do not believe that the case can be proved as at today’s date.”

3.5.231 Rothschilds then proposed a stand-by facility of US$12 million for three years, limiting drawings to US$4 million per year.  This figure was arrived at as being consistent with the amount sought from HKR and the level required by bankers for rescheduling.  Rothschilds concluded:

“ On the basis of the cash flow projection, we believe that the extent to which the proposed committed facility by Wheelock Marden to WMI would be utilised in its first year would be minimal if at all.  In addition the annual limits suggested on drawings would act as a safeguard in the event that the WMI cash flow deficit exceeds the levels projected.  Thus by the provision of a limited amount of short-term support Wheelock Marden should be able to protect its significantly larger investment in WMI at least for the next three years.

It should be noted that this support would be in addition to the performance guarantee given in respect of the Rangelock financing; Wheelock Marden’s liability in this connection is presently projected to amount to US$4.5 million over the next 27 months.

In conclusion we believe that limited short-term support for WMI should be considered by the Board of Wheelock Marden conditional upon the rescheduling of WMI’s debts as proposed by WMI’s financial advisers.  By doing so the Board will be seen to have enabled Wheelock Marden to fulfil its responsibilities to its subsidiary at limited cost while allowing more time for the highly cyclical shipping market to improve.”

3.5.232 On 12th September, Mr. Brothers sought and obtained from MMB and LBI an extension of 14 days for payment of the instalment due on Marilock.  On the same day, a copy of the three-year cash flow dated 1st September was sent to secured and unsecured bankers.

3.5.233 14th September was perhaps something of a milestone.  First, WM received from WMI(UK) a further formal demand on WM for shortfall in charter-hire on Rangelock, this time for US$168,136.00.  Then, Price Waterhouse in respect of WMI’s interim accounts for six months ended June 1983 pointed out that:

“ The carrying value of the investment in Pacnorse includes a fairly substantial amount of “ goodwill”.  The results of Pacnorse are accounted for on the equity basis.  However, in view of the poor results of Pacnorse, consideration should be given to reducing the “ goodwill” portion of the carrying value of the investment.  Depend-on (Sic) the results of Pacnorse for the second half of the year, this problem may become more significant at 31st December, 1993.”

3.5.234 Next, WMI directors received a circular indicating HKR was unlikely to proceed to make a commitment and proposing a form of letter to be sent to WM.  The directors approved the letter which was signed by Mr. Lees and sent on the same day (App. 3/22).  It said that without support in the order of US$12m over 3 years rescheduling was unlikely and without rescheduling “ WMI would not be able to meet its existing commitments as they fall due and therefore would have to cease trading”.

3.5.235 On the following day, there were three Board meetings.  HKR met at 3:00 p.m, with Mr. Lees in the chair, and endorsed its Committee’s decision that:

“ Having discussed and fully considered EAW’s report, the Committee has decided that the Company should not make a commitment of up to US$12 million to WMI.  Accordingly, a letter is today being sent, a copy of which is attached, to WMI to advise them of the Company’s decision.”

3.5.236 The letter to WMI simply advised termination of discussions.  A further letter to WMI enclosed a copy of a press announcement.

3.5.237 The WM Board met at 3:45 p.m., again with Mr. Lees in the chair.  The Board discussed WMI’s letter seeking support.  Mr. Lees proposed that WM should respond immediately and that a reply had been drafted in conjunction with the company’s legal advisers.  I have not seen that draft.  There was also, however, a draft press announcement which after setting out the background concluded

“ The Directors have decided to extend parent company support to WMI in the form of a committed stand-by facility amounting to US$12 million over a period of 3 years, subject to certain conditions, including acceptable arrangements being agreed by WMI with its lenders on the proposed rescheduling of existing loans.”

3.5.238 It is not unreasonable to assume that the draft letter would have given a similar indication.  After discussion, however, a holding letter was approved and sent:

“ We refer to your letter of 14th September 1983 asking whether we, as Wheelock Maritime International Limited’s (“ WMI”) parent company are prepared to extend financial support to WMI in an amount of the order of US$12 million limited to a period of three years.

This matter will have to be considered very carefully by our Board in conjunction with our financial advisers and therefore we are not able to provide you with a definitive answer immediately.

We can confirm that we are prepared to consider such support but before reaching a decision we need to obtain further advice from our financial and legal advisers.

We appreciate the urgency of this matter and it is our intention to let you have an answer following our Board Meeting on 23rd September, 1983.

For the avoidance of doubt, the foregoing is not, however, to be regarded as creating any legally binding obligation or commitment on our part.”

3.5.239 The WM Board also considered the draft press announcement.  The minutes of the meeting record:

“ Mr. Poon then gave further explanations with regard to his proposed amendments and advised that as the Company had only just received a formal request for support from WMI, it would be inappropriate to disclose in the announcement the terms and conditions of a commitment because it might mislead lenders into believing that were they to agree to the rescheduling and to certain other conditions that the Company would be bound to extend its support to WMI, which was not the case.

Mr. Lees acknowledged Mr. Poon’s point especially as it had not yet been decided what conditions would be imposed with regard to parent company’s support, if extended.  It was also important, Mr. Lees said, that the lenders should not construe that the Company would give support subject to the fulfilment of certain conditions.”

3.5.240 The approved announcement stated only that WM was considering WMI’s request and would respond after its next meeting on 23rd September.

3.5.241 The WMI Board, again with Mr. Lees in the chair, met at 4:30 p.m. and considered the letters from HKR and WM.  In the minutes, four fairly short paragraphs summarize the meeting:

“ At the request of Mr. Lees, Mr. D.J. Shaw outlined the legal position as regards the Company continuing to carry on business until Wheelock Marden had given its decision.  Mr. Shaw advised that the Directors could carry on trading provided they were satisfied that there was a reasonable prospect of sorting something out which would enable the Company’s financial problems to be resolved.  The fact that the parent company was, he said, carefully considering the Company’s request for support recognised the urgency of the matter and he advised that unless any Director did not think there was a reasonable prospect of sorting something out then it would be reasonable to wait for this answer.

Mr. Patrick Poon queried the legal position of a Director who was both a Director of the Company and of Wheelock Marden and in reply Mr. Shaw said that provided such a Director was of the opinion Wheelock Marden’s announcement had been made in good faith (and he had no special knowledge indicating that no such support would be forthcoming) and provided the Director concerned believed there was a reasonable prospect of sorting something out then the Director concerned could justify the Company continuing to trade until 23rd September 1983 when Wheelock Marden’s decision would be known.

Mr. Lees then asked each Director of the Company who was also a Director of Wheelock Marden to confirm that he had no special knowledge to indicate that the aforementioned was not the case.  Messrs. Patrick Poon, R.J.F. Brothers, H.W. Leung and P.C. Lee confirmed that they had no such special knowledge.  Mr. Lees confirmed that he himself had no such special knowledge.

It was resolved that Wheelock Marden’s letter dated 15th September 1983 be accepted and that the Company continue to trade until 23rd September 1983 pending Wheelock Marden’s formal decision on the Company’s request for financial support.  In the meantime care should be taken that only essential debts are paid.”

3.5.242 The meeting was, however, tape recorded and a transcript is available.  According to the transcript, which is not in dispute, Mr. Lees after referring to WM’s reply said:

“ I suppose the first question I would like to ask our legal advisers is whether in fact this letter leaves us enough prospects to allow us to continue trading until ... at least until Wheelock Marden has had the opportunity of having their Board Meeting to consider our request fully.  Would you like to comment on it as it stands?”

3.5.243 Mr. Shaw responded:

“ The basic test is, as we’ ve said on previous occasions, is the Directors may carry on trading provided they are satisfied there is a reasonable prospect of sorting something out which will enable the problems to be resolved and as long as there is a reasonable prospect they are entitled to explore proposals and explore opportunities and to continue other efforts under consideration and clearly the fact that HK Realty have said that they are not prepared to go ahead means that the Directors have got to look at the position very seriously, because as I understand it the US$12 million injection from whatever source is regarded as an essential part of any rearrangement with bankers and without it, it really is very uncertain whether the bankers would come to any deal with the Company as regards rescheduling.  The position is that a request has been put to the parent company ... put again to the parent company.  The parent company has given a non committal answer but having said that we did ask them to say if the answer is ‘ no’, to say ‘ no’ straight away.  It did not say that.  It has said it is considering it carefully now.  It recognises the urgency and therefore obviously it is for the Directors to decide that provided you still have the view there is a reasonable prospect and there can be no certainty of this ... provided there’s a reasonable prospect of it being sorted out then it could possibly continue but you are put on notice that this really is a very delicate situation and clearly the time factor is very important so that we can’ t allow this uncertainty to continue for a very long period.  Now, Wheelock Marden has come back and said ‘ we will endeavour to answer within a week’.  It seems to me that unless any Director does not think there’s a reasonable prospect of sorting something out then it is reasonable to wait for this answer.  If any Director does have that feeling now then he really ought to say it.  But if no one takes that negative position yet then I think it is reasonable to say that you can continue to wait and see, for that week.  But to very much be on notice during that week that you ought to avoid taking up any commitments other than the running of the Company and the preservation of its assets and that they have it in mind that if at the end of the week the answer is no, then it is very likely that the decision will have to be to cease trading at that point.  It’s not certain; we’ ll have to consider that situation when it arises but this is a very delicate stage and I think unless any Director does not think ... sorry, wrong negatives ... does not think there’s a reasonable prospect of a solution coming out then it is permissible to wait for a week but thereafter it has got to be looked at very carefully ... that’s my view.”

3.5.244 Mr. Poon then inquired about the position of a director who was also a director of WM to which Mr. Shaw replied:

“ Well, I think if there was a Director of Wheelock Marden and because he was a Director of Wheelock Marden he would have a certain amount of knowledge and if he knew or had reasonable grounds for thinking that the answer was very likely to be ‘ no’ next Friday, he would be in a very, very difficult position, if he had knowledge of it.  Perhaps there wasn’ t a reasonable prospect.  If on the other hand it was finely balanced or was not known yet, has no reason to think the answer will be ‘ no’, then he will be in a less difficult position.”

3.5.245 There was discussion about paying debts and whether there should be a suspension of the company’s shares, in the course of which Mr. Reynolds said:

“ I think so far as a suspension of shares is concerned the situation of the Company I think is in no different a position now as it was a week or two weeks’ ago.  In other words, it was entering into discussions with one company, HK Realty, and now it’s the parent company, with a view to negotiating funds which are necessary for its survival and unless there was a reason to suppose, as David Shaw was saying that this avenue was less likely to prove successful than the HK Realty avenue, I think the decision on trading now should be the same as before and I think therefore it would not be necessary to suspend trading.”

3.5.246 Mr. Poon then returned to the position of a director who did not think there was a reasonable prospect of sorting things out and whether he could withdraw to protect his position.  Mr. Shaw said:

“ I think the difficulty on that is that this is a decision for the Board to take and unless the Directors do have views as to the reasonable prospect, then they’ ll have to consider ceasing to trade and if one Director intimates that he is in the position, it could possibly put the other Directors in a very difficult position on whether they can take the contrary view.  Now it may be that’s based on personal feeling or possibly it’s based on some impression as to how the Wheelock Marden Board will decide.  I can’ t really tell but I don’ t think that by abstaining or absenting yourself you necessarily can avoid joining in the consequences.”

and

“ I think one point I must make is that if Wheelock Marden is not prepared to consider this seriously and has it in mind to turn us down, it would be very irresponsible to put out the announcement.  I think we can take some comfort in the fact that they are prepared to give us this serious consideration.  They’ ve written a letter ...”

3.5.247 After further exchanges, this occurred:

“ [Mr Poon]:  Well, I would like to go on record that I hold the view that there is no such prospect.

[Mr Lees]:  You say you believe there is no reasonable prospect.

[Mr Poon]:  I would like to put that on record.

[Mr Shaw]:  In other words, what you are saying is that the chances of Wheelock Marden saying ‘ yes’ must be considered very low.  That’s the inference on your remark.

[Mr Poon]:  That’s my view.

[Mr Shaw]:  But Wheelock Marden have written a letter saying they’ re going to consider it very seriously and look at this over the week which does indicate then that no firm decision has been taken at this stage.

[Mr Poon]:  I know but I’ ve also access to financial advice from also HK Realty.  I think that I cannot accept that I can hold the view that there is little prospect.

[Mr Reynolds]:  Let me make a point that I think so far as HK Realty is concerned, I think the decision for a company with no shipping interests and no shareholding interest in Wheelock Maritime and the advice from merchant banks that they would get, could very well be very different from the advice that Wheelock Marden will get given Wheelock Marden’s position as a controlling shareholder already in the shipping market and already with that shareholding interest.

[Mr Poon]:  Well I don’ t approve the context of that report.  Now let me put it this way.  Well, it’s my personal view that there is no reasonable prospect for anything to come out in favour of support at the present time for this Company.

[Mr Shaw]:  Accepting that’s your personal view, if that reflected the view of other Wheelock Marden Directors would it not be irresponsible for them to make an announcement tonight, that the public is going to think that this is a matter on which Wheelock Marden is giving serious consideration and it has not made its mind up but since it is giving it’s serious consideration it certainly is possible that it will be providing the support.  Now if that is not the case, the Wheelock Marden Board should not be bringing out that announcement - if that reflects the view of the Board.”

3.5.248 Mr. Shaw went on to emphasise that it was what the WM Board would decide, not the view of an individual director, which was important and continued:

“ Now, are you in a position at this point of time really to form any view as to what the future looks likely to be because if you are not then it must be very difficult at this point of time for any one Director to put himself in the shoes of all the other Directors, it’s difficult for you to say there’s no reasonable prospect or there’s little reasonable prospect because it is entirely dependent on the views of the other Directors.  I can obviously appreciate that you may have a personal view on it but in this case we are perhaps discussing whether the Wheelock Marden Board as a whole is likely to come to a ‘ yes’ or ‘ no’ answer.  I would have thought, assuming this has been put out in good faith, it’s really very difficult for anyone to say at this point ‘ I don’t think there is any real chance that they will come up with a yes answer’.”

3.5.249 Eventually, Mr. Poon accepted that WMI could wait for a week and could not be accused of fraudulent trading.  Each director then confirmed that he had no special knowledge and that WM’s announcement that it was considering WMI’s request had been made in good faith.  Mr. Lees commented:

“ maybe I could say first of all, from the cashflows that you’ ve all had it would seem that provided we can come forward with some support in the form of this US$12 million that there should not be a problem for two or three years provided we get support, therefore with that prospect in mind it would be in the shareholders’ interests to continue trading, if we believe it would be in their best interests to take the support but I think that until we’ ve got a definite ‘ no, there will be no support’ we would not be acting in the shareholders’ interests.  As long as we are legally covered but we are not actually, as you put it, fraudulently trading.”

3.5.250 Mr. Lees then inquired whether, if there was no support, the banks would help.  Mr. Reynolds thought it would be difficult because the banks would not believe WM would not support its subsidiary.  Mr. Lees summed up by saying:

“ I think it would be irresponsible ... put it the other way round, I think it would be irresponsible not to trade for another week if there is reasonable prospect that the parent company is seriously considering it.  They said they are considering it and I think to take precipitous action on our part would be totally wrong in this case.”

3.5.251 The meeting went on to discuss the press announcement.

3.5.252 The following day, WMI received a letter from Mr. Shaw with advice on the Dalians, which was that the yard could sue WMI under the letter of intent if the buyers failed to take delivery.  WM also received a letter from two directors, Mr. Tang and Mr. Lo, written in consultation with three other directors, Mr. Ying, Mr. Hsu and Irene Cheung, in which they posed questions about WMI’s request for support and the Rothschilds’ report of 8th September.  The queries included:

1) Why Rothschilds recommended US$12 million when there was only a US$3 million deficit in the short-term?

2) Whether Rothschilds had tested the sensitive assumptions or consulted experts on predicted charter rates?

3) What view Rothschilds took of the likelihood of US$12 million being repaid?

4) Whether Rothschilds had considered the net market value of WMI’s assets?

3.5.253 These queries were passed to Rothschilds who submitted a further report on 21st September.  After the introduction, they dealt with “ Rationale for Support”

“ Throughout our assignment one of our prime concerns has been to examine the rationale for support by Wheelock Marden of WMI.  In view of the importance of this at the present time we consider it appropriate to reiterate here the various issues of relevance which we have identified.

i) Wheelock Marden must consider the protection of its material financial interest in WMI, a company which has been a valuable member of the group for a long period of time and which was included in the consolidated accounts at 31st December, 1982 at its book net worth of HK$306 million.  This does not take into account Wheelock Marden’s projected commitment under the Rangelock financing of US$4.5 million over the next 27 months or its current account surplus with WMI of US1.7 million.  The level of support which has been proposed for WMI is also relatively small in the context of the Wheelock Marden consolidated net assets of HK$2.1 billion, particularly given the financial resources and credit lines available to the Wheelock Marden group.

ii) There may be no legal obligation on the part of the directors of a parent company to provide or arrange financial support for its subsidiary, the directors’ only responsibility being to take whatever action is in the best interests of the parent company.  However the ramifications of withholding support for a subsidiary could be far-reaching for a parent company with the damaging effects on its reputation possibly reflected in withdrawal of credit lines and loss of future contracts, not to mention the adverse publicity which such a move might attract.  In a recent case in England the initial decision of the Board of a public company, Esperanza PLC, not to stand behind one of its subsidiaries created substantial public comment.  Indeed during the legal proceedings Lord Denning said: “ It only needs half a moment’s thought to realise the enormous damage which would be done to the holding company if it did not support the individual members of its group.  I should have though that the clear expectation of everybody would be that Esperanza Ltd. would support these individual comapnies - as, beyond doubt, they ought to do.”  The Board eventually reversed its initial decision and supported the subsidiary on the basis that the adverse commercial consequences of not doing so would have been far-reaching.

iii) The US$12 million performance guarantee given by Wheelock Marden in respect of the Rangelock financing in January, 1983 could be regarded as a precedent for support being provided to WMI by its parent company.  So far as we are aware the financial standing of WMI has not deteriorated materially since then.  The Board of Wheelock Marden should therefore be prepared to justify withdrawal of support for WMI at this time.

iv) The position of Wheelock Marden is complicated by the fact that it is not only the parent company but also the general manager of WMI, for which it receives a fee and an annual commission.  Whilst this position does not impose any obligation on the Board of Wheelock Marden to extend support to WMI, criticism particularly from the minority shareholders of WMI may be a possibility if support is withheld.

It has been our conclusion that the only circumstances in which Wheelock Marden could reasonably withhold support for WMI would be where the Board were to take the view that the case against a significant improvement in the trading prospects of WMI was overwhelming in terms of the financial impact on the group.

In our letter dated 8th September, 1983 we stated that we did not believe that the case could be proved as at that date.  This conclusion was based on the cash flow projection for WMI dated 1st September, 1983 which showed a maximum cash deficit of US$3 million up to 31st August, 1986.”

3.5.254 Rothschilds went on to examine the six sensitive assumptions in greater detail and said:

1) Local brokers had confirmed that the charter-hire rates were reasonable.

2) Whether WMI could cancel the Dalians at no cost remained to be clarified.  However, WM would have to consider whether for political and commercial reasons delivery should be taken.  If the WM Board approved delivery then “ the adverse effect on the cash flow of WMI could be material”.

3) The timing and sale of the Spanish vessels were assumed as reasonable by Mr. Brothers and Mr. A. Marden.

4) Interest rates had been confirmed as reasonable by Rothschilds currency management office in London.

5) The explanations and assurances by Mr. Brothers and Mr. Lees satisfied them that the Pacnorse loan would not be called in the next three years.

6) WWW was in a strong position and would not call for shareholders’ funds.

3.5.255 Rothschilds also confirmed that the cash flow dated 1st September had been prepared with due care and attention on the basis of reasonable assumptions.  They re-affirmed what they had said about support in their earlier report and said a short-term solution should be sought with minimal financial commitment from WM “ in order to create a breathing space for WMI”.  They suggested a short-term stand-by credit facility or the purchase of WMI’s shares in WWW.  They repeated their earlier justification for a facility of US$12 million but said that on the basis of a three-year cash flow, using the same assumptions save for rescheduling as the cash flow of 1st September, which showed a deficit in only one month in the next two years, a facility of US$4 million for two years:

“ would therefore enable WMI to remain solvent for the foreseeable future and await the widely expected recovery in the shipping market without having recourse to those lending banks which have received the restructuring proposal.  A small number of banks are currently deferring agreement to the provision of finance to WMI for both newbuildings and sale and leaseback arrangements until some evidence of support from Wheelock Marden is given but we have been advised by Mr. Brothers that a facility of US$4 million limited to two years is likely to be sufficient to induce these banks to provide the necessary finance.  A facility of US$4 million would also provide a small cushion should the incidence of cash flows not correspond exactly to the projection, which is after all only intended to demonstrate the trend in cash flows.”

3.5.256 Rothschilds therefore recommended a short-term solution to create a breathing space which could be US$12 million over three years with rescheduling or US$4 million over two years without rescheduling.  They remarked:

“ The three-year facility would offer WMI a greater opportunity to recover from its current financial problems and to resecure credit facilities, which are currently frozen, but it would also demand a greater commitment from Wheelock Marden.  We do not however think that this represents a greater exposure for Wheelock Marden since any advances would be secured on a valuable asset in the form of WMI’s interest in WWW.  The shorter facility would be a lesser commitment on the part of Wheelock Marden but it would place greater emphasis on an early recovery in the shipping market.”

3.5.257 As to the proposed sale and purchase of the WWW shares, Rothschilds estimated that WMI would receive US$10 million net after setting aside cover for the Rangelock guarantee.  However,

“ we are conscious of the urgency of the decision which is required so as to avoid any risk of personal liability for fraudulent trading on the part of the directors of WMI.  The other aspect which should be considered is whether the lending banks would view the sale and purchase agreement as evidence of support by Wheelock Marden for WMI.”

3.5.258 Insofar as their report did not deal with the detailed queries raised by Mr. Tang and Mr. Lo, Rothschilds said:

“ The chances of repayment of funds advanced by Wheelock Marden to WMI are principally dependent upon a recovery in charter rates materialising in the next two or three years and the significance of that recovery.  It remains our view that the inconsiderable commitment (in the context of the Wheelock Marden group’s net assets) is a small price to pay for extending the life of WMI by two or three years and enabling that company to profit from any recovery which should take place.  The Board of Wheelock Marden can then decide on the action to be taken on the basis of the circumstances which are prevailing at that time.”

3.5.259 As to the net market value of WMI’s assets, Rothschilds had been unable to obtain the necessary information in the time available.

3.5.260 Going back some days, also on 16th September, Fraserburgh Shipping, owner of Sevilla 261, was reminded it had not paid US$520,000.00 due on keel laying despite an earlier reminder on 18th July.  It was asked to remedy this default situation.

3.5.261 On 20th September, Mr. Shaw through his London office sought advice from counsel.  He seems to have done this in order to be prepared for the eventuality of WM declining to support WMI.  In his covering note to Mr. Freeland in London, Mr. Shaw said:

“ As mentioned to you on the telephone, my personal view is that commercially it is a situation where WMI should carry on since, despite its serious financial position, it is possible that accommodation can be reached for its various creditors which would enable WMI to carry on in some form or another.  However, picture painted by Instructions is rather bleak.  What we are looking for is advice from Counsel which would enable Directors properly to carry on and to give them as much legal “ rope” as possible.

Having said that, it should be borne in mind that heavy reliance is being placed on the legal advice in this case and we must ensure that the advice is comprehensive and cannot subsequently be attacked by Directors.  We require some “ constructive” advice from Counsel.”

3.5.262 The instructions set out the background and the advice already given.  They then stated:

“ There are cogent commercial reasons why WM should give such support; for example, in order to protect its existing investment and to preserve the good reputation of the WM Group.  However, it is known that doubt exists amongst certain of the Directors of WM as to whether it is prudent for the parent company to inject further funds into shipping, which is currently a very depressed industry, and it is possible that those Directors of WM who are to make this decision (those Directors of WM who are also Directors of WMI are disqualified from voting by virtue of their “ interest”) will not feel able to vote in favour of providing the support requested by WMI.  This will obviously depend upon their consideration of all relevant factors at the Board Meeting on 23 September and on the advice received from their financial advisers.  However, it is possible that the WM Directors will decide either to refuse their request or state that the provision of any further funds to WMI must first be approved by the shareholders of WM in general meeting.”

3.5.263 Counsel was asked, inter alia, to advise whether the directors of WMI could continue to trade and incur fresh credit while all possibilities were being explored. 

3.5.264 The following day, Mr. Shaw sent a supplemental memo for counsel.  In a covering note to Mr. Freeland he said:

“ Have had further meeting this morning with Robbie Brothers, Schroders & Chartered and others to discuss the position.  There was considerable discussion as to whether, if WM say that the only basis on which they can provide support is by getting a proposal approved at general meeting, this should be rejected.  It would probably produce the worst of all possible worlds, in that WMI would be faced with a period of further uncertainty which, apart from paralysing efforts to resolve their various problems, would lead to a situation where, if the shareholders turned down the proposal, the result would almost certainly be liquidation.  What we have been discussing today is whether it may be possible to come up with proposals whereby, rather than straight financial support, WMI would either sell its interest in Worldwide Wheelock to WM or would be able to raise bank financing against the security of its shareholding in Worldwide Wheelock.

I would be grateful if you could pass the attached Supplemental Memorandum to Counsel.  As you are aware, we really need some “ comfort” which will enable the Directors to permit WMI to continue, while all opportunities are being explored.”

3.5.265 The supplemental memo briefly stated that S&C had indicated that WMI’s position was less serious than that of a number of Hong Kong companies that were in difficulties and that even without WM support the banks might agree to some arrangement that would allow WMI to carry on.

3.5.266 On the same day, Mr. Shaw also wrote to WMI asking for settlement of his firm’s account of HK$479,216.00 and for a further HK$200,000.00 on account of costs.  Also, Mr. Brothers wrote to WM with a proposal for WM to buy WMI’s shares in WWW for about US$17 million.

3.5.267 Next day, Mr. Shaw received from Mr. Freeland a summary of counsel’s advice.  It was:

“1. From the facts in your instructions and in the Schroder report, he felt that although company technically insolvent (and Directors aware of this), whilst Directors of WMI are waiting for answer from WM there is no reason why Directors should not go on trading.

2. Position which seems to concern him is that while WMI (and its subsidiaries) continue trading they are inevitably incurring new credit e.g. bunkers and other day to day operating expenses.  In order that they may continue to do so without incurring personal liability, they must have reasonable grounds for believing that there is some prospect that the new creditor (and existing creditors) will be paid in full within a reasonable time.  If shareholder support is not forthcoming then Directors must satisfy themselves that without such support new creditors will be paid.”

3.5.268 The summary continued that if there was no positive indication of shareholders support, major creditors would have to be approached to see if they would support WMI but

“ unless Schroders and Directors were able to say within 7 days that (taking into account the creditors reappraisal of the situation following the lack of shareholder support) there was a reasonable prospect of an agreement in principle being reached on a scheme whereby the Directors could be satisfied that there was a reasonable prospect etc. of all creditors being paid in full, the Directors would then have no alternative but to cease trading.”

3.5.269 The summary concluded that counsel:

“ was not particularly encouraging, but he is obviously prepared to go along with a continuation of trading on the basis described above.”

3.5.270 The WM Board met on 23rd September at 3:30 p.m.  They considered the Rothschilds’ report of 21st September and WMI’s letter proposing the sale of the WWW shares.  Mr. Young of Rothschilds said if the market did not improve during the breathing space “ further action would have to be taken possibly involving the dismantling of the WMI Group in an orderly manner”.  Mr. Tang said he and a number of directors felt US$12 million to be too large but felt US$4 million was feasible.  After discussion, the Board approved a US$4 million stand-by facility for two years subject, inter alia, to termination if any creditor sought to liquidate WMI.

3.5.271 The WMI Board met at 8:30 p.m. and considered WM’s offer.  Mr. Reynolds of S&C was asked what lender reaction might be.  His opinion was:

“ that the secured lenders would do nothing for the time being, but that they would be prepared to come to an agreement with the Company.  He advised that the unsecured lenders would present more of a problem, because the US$4 million stand-by credit facility would not assist them in any way and in any case they had the power to put the Company into liquidation.  Mr. Reynolds went on to say that the cashflow showed a deficit of US$3.5 million in December 1985 which took no account of the Dalian newbuildings.  He pointed out that on present projections the Company could not afford to proceed with those newbuildings.”

3.5.272 Asked about the legal position:

“ Mr. Shaw advised that provided the Directors continued to hold the view that taking into account the proposed stand-by facility and other relevant factors there was a reasonable prospect that the Company would be able to pay off all creditors at a later date it would be possible for the Company to continue business for the time being.”

3.5.273 It was agreed to accept WM’s proposal and that

“ with the provision of the stand-by credit facility the Company was an acceptable basis for continuing to trade, but that the position would have to be monitored very carefully on a continuing basis.”

3.5.274 An announcement was made the same day which indicated that WMI “ no longer intends to request a rescheduling of future obligations under existing secured loan facilities” over the two-year period.

3.5.275 Next day, Mr. Brothers telexed Orient Leasing with details of the announcement and asked to draw down on the loan on Manila Faith as soon as possible.  He informed WWS of this.  The matter was, however, not so easily resolved.  Notwithstanding the US$4 million loan facility, Orient Leasing on 27th September asked that HSBC reschedule its loan repayments, that being a reference to Marilock.  HSBC, however, felt it could not accept any new commitments.  Mr. Brothers therefore had to write to Orient Leasing on 29th September explaining the arrangements which WMI had with the bank, i.e. a guarantee of the Sterling lease payments to C&W, the extent of which depended on Marilock’s earnings.  He asked for the condition to be deleted and for advice as to when Orient Leasing’s board would consider the application.

3.5.276 Indicative of WMI’s cash problems was a note from Mr. Campbell to Mr. Yuen on 26th September with a list of outstanding invoices as at 23rd September which was thought might be “ useful in determining who should receive priority of payment”.

3.5.277 On 27th September, Mr. Shaw wrote to Mr. Brothers asking for further information about the Dalians to enable his office to pursue with counsel whether the yard might have waived its rights in relation to a WMI guarantee.  Mr. Brothers supplied the information on 30th September.

3.5.278 On 28th September, Mr. Brothers advised Wayfoong that WMI was drawing down US$1.6 million for payment to MMB in relation to the joint loan from MMB and LBI on Marilock.  WMI directors by circular approved the execution of security documents including a third mortgage on Asia Culture and Asia Heron and a guarantee by WMI.  This sum together with interest would be repayable on 30th December.

3.5.279 On 29th September, BOA wrote in relation to the loan on Fenlock, seeking authority to pay principal and interest out of charter-hire accumulated in a control account.  After advice from Mr. Shaw and Mr. Reynolds, authority was given on 4th October but BOA’s request for an assignment of WWW dividends was left in abeyance.

3.5.280 On 30th September, Mr. Brothers produced the general manager’s report for WMI for six months ending June 1983.  He reported a net loss of HK$14.8 million against a profit of HK$2.6 million the previous year or after adjustments a loss of HK$11.4 million against a profit of HK$11.6 million.  He said:

“ The market continues at abysmal levels not altogether different from those prevalent last year.  The primary cause behind the drop in profits is the additional losses incurred by Pacific Norse Shipping Co. Ltd. which last year was still partially shielded by existing contracts of affreightment from the full effects of the poor market.

Turning to the principal activity of the Group:-

Shipping

Although very low rates have continued to prevail during the period under review some improvement can be noted.  This was particularly so last Spring when there was an appreciable improvement in rates (although from very low levels) and an appreciation in ship values.  Advantage was taken of this improvement to fix several of our vessels over the summer months as well as commence the planned tonnage disposal programme.  This programme is centred on the older vessels and sales were concluded for the “ Asia Morality”, “ Asia Loyalty”, “ Asia Flamingo” and “ Asia Fidelity”.  These sales were to Iranian and Turkish buyers and generally satisfactory prices were obtained.”

3.5.281 And later,

“ Despite this improved background in international market rates, the past six months have been particularly difficult for the Group.  Projected sales of two particular vessels did not materialise and the Group was faced with a liquidity crisis in March.  These difficulties were only partially alleviated by the sale of its shares in Wheelock Marden & Stewart.  The only immediate course to retain liquidity was a suspension of principal repayments to the Company’s Banks.  This action of course led to a great deal of adverse publicity.  An application was also submitted to the Parent Company for support by way of a loan or guarantee.  This request was subsequently referred to Hong Kong Realty whose reply declining to assist was not received until mid-September.  A decision eventually by the Parent Company to provide a secured stand-by credit facility for US$4 million for a period of two years has now enabled the Group to return to more normal trading conditions.  The earlier request to the Company’s Banks for a rescheduling of existing debt has been temporarily dropped although it is still intended to approach the Banks in due course for a renegotiation of the loan terms.  Regrettably the position taken by the Board of the Parent Company over the matter of support has greatly exacerbated the situation in the most public manner and the task of negotiating better terms with the Banks will be a difficult one.”

3.5.282 The WMI Board met the same day.  Mr. Brothers said:

“ discussions had been held with lenders following (WM’s) indication of support in the form of a secured stand-by credit facility of US$4 million over a period of two years.  Most of the lenders had, he said, expressed disappointment that support to the extent of US$4 million only was forthcoming and they had expressed interest in learning the terms of the stand-by credit facility.”

3.5.283 Mr. Brothers also reported that finance for the Spanish vessels was almost in place but that it might be necessary to request a further deferment in delivery of the Dalians.

3.5.284 At a shipping committee meeting on the same day, Mr. Brothers advised that Japan Leasing had been asked for a decision about World Rainbow while priority was being given to the sale of Manila Faith to resolve the problem of the WWW loan.  He also said Mr. Shaw had advised counsel’s opinion should be obtained about cancelling the Dalians.

3.5.285 An important element of WMI’s strategy was and had been for some time careful cash management.  An idea of how this was approached is given in a memo dated 11th October from Mr. Cameron to Mr. Campbell, who was to be responsible for WMI during Mr. Cameron’s absence.  Mr. Cameron said:

“ In these very difficult times it is not possible to give precise instructions, however my recent practice has been to accumulate funds and only make payments in respect of:

a)  Interest

b)  Items to avoid delays in vessels sailings, or other hold ups etc.

c)  Items for which C.W. Yuen make urgent entreaties, for matters of necessity.”

3.5.286 Mr. Cameron went on to mention a number of outstanding payments which Mr. Yuen had not included, for example US$120,000.00 for management fees on Marilock, a commitment fee of US$150,000.00 to Ansbacher for loans on two Spanish vessels, and legal fees.

3.5.287 On 12th October, WM formally advised WMI of the terms of the US$4 million facility which was to be for two years from 17th October 1983.  It was a detailed formal document.  Seven days’ notice of any draw-down was required and draw-down was conditional upon there being no outstanding event of default and no other source of funds.  In case of default, which included any enforcement action by a creditor, WM could terminate the facility so that all outstanding moneys became payable.  Interest was to be paid, calculated at a daily rate.  The facility was to be secured by a pledge by Glamorgan of its WWW shares.

3.5.288 After consideration by the WMI directors, WM’s offer was accepted the same day.

3.5.289 At the same time, WM agreed to give a letter of comfort to Ansbacher in relation to loans on the two Sestao vessels.  This letter simply confirmed that WM would not without notice change any of the existing shareholding arrangements between it, WMI and the owners of the two vessels.

3.5.290 The shipping committee met the same day.  Mr. Brothers reported AESA had agreed not to impose penalties of US$950,000.00 for late delivery.  There was less good news, however, in relation to Manila Faith:

“ It was noted that it was possible Orient Leasing would back out of the proposed re-financing of “ Manila Faith” in which case World-Wide might arrest the vessel and take over its management.

General discussion then followed on the various alternatives available during which it was noted that the Nam Fung proposal did not provide sufficient funds to pay off the World-Wide Wheelock temporary loan.  Word-Wide had suggested that WMI should pay an additional amount of say US$500,000 to World-Wide Wheelock Shipping Inc. to reduce the loan in order to secure their agreement to allow sufficient time for the vessel to be sold or refinanced elsewhere.”

3.5.291 The committee also agreed that charter-hire fixtures were to be reported to it each week and that a register would be maintained.  They also discussed the transfer of WMC and WMS to WMI at the end of the year.

3.5.292 Finally, on 12th October, WMI(UK) gave notice to WM of a shortfall on the Rangelock charter-hire of US$222,477.00 and made a formal demand for payment.

3.5.293 The WM Board met again on 18th October when Mr. Brothers reported that it was unlikely finance would be coming for Manila Faith from the source originally anticipated and other arrangements were being investigated.

3.5.294 On 19th October, there was bad news from Norton Rose about the Dalians.  Counsel had advised that WMI’s letter of intent was legally binding.

3.5.295 The shipping committee met the same day.  Mr. Brothers reported that three Spanish vessels were delivered on 13th October and that Iran had signed a non-binding agreement for sale to them of the four Spanish vessels, Manila Faith (and another Spanish vessel which was not owned by the WMI Group) for US$82 million in exchange for oil.  He said in relation to World Rainbow that Japan Leasing wanted a four-year cash flow.  It was agreed that this was not appropriate but a Clarkson valuation would be obtained (it was obtained on 21st October, being US$11.5 million).  The committee also noted that Orient Leasing were now unlikely to proceed to refinance Manila Faith, that Grindlays were not prepared to provide the level required, and that leasing possibilities with Ansbacher would be pursued.

3.5.296 On 21st October, WMI wrote to Allied asking them to roll over their loan of $1 million due on 21st October for a further two months.  Allied replied on 31st October agreeing to roll over to 30th November only.

3.5.297 On 24th October, CSTC advised that Dalian 270-8 would be launched on 7th October and asked for the third instalment to be remitted.  Also on 24th October, BNP wrote formally to confirm the arrangements which Mr. Brothers had made with it in relation to its two loans.  For Inverlock, WMI was to get US$90,000.00 per month operating expenses, the balance of hire going to interest and principal.  For the three vessel loan, all charter-hire was go towards interest and principal.

3.5.298 Some time earlier, the Marden family had apparently asked Wardley Limited to consider a proposal that the family acquire WM’s shareholding in WMI.  At the request of Mr. Marden, Mr. Brothers met Wardley.  Subsequently, Wardley produced a report on 8th October, a report that is no longer available.  Mr. Brothers saw the report and on 24th October prepared comments for the family.  He was critical of the report which he regarded as superficial.  In the absence of the report there is little point in reviewing Mr. Brothers’ comments in detail.  In relation to Pacnorse, however, Mr. Brothers said:

“ No “open-ended deferment of shareholders’ loans had been agreed upon between the parties”.  WMI and Jebsens each owe Pacnorse US$12.5m and it is only on the basis of the cash flow presented by Jebsens for the period ending 1984 that we have been able to state that no repayment of the loan is anticipated.  The cash flow deficit in August 1984 referred to was anticipated to be met out the acceleration of interest payments due by both shareholders at the end of the year.  At that time and after payment of interest, current projections show the deficit at US$1.1m.”

3.5.299 On 25th October, Mr. Brothers wrote to WMI(UK) which had just retained US$35,000.00 out of charter-hire from Asia Hunter to pay Turnbull Scott for the operation of Marilock.  He said WMI(UK) was not to retain any hire without written instruction from Hong Kong because in some cases all charter-hire was to go to creditor banks.  He concluded:

“ Although our cash resources at the present time are extremely tight, we hope that within a short period we will be able to conclude arrangements which will ease the position and enable us to keep accounts current.  In the meantime, I am relying upon you to do your best to placate our creditors.”

3.5.300 The shipping committee met on 26th October.  Mr. Brothers reported that Japan Leasing was concerned about its position on World Rainbow, now valued at US$11.5 million, when the charter expired in 1988.  US$5 million of the proposed loan would still be outstanding.  Japan Leasing wished to reduce the amount of the loan but this would be resisted.  As to Manila Faith, Mr. Brothers said Showa Leasing were considering and that an approach might be made to WWS to put the loan on a firmer basis.  He also said he intended going to China to negotiate price and terms for the Dalians.  A request to Allied to roll over the US$1 million loan until December was noted and, because the loan should be repaid by 31 December, it was agreed to sell Asia Rindo.

3.5.301 On 1 November, a 10 year cash flow incorporating retention accounts was prepared (App. 2/19).  It showed a deficit of US$57.3 million December 1990, reducing to $38 million in December 1992.

3.5.302 The shipping committee met again on 2nd November.  Mr. Brothers reported that Japan Leasing had indicated they might be prepared to go to US$9 million on World Rainbow.  He had said to them he expected at least US$10 million.  Mr. Lees advised that WWS would agree a two-month extension of the loan on Manila Faith (an agreement which was formally confirmed next day).  Mr. Brothers also said that there might be a possibility of sale and lease-back for the two BW newbuildings.

3.5.303 On 3rd November, S&C submitted their account for HK$431,500.00 outstanding on their total fee of HK$1.25 million.  They said they were ready to continue to advise on the basis of a retainer of HK$50,000.00 per quarter.  A retainer was later agreed at a reduced sum.

3.5.304 On 9th November, CSTC advised that Dalian 270-8 was launched on 7th November and asked for payment of the third instalment.

3.5.305 The shipping committee met the same day.  Mr. A. Marden informed them that Japan Leasing had not approved the sale and lease-back of World Rainbow.  However, negotiations were continuing.  Mr. A. Marden was authorized to negotiate on a price of US$9.5 million down to US$9 million.  The committee noted that a drawing of US$500,000.00 under WM’s facility would be made on 23rd November.  Further, because Allied had agreed only to roll over its loan to 30th November, Asia Rindo would have to be sold or refinanced with minimum delay.  The committee also discussed the Dalians, noting that the price was US$30.5 million while the current market value was only US$20 million.

3.5.306 On 11th November, WMI(UK) made a further demand on WM under the Rangelock guarantee for US$204,000.00.  On the same day, by circular WMI directors agreed to give notice of intention to draw down US$500,000.00 on 23rd November under the WM facility because the refinancing of World Rainbow and Manila Faith, which had been assumed in WMI’s cash flows, had not taken place.  Also, Grindlays advised that following the sale of three vessels its US$11 million loan had been reduced to US$4.5 million.

3.5.307 The WM directors met on 16th November and approved the draw-down.  It was confirmed that a copy of the facility letter had been sent to all banks and yards except Dalian because it was not appropriate in view of sensitive negotiations.  Mr. Lees informed the meeting of counsel’s opinion as to WMI’s obligation to the Dalian yard.

3.5.308 On the same day, LBI agreed that because the owner of Annalock had said it was still unable to pay interest on the loan it would further roll over interest of US$955,000.00.

3.5.309 The shipping committee met on 17th November.  They noted a four-year cash flow had been prepared to enable Japan Leasing to evaluate World Rainbow and agreed the matter be progressed speedily.  They also noted that WWW would make a loan of a further US$210,000.00 for Giant to lend to the owner of Asia Hunter to make a re-delivery settlement with its charterer.  The loan now totalling US$10.5 million would become payable by 5th November 1984.

3.5.310 On 18th November, the Dalian yard wrote to WMS acknowledging the difficulties facing both sides because of the depression in the shipping business and expressing the hope that the matter could be settled next month.

3.5.311 The shipping committee met again on 23rd November and learnt that Japan Leasing would make a decision in a week.  They noted that US$1.1 million was due on the Marilock loan in December.  It had been assumed that this would be rolled over as part of a three-year package but HSS had indicated it should be paid.  It was agreed that ways of raising this sum be explored including a third mortgage on World Rainbow. 

3.5.312 On 28th November, Mr. Campbell produced a memo on short-term cash flow forecasts for WMI.  He had set up a shipping account committee within his department, which had earlier defined “ critical payments” and “ urgent overdue payments”.  In his memo, he said:

“ Initially we should confine payments in the short term cash forecast to those which are classified as critical.

Once we have prepared a forecast showing only critical payments we can determine whether or not there will be sufficient funds to meet them.

Later we may include other payments particularly those which are classified as urgent overdue payments.

If a forecast projects a deficiency then management must be approached to take some action to make good the deficiency.  Management will then be aware that if no action is taken the continued operation of vessels will be endangered.”

3.5.313 Later in a memo dated 30th January 1984 to Mr. Cameron, Mr. Campbell said:

“ Critical payments include and are confined to the following items.

*  Payments for loan interest and principal

*  Crewing fees

*  Canal dues

*  Cash advances to meet ships disbursements

*  Other items which are deemed to be critical from time to time (e.g. payments for bunkers which must be made to ensure that future supplies are not cut off).

In broad terms critical payments are those which at any particular point in time we consider must be made in order to ensure the continued operation of our vessels.”

3.5.314 The shipping committee met on 30th November.  They discussed fallback arrangements for World Rainbow in case Japan Leasing did not proceed.  Alternatives were an approach to HSS or the possibility of an increased loan by Grindlays.  It was also agreed that refinancing of Manila Faith by 5th January be given priority.  The committee also heard that Mr. Brothers had reported a proposal that BW acquire hull 912 for US$1.  Subject to a review of the figures, the committee agreed in principle.  The committee noted that the Allied loan was repayable that day and considered how the vessel might be refinanced.  It was agreed that local banks and RBS be approached.  It was also agreed to acquire WMC and WMS from WM at net asset value on 1st January 1984.

3.5.315 Mr. A. Marden followed up on 2nd December by writing to Grindlays about World Rainbow with a three-year cash flow which, inter alia, included liquidation of WWW.  The WMI shareholding was valued at US$17 million.  After a deduction of US$3 million in respect of WM’s Rangelock guarantee, US$14 million would be injected into the cash flow.  Mr. A. Marden concluded:

“ As you can see from the graph, the extra US$14.00M just about does the trick but the sale and lease-back of the “ World Rainbow” is an integral part of the management’s plan to get the Company back on an even keel again.  Could you please give the matter your urgent attention?”

3.5.316 On the same day, WWS wrote to Giant asking it to remit US$100,343.00 interest in respect of the loan on Manila Faith.  This was corrected to US$122,800.00 on 5th December to reflect the increase in the loan by US$210,000.00 on 2nd December.

3.5.317 On 5th December, BOA wrote to Mr. Brothers informing him that while he had been away in November Portland Investments Ltd., the owner of Fenlock, had missed an interest and principal payment on 2nd November, although it was paid on 10th November.  The bank said it felt it appropriate to take no action “ in spirit of our relationship” but asked for a strong effort to honour payment obligations.

3.5.318 The shipping committee met 8th December.  There had been no progress on refinancing World Rainbow.  The committee noted that an interest payment on Manila Faith was not yet paid, that US$50,000.00 would be paid on account, and that US$64,000.00 was due when the vessel would be redelivered on 11th December from charter to Iran.  The committee also noted that Allied would be asked to roll over their loan to 29th December.

3.5.319 On 9th December, Mr. Brothers wrote a position paper on WMI for the WM Board.  It was

“ to summarize the latest position of the Group as regards what has already been settled and what is hoped will be achieved in the future.”

3.5.320 In the paper, Mr. Brothers said:

“ General Strategy.  By and large all existing secured creditors are fully secured by their respective charges.  It is imperative that the Group retains as liquid a position as possible if it is to avoid a repeat of the crisis that developed in the Spring of 1983 when it ran out of funds.  The Group therefore intends to negotiate with all existing secured creditors to agree a loan repayment profile that will reduce principal repayments to a level that can be funded by the earnings of the asset charged whilst at the same time ensuring that the bank concerned remains fully secured.  Lloyds Bank International have already agreed to this arrangement with regard to the m.v. Rangelock.  The other banks significantly affected are The Hongkong & Shanghai Banking Corporation, Banque Nationale de Paris and Bank of America and discussions to this end will be initiated in the near future.  Special arrangements have to be worked out with respect to the Unsecured Banks and Pacnorse and this is dealt with later in the paper.

A cornerstone of management’s plan is to reduce overall debt exposure and this will be achieved by selling all of the older vessels as the opportunity arises plus all four of the Spanish built newbuildings.  So far this year, the Group has sold five vessels.

Liquidity will be retained by the refinancing of one vessel (“ World Rainbow”) and a liquidation or sale of the Group’s holding in World-Wide Wheelock.

No new credits will be negotiated or newbuildings accepted if same would severely strain current liquidity.  To the extent that this cannot be achieved, the Group is prepared to risk defaulting on existing newbuilding contracts.”

3.5.321 Mr. Brothers went on to summarize the position in relation to the BW newbuildings and the Dalians, where delivery had been deferred against a 10% payment, but

“ The Group has not however been able to make payment and further discussions are being scheduled to resolve this situation.  No parent company guarantees have been given in respect of these contracts although the effect of an outright cancellation would be far-reaching.”

3.5.322 Of WWW Mr. Brothers said:

“ Wheelock Maritime’s share in the Group is estimated to have a value of $17 million or more depending on the values placed on the tonnage.  These shares have been pledged to Wheelock Marden for an estimated aggregate amount of $10 million.  The additional equity in the shares is of fundamental importance to Wheelock Maritime and now that the tankers (which in the past had been the main obstacle to a sale on liquidation of the Company) have been sold, a closer look must be taken into the future of this particular Group.

3.5.323 Mr. Brothers concluded:

“ The $4 million “ Working Capital” Facility. 

Formalities in respect of this facility have been completed and an amount of $500,000 has already been drawn down.  It is imperative for the future well-being of the Group that this facility is retained to meet vital working capital requirements in the future and is not utilized to meet large loan principal repayments or down-payments on newbuildings which if this was to be the case, would in the absence of any other source of funds, quickly force the Group into another cash crisis and possible liquidation.

Summary.

The events of 1983 have naturally enough destroyed confidence in the Wheelock Maritime Group and a quiet period of consolidation is now very necessary to enable management to carry out its task of streamlining the fleet and restoring its credibility.  There remains some considerable ‘ equity’ value in the Group and the vessels owned by Wheelock Maritime will, when the market recovers, be highly marketable and as such profitable.  The Group will continue to work as closely as possible with its existing creditors to ensure that they are fully informed of all developments and it is hoped that in return, Wheelock Maritime can rely on their support until the overall market situation returns to more normal trading conditions.”

3.5.324 On 12th December, WMI(UK) made a further demand on WM for US$111,750.00 under the Rangelock guarantee.  Also Mr. Brothers wrote to LBI and Midland Bank asking that interest on the loans relating to Annalock and BW912, due on 13th December, be rolled over for one month while negotiations with the Fund continued.  LBI refused next day and asked for payment of US$999,000.00 on 14th December.  Midland however agreed.  At the same time there was a similar disagreement over the Marilock loan which was syndicated between LBI and MMB - MMB was prepared to roll over principal due on 14th December but LBI was not.  There was a flurry of telex correspondence.  On 14th December, it was agreed LBI would roll over interest due on BW 912 to 21st December but that the payment due on Marilock must be made.  This was achieved by obtaining from HSS a second loan facility of US$1.13 million repayable on 30th March 1986 against fourth mortgages on Asia Culture and Asia Hunter, a fourth assignment of earnings on Asia Hunter and a WMI guarantee.  It was also agreed that the earlier facility of US$1.16 million should also be repayable on 30th March 1986.  Approval by WMI directors was given to these two matters by circular on 14th December and 20th December. 

3.5.325 The shipping committee also met on 14th December at which Mr. Brothers’ paper was tabled.  Mr. Brothers reported that the chances of Japan Leasing providing finance for World Rainbow were more remote.  It was therefore agreed “ it was of the utmost importance to pursue other alternatives”, “ that it would not be feasible to get an existing creditor to increase their exposure” and it “ would be given top priority with a view to finalizing matters early in the new year”.  As to Manila Faith, Mr. Brothers said he had had discussions with Ansbacher about a sale and lease-back but Ansbacher felt another bank should be brought in.  He said he had asked Ansbacher to indicate their willingness to refinance so that he might persuade WWS to extend the WWW loan beyond 5th January.  In the meantime, he had asked Mr. Lee about liquidating WWW and Mr. Lee had indicated that Sir Y.K. Pao might be in favour if it solved the Manila Faith loan.

3.5.326 Mr. Brothers also reported on the BW position and Allied loan.  As to the latter, Ansbacher was proposing a sale and lease-back of Asia Rindo but it would be expensive and Ansbacher doubted if documentation could be completed by 29th December.  Ansbacher was prepared to advance US$1 million against an Allied guarantee.  The meeting discussed whether Mr. Brothers should go to Beijing about the Dalians.  If so, he should take a cash flow and advise the Chinese “ that as the Group had no funds available it would not be possible to proceed with the purchase ... ”.  It would be preferable for the Chinese not to take legal action in view of the legal opinion about WMI’s obligations.  Finally, Mr. Campbell reported “ insufficient funds were available” to make payment due to LBI and Midland Bank that day and other arrangements would be made.

3.5.327 On 17th December, Mr. Campbell provided a calculation of WMI’s share upon liquidation of WWW.  This would be approximately US$13.7 million but that did not take account of the Manila Faith loan then amounting to US$10.7 million.

3.5.328 On 19th December, Mr. Marden delivered his report as chairman of the Hong Kong Shipowners Association.  He said 1983 had been even more difficult than forecast.  Although there had been some activity earlier in the year, it had fallen back by summer.  There was, however, a slight note of optimism for the oil trade.

3.5.329 On the same day, Wardley produced a report for Mr. Marden and “ others”.  Apart from Mr. Marden, it was not apparently seen by any other Defendant director.  Its purpose was to examine a possible purchase of WMI by a group of investors, probably headed by Mr. Marden, for a nominal consideration.  The investors would when required inject some fresh capital.  Wardley’s analysis and comment was based upon information supplied by WMI management.  Wardley took the view, inter alia, that charter rates for 1985 would have to double those projected for 1984 to meet cash outflows, that the over-supply of bulk-carriers in the 40-70,000 tonne range would be apparent for many years, and that

“ there will be upturns in the market but that these will probably be of short duration and consequently the opportunities for WMI to trade out of its shortfall will be limited.”

3.5.330 In relation to Pacnorse, Wardley noted the US$12.5 million loan was repayable on demand and that Pacnorse cash flows projected a deficit beginning in August 1984, so

“ The cash flow position of Pacnorse would therefore seem even more urgent than that of WMI and it is dependent upon an uplift in the market at an earlier stage.  The position of Pacnorse therefore requires detailed examination since its possible insolvency could also result in the insolvency of the WMI group of companies.”

3.5.331 In considering market reaction, Wardley said:

“ With regard to the public, it has been well publicised for some time now that WMI is in or faces severe financial difficulties.  The public is also fully aware of the attempts made by WMI to obtain support from within the Wheelock Marden group of companies and of the limited success which protracted efforts has encountered.  Faced with what is at best an unhelpful and at worst an obstructive parent company, the market would probably view an acquisition as a bona fide positive attempt to tackle the problems of WMI free of the restrictive attitude of the remainder of the Wheelock Marden group of companies.”

3.5.332 Wardley concluded:

“(a)  substantial future uplifts in the charter market are necessary if WMI is to meet its liabilities from increased earnings and sales of vessels;

(b)  the WMI fleet does not show a sufficient degree of diversity and is highly reliant on Panamax vessels which are currently uneconomic;

(c)  our view of the world shipping markets is not encouraging in that it is unlikely that a sustained uplift will occur in the bulk carrier market - at best the upturns will be of short duration which will allow a partial trading out by WMI.

Based on the above, we consider that the risks seemingly inherent in the proposed acquisition outweigh the possible returns and we would not recommend the acquisition.”

3.5.333 The WM Board met next day.  In relation to WMI, Mr. Lees reported that the oil deal was progressing and included the four Spanish newbuildings and Manila Faith, and he

“ noted that whilst the proposed sale would involve an overall loss, it would mean that the vessels concerned would be out of WMI’s books and would considerably ease the situation as far as WMI was concerned.”

3.5.334 Mr. Lees also said that if WWW was liquidated WM would be given alternative security for the pledge on WWW shares, perhaps a mortgage of a debt-free Manila Faith.  Finally, he

“ reported that considerable progress had been made over the past year in resolving WMI’s difficulties and hopefully the remaining problems could largely be settled over the  next four months.  He went on to say that a revival in the shipping market was anticipated sometime over the next two years but if a revival was further delayed WMI should be in a stronger position to survive as a result of the steps already taken.

The Chairman congratulated all those who had been concerned with resolving WMI’s difficulties.”

3.5.335 The WMI Board met on 21st December.  Again they “ agreed that it was extremely important to refinance World Rainbow without delay”.  However, it was noted that the liquidation of WWW or the sale of Manila Faith would obviate the need to refinance this vessel.

3.5.336 On 26th December, Mr. Lloyd was in Iran.  He and the Iranians signed an offer and counter-offer for the sale and purchase of seven ships for US$88 million and US$87 million respectively.  These included five WMI ships, being the four Spanish vessels and Manila Faith.  This document valued the Sestao vessels at approximately US$13.5 million each and the Sevillas and Manila Faith at US$12 million.  Payment would be in oil.

3.5.337 The shipping committee met on 28th December and noted that Mr. Lloyd was cautious about the oil deal but that a result should be known within four weeks.  Mr. Brothers reported on arrangements he had made for Annalock and BW912.  The sale of 912 was approved and the agreement made by Mr. Brothers for 911 was ratified by WMI directors by circular that day.  The committee noted that US$60,000.00 would be paid to NBNA on 30th December although there would be no commitment to making monthly payments of this amount until the Group’s financial position was clearer.

3.5.338 On the same day, Mr. Brothers wrote to WMI(UK) emphasizing that “ overall cash management of WMI remains critical and it would not be an over-exaggeration to say that everyday counts”.  Next day, WMI(UK) reported the sale of Asia Momo to Iran and that US$1.7 million had been credited in respect of the Grindlays’ six ship loan.

3.5.339 On 30th December, LBI agreed to roll over until 4th January interest due on 30th December of approximately US$1 million in relation to the Annalock loan because the owner was unable to pay.  By circular, WMI directors agreed on the same day, WMI being guarantor.

3.6    1984

3.6.1 The shipping committee met on 4th January 1984.  Mr. Brothers reported that the Chartered Bank was considering refinancing World Rainbow at a slightly lower amount and that repayments would be matched to charter-hire income.  Mr. Campbell said a payment of interest and capital was due in mid January and would be US$150,000.00 in excess of the amount in the retention account.  Mr. Brothers also reported that there was little doubt agreement would be reached for the sale of seven ships to Iran for US$88 million in exchange for oil.  The prices, although a little disappointing, were above the market.  The next step would be the sale of the oil which would have to be completed at the same time so that the Group would know where it stood.  Discussion about the sale followed.

3.6.2 The Minutes of the meeting later recorded:

“ PAYMENTS:   RJFB advised that it had become possible for the Group to secure a certain amount of trade credit because suppliers, etc. were now somewhat less concerned about the Group’s financial difficulties. However, with the delay in the re-financing of the “ World Rainbow” and the employment of certain vessels on Voyage basis requiring larger initial payments, it was temporarily impossible to generate sufficient funds to support the day-to-day operation of the Group’s vessels.  This unsatisfactory situation would, he said, shortly be remedied on expected receipts of funds from re-financing and freights.  Whereas we knew that the situation would be remedied, the non-payment of over-due bills would if allowed to continue create an unnecessary lack of outside confidence in the Group which would only make our position more difficult in the long run.  Moreover there were instances such as had happened during the previous week when the “ Rangelock” had almost missed transitting the Suez Canal due to lack of funds.

RJFB advised that whereas he was most anxious to preserve the US$4 million working capital facility from Wheelock Marden, he believed that there could be instances whereby it should be used to meet certain unavoidable commitments especially as in the case of bunkers, compensatory freights would be due in the near future thereby enabling repayment.

General discussion then followed on the delays in the re-financing of the “ Manila Faith” and the “ World Rainbow” which had resulted in the funds assumed in the cashflow not being available for operational purposes.  WJL stated that it was important not to deviate from the cashflow shown to the Wheelock Marden Board.  HWL however felt that provided definite funds were anticipated and these could be limited to and repaid from earnings of a particular vessel, the Stand-by Facility should be utilized.  It was finally agreed that documentation be prepared for an immediate drawn-down of a further amount of approximately US$500,000 under the Wheelock Marden secured standby credit facility on the basis that the amount would be repaid upon draw down of the Ansbacher loan against the “ Asia Rindo”.”

3.6.3 On 6th January, the WMI directors agreed by circular to ask to draw down a further US$500,000.00 because the refinancing of World Rainbow and Manila Faith was not yet concluded.  Repayment would be made out of the refinancing, expected shortly, of Asia Rindo by Ansbacher.  WMI needed some US$340,000.00 for bunkers and US$170,000.00 for interest on Manila Faith which WWS were insisting should be paid on 6th January as a condition for an extension of the loan for one month to 6th February.  WM approved the draw-down on 9th January.

3.6.4 Unfortunately for Mr. Brothers and WMI a new problem, designed to throw WMI’s careful cash flows into disarray, now began to emerge.  It came from the joint-venture, Pacnorse, and was summarized by Mr. Brothers thus in para 252.4 of his witness statement

“ Pacnorse’s problems were twofold.  Firstly, the failure by shippers to ship contractual quantities under the contracts of affreightment.  This resulted in a loss of income.  There was not a great deal that Pacnorse could do.  They could not sensibly sue the shippers, who were in breach of the contracts of affreightment, principally because this would be bad for future business and also because in some cases the shippers were in jurisdictions where this would probably not prove worthwhile.  Secondly, those pool ships which were on the spot market were affected by the drop in market rates.  Pacnorse’s problem was a gradual decline to a position where income did not cover expenditure caused by the progressive ending of its contracts of affreightment.  The extent of the problem was unforeseen in 1983.  At that time, the problems had been the Grand Marine charters and the Namura newbuildings.  The first problem had been overcome in 1983 by Pacnorse repurchasing six of the eight vessels from Grand Marine and taking over the leases of the remaining two vessels which were owned by Orient Leasing.  It was thought that the second problem would be overcome by a sale of Namura hull 865.”

3.6.5 Namura 865 was to be sold to an Egyptian buyer, Misr Edco, financed by the Japanese yard against a letter of credit from an Egyptian bank, Bank Misr.  On 7th January, a telex was received from Mr.  Gabrielsen of Jebsens indicating there were doubts about whether the bank would give the letter of credit.  This followed an earlier communication from him in December about Pacnorse generally, in which he queried whether Pacnorse could say it could not take delivery of Namura 865

“ Without inferring that the shareholders are unable to come up with sufficient repayments of sharehol[d]er loans as well provide cash for bank guarantee-security?

it would seem difficult for pacnorse to take this position if the company had kept the dlrs 25 mill.  in a decemt bank instead.  the other creditors in pacnorse would obviously have view on acceptability of taking delivery, but we have achieved a substantial deferment of delivery of the other three already.  is therefore our (pacnorses) position defendable?”

3.6.6 Mr. Brothers wrote to Mr. Gabrielsen on 9th January.  He said:  “1984 is to be a critical year for Pacnorse” and referred to “ the desperate straits” of Pacnorse.  He made suggestions for improving operational expenses and then said:

“ There can be absolutely no question of Pacnorse taking the Namura 865.  The clearer this becomes to Namura, the more likely “ Japan Inc.” will find a way to accept the Egyptian risk that is involved and it is vital that this sale should go through.”

3.6.7 Mr. Brothers noted Mr. Gabrielsen’s comments about Pacnorse saying it could not take delivery and continued:

“ Our total Shareholders’ Loan is the only cushion available to Pacnorse.  It must be preserved to meet our obligations to our existing Bankers who I believe have to have overall priority if our resources do not stretch to covering our total commitments.  If this was a year ago, I would have said that Pacnorse must stand by its total commitments.  However in WMI’s case and in facing a cash situation which made this impossible, we had to adopt priorities which have effectively enabled us to keep faith with our Bankers while achieving very substantial concessions from the Yards.  It wasn’ t easy and no doubt our good name has suffered but it was the right course nevertheless.  If you run three year projections using today’s income figures, you will see how important it is to preserve our position which will be doubly illustrated if you then superimpose the acceptance and subsequent trading of 865 let alone the other three newbuildings.  I know that your Organisation is in the direct firing line here but by facing the problem now, we give Pacnorse a good chance of surviving whatever levels the market may hold in the future.  While hoping for the best, we must plan for the worst which in this case the likelihood is as I have proposed your projections should be prepared.  (Incidentally, surely our Bankers will not be happy with projections that stop at 12/84?  In our own case we provide until end 1986).  If, without a market recovery we cannot see three years ahead with shareholder support but without the Namuras then I would reluctantly query the advisability of either shareholder giving any support although, I quickly stress, I don’ t think this situation yet applies.”

3.6.8 Finally, Mr. Brothers said:  “ I do not believe that there will be a problem for us in paying interest quarterly and it is clearly necessary”.

3.6.9 Earlier WMI cash flows in February and March 1983 had provided for repayment of the Pacnorse loans by instalments in 1983/84.  However, agreement by Pacnorse to repurchase eight vessels sold to Grand Marine obviated the need to repay.  From the cash flow of 6th April 1983 onwards, no provision was made for repayment.  However, a cash flow dated 24th January 1984 was to incorporate quarterly payments of interest at 10%.

3.6.10 On 10th January, Ansbacher, which had provided top-up finance for the Sestaos, agreed to defer interest due on 13th January.  Of US$165,192.00 then due, US$126,000.00 would be paid from a retention account while the balance of US$36,000.00 would be advanced to the borrowers at Libor plus 3½% and would be repayable on 31st January.  This letter bears Mr. Brothers’ manuscript note to Mr. Campbell:

“ We should now make payment of the outstanding interest to avoid the excessive costs.”

3.6.11 On 11th January, there was a meeting of the shipping committee at which Mr. Brothers reported, inter alia, that a decision was still awaited from Chartered Bank about Manila Faith and that Shell had expressed interest in acquiring the Iranian oil.  A paper prepared by Mr. Campbell indicated that the sale of the five WMI vessels for oil would produce a net cash inflow of US$810,000.00.

3.6.12 On 12th January, WMI directors by circular approved refinancing of Asia Rindo. The vessel was sold to and chartered back by Ansbacher for almost US$1.5 million.  The outstanding Allied loan was paid off leaving nearly US$500,000.00 cash for WMI.  The cash was used on 17th January to repay a similar sum drawn from the WM facility.  But on that day, WMI gave notice of its need to draw down a further US$900,000.00 because of the failure to refinance World Rainbow and Manila Faith.  WM approved by circular the same day.  WMI certified that US$924,000.00 needed for interest, crewing fees and bunkers could not be paid out of other funds available.  US$900,000.00 was repaid on 30th January when Thorlock (one of the Sestao hulls) charter-hire was received.

3.6.13 The shipping committee also met on 17th January.  Mr. Brothers reported that Chartered Bank had declined to refinance World Rainbow.  He had contacted Grindlays who were working on a possible refinancing.  He hoped to finalize matter soon.  Mr. Brothers also reported that WWS seemed content to allow the situation in respect of the loan on Manila Faith to continue pending the sale to Iran.  There was, however, some disappointing news about the oil because Iran was posing difficulties about purchasers of the oil and would not accept Shell.

3.6.14 Later that day, the WM Board met.  They discussed matters arising from the management committee minutes.  In particular, that the sale of five ships for oil would result in a loss of US$14 million, that is in the profit and loss account, but that there would be a reduced cash drain and some US$800,000.00 would be realized.  The Board also noted that discussions (between Mr. Brothers and Sir Y.K. Pao) had taken place concerning the possible liquidation of WWW.  Such liquidation would realize about US$13 million for WMI on current values.  In response to a query by Mr. Ortiz-Patino, it was agreed to prepared a cash flow and balance sheet reflecting the sale of BW 912 and of the ships for oil.

3.6.15 On 18 January Midland Bank declared an event of default in relation to BW 912 for non-payment of interest on 13 January.  It reserved its rights.

3.6.16 A cash flow was prepared on about 24th January (App. 2/20).  The assumptions included the sale of five ships for oil, the sale of BW 912, the liquidation of WWW and cancellation of the Dalians without penalty.  It showed a deficit of US$13 million in December 1986.

3.6.17 Mr. Campbell produced four balance sheets on 31st January.  With WMI vessels and Pacnorse at book value and cost respectively, net assets were US$36 million.  With Pacnorse at an estimated net asset value, WMI’s net assets would be US$18 million.  With vessels at market value, net assets would be US$16 million.  A combination of the last two balance sheets produced a net deficiency of US$2 million.

3.6.18 The shipping committee met on 25th January.  Mr. Brothers reported there were indications that Grindlays would refinance World Rainbow for US$9 million.  There was also the possibility of Chartered Bank reviewing its decision and of Ansbacher refinancing.  So it was agreed that it was in WMI’s interests to raise as much as possible even if it resulted in a small delay.

3.6.19 On the same day, WMI received a telex from Mr. Gabrielsen which said that, because of the problems over Namura 865 and the failure to receive money back on it, Pacnorse would have a cash shortfall in February of US$2 million.  Mr. Gabrielsen enquired whether an advance interest payment would be a solution, i.e. interest on the shareholders’ loans.  Mr. Brothers replied on 27th January expressing hope that between WMI and Jebsens they could provide sufficient funds to enable Pacnorse to meet current outstandings with its bankers.  He emphasised, however, that Pacnorse could not afford to take on further liability in the form of Namura 865.  He said WMI was looking into the question of an advance interest payment.

3.6.20 On 1st February, Mr. Brothers received a further telex from Mr. Gabrielsen, the effect of which was that no money could be expected from Misr Edco and “as the situation is now Pacnorse require a minimum of $2 million from the shareholders value February 8th, WMI’s share of this would be $1 million”.  This was followed on 7th February by a letter which refers to a telephone call about which there is no evidence.  Mr. Gabrielsen said:

“Suggest you inform NatWest of cash - shortfall in Pacnorse and advise them of call on shareholders and due to your own problems this only produced DLRS 1mill which is insufficient to pay the amount due to NatWest 10th Feb.  (DLRS. 1,567,000).  We could pay them part of the amount and defer balance.  Next problem would be payments on most vessels (other than NatWest).  These are due 1st March.  Difficult to see that NatWest would accept us paying to them without having covered their shortfall.  Would therefore suggest that you ask them only to defer till 29th Feb.  We may have to talk to all the other creditors of Pacnorse prior to that.  The board meeting in Misr Edco is now scheduled for 20th Feb. And it is unlikely that Pacnorse will receive any money from Misr Edco until last days of March.”

3.6.21 The shipping committee met on 8th February.  Mr. Brothers reported that negotiations were still continuing with Grindlays for refinancing Manila Faith at around US$9.5 million.  He also reported that the oil deal was going ahead, twelve ships being sold for US$99 million including the four Spanish vessels, Manila Faith, Manila Pride, Manila Enterprise, Asia Rindo and Asia Hunter.  Shell would now purchase the oil and a loss of US$1.95 million on the sale of the oil would be absorbed pro-rata by each shipowning company.

3.6.22 Turning to Pacnorse, Mr. Brothers explained the problems and said that while Jebsens had indicated that they would pay US$1 million, unless WMI also repaid US$1 million Pacnorse would be unable fully to pay Nat West.  He said it was suggested he meet Nat West as the loan had been arranged through Hong Kong and ask for a partial roll-over pending a long-term solution.  In the meantime,

“it was agreed that it was important that steps be taken to resolve this problem as a matter of urgency.  If the confidence of our bankers was to be retained, it was important that we were seen to be working closely with Jebsens.”

3.6.23 The shipping committee also agreed to apply to draw down a further US$950,000.00 pending receipt of freight on Sealock, there being a cash shortfall in the following week.  It was also agreed to contact Grindlays to see if $217,000.00 due for freight on Manila Enterprise could be released “to help alleviate the tight cash position”.  The application for the draw-down was made to and approved by WM on 14th February on the basis that World Rainbow and Manila Faith had still not been refinanced.  Urgent payments included some US$500,000.00 for bunkers, a difficulty attendant upon voyage charters while WMI continued to operate on the spot market.

3.6.24 On 13th February, WMI (UK) made a further formal demand on WM for $140,460.00 under the Rangelock guarantee.  On the same day, Ansbacher advised it had not received principal and interest due that day on the loans on the 2 Sestaos.  It appears payment of some US$64,000 was made a day or two later.

3.6.25 The shipping committee met on 15th February.  Mr. Brothers reported a prospect of Security Pacific refinancing World Rainbow for US$10.5 million.  He also reported on the oil deal under which there would be bilateral agreements for the sale of ships and for the sale of oil by the National Iranian Oil Corporation (NIOC) to Shell.  Then:

“The steps in the deal were summarised as follows:-

(i) Shell would buy the oil and open a Letter of Credit in favour of NIOC for US$100 million drawable on shipment of oil, the first such shipment being for approximately US$65 million;

(ii) NIOC would deliver oil and draw against Shell’s L/C;

(iii) under an irrevocable instruction or agreement NIOC would deposit US$65 million and subsequent oil payments to a special deposit account under the name of Bank Markazi;

(iv) The “escrow bank” would open an L/C in favour of WMI for the purchase of the twelve vessels;

(v) WMI would give an irrevocable instruction to the “escrow bank” to pay L/C funds on the sale of ships to the various mortgagee banks and to pay US$1.95 million to Shell, being the agreed discount on the oil price.

An outstanding difficulty was in relation to the US$1.95 million discount on the GSP of the oil.  Shell were being asked to sign the ‘oil agreement’ before the ‘bilateral agreement’ was concluded and were concerned to ensure they were covered in respect of the US$1.95 million.  They had requested that they be provided with a bank guarantee in that respect.

It was noted that The Hongkong and Shanghai Banking Corporation would be approached to provide the necessary guarantee and that Wheelock Marden & Co. Ltd. (WM) had indicated that they would be prepared to counter-guarantee the Bank in respect of that guarantee.  WM had advised that any amount it was called upon to pay under its counter-guarantee would be earmarked against the unutilised portion of the US$4 million Stand-by Credit Facility, and that counter guarantee given by them would be conditional upon the ‘bilateral agreement’ being entered into.  WMI would be required to give their irrevocable instruction to pay US$1.95 million to Shell to enable the Bank’s guarantee and WM’s counter-guarantee to be released and cancelled.”

3.6.26 The committee also approved a pro-forma balance sheet as at 31st March which had been required at the previous meeting.  With retained vessels at book value of US$116 million and Pacnorse at equity value at December 1982 less losses, WMI had net assets of US$19.8 million.

3.6.27 Mr. Brothers also reported that Nat West had agreed to roll over the Pacnorse loan for ten days.  Finally, he said on a recent visit to Beijing it was clear that the Dalian yard would not agree to cancellation but might make ten-year finance available.

3.6.28 By circular the same day, in respect of the oil deal the WMI directors agreed in principle the sale of eight WMI vessels for US$70.1 million which, although involving a net loss of US$12.4 million, was now estimated to produce $246,000.00 cash after sale expenses and outstanding loans had been paid.  Also, Mr. Brothers wrote to HSBC asking it to guarantee the oil discount.  The following day, HSBC gave a guarantee to Shell, and WM directors by circular agreed to provide the counter-guarantee for $1.95 million which sum was to be counted within the $4 million facility.  In effect, therefore, the facility was reduced by almost half.  Finally, on 20th February, by circular WMI directors ratified the signing of the bilateral agreements and agreed that the WM counter-guarantee of the bank guarantee upon which Shell was insisting should be ear-marked against the facility.

3.6.29 On 16th February, LBI advised WMI (UK) that repayments of principal of US$1 million on the Rangelock loan due on 13th July 1983 and $1 million due on 14th January 1984 were now rolled over to 13th March 1984.

3.6.30 On 22nd February, the shipping committee heard that Security Pacific were unlikely to refinance World Rainbow and that negotiations with Grindlays had been stepped up.  Discussions were also taking place with Jebsens about Pacnorse.  On the same day, a summary of trade creditors showed US$4.2 million invoiced but not paid.  Of this US$1.8 million was attributable to “WMC”.  It is not clear whether this was WMI’s current account with WM or amounts due to WM Chartering.

3.6.31 On 28th February, WMI applied for and WM granted a further draw-down of $150,000.00 for interest on loans because of the failure to refinance World Rainbow and Manila Faith.  WMI proposed repayment out of charter-hire due.  It is perhaps indicative of how the WM Group worked in that Mr. Lees and Mr. Leung signed WMI’s request.  Mr. Lees, Mr. Leung and Mr. Brothers signed the WM circular, and Mr. Brothers signed WM’s letter to WMI approving the draw-down.

3.6.32 The shipping committee met next day.  Mr. Brothers reported that it appeared likely that Grindlays would refinance World Rainbow at $9.5 million and that the repayment schedule would be linked to the ship’s charter-hire and to the earnings of Asia Culture of which Grindlays had an assignment.  He also reported a delay in the oil deal.  The committee then heard that the management committee had asked for the balance sheet for 30th June to incorporate the market value of remaining vessels.

3.6.33 Mr. Brothers next reported that the Pacnorse problem was not only the failure of Misr Edco to pay $2.5 million but also the failure of the pool to pay $1.67 million owed to Pacnorse.  It was therefore agreed to be essential to put Pacnorse in a position to ensure minimum calls on shareholders.  Mr. Brothers said he and Mr. Gabrielsen had recently seen the Pacnorse banks in London and asked them to waive principal payments for two years.  He

“advised that Pacnorse’s current cash difficulties had served to focus attention on the loans made to Pacnorse shareholders and on the need to resolve matters for, whatever strategy might be formulated for WMI, this could be adversely affected by the Pacnorse situation.  For this reason, he said, it was proposed to change the shareholders’ loans into fixed interest loans repayable over 15 years at an interest rate of 6%.  The matter would, he said, be developed further at the Pacnorse Board Meeting to be held in Hong Kong on 2nd March 1984.

He went on to say that Jebsens had now accepted that Pacnorse’s last three Namura newbuildings would have to be cancelled and it was hoped that Jebsens’ relationship with Namura would enable this to be done without penalty in legal action.

It was noted that Jebsens had repaid US$1 million of their shareholders’ loan.  WMI had not been able to do the same.”

3.6.34 Mr. Brothers then reminded the committee of the arrangements he had been trying to make for Annalock, i.e. a sale to and lease-back by Cable & Wireless similar to that for Marilock.  Cable & Wireless were prepared to do this once tax clearance for Marilock had been given but such clearance was still awaited.  Under the proposed arrangements LBI were taking additional exposure and had asked WMI to put up some “earnest money” from the facility.  Mr. Brothers thought US$1 million would be required.  To allow time for the committee to consider the various options it was agreed to ask BW to delay delivery until 16th March when there should be a commitment to refinance World Rainbow and the oil deal should have progressed.  It was also noted that some $3-400,000.00 would have to be arranged to finance extras.

3.6.35 Mr. Brothers telexed BW next day asking for delivery of Annalock to be delayed to 16th March.  BW replied on 2nd March requiring delivery no later than 14th March.

3.6.36 Further summaries of trade creditors now showed that the position had deteriorated from $4.3 million on 24th February to $5 million on 2nd March.

3.6.37 On 2nd March, Mr. Campbell produced WMI’s draft profit and loss account and balance sheet for 1983.  He pointed out that no provision had been made for

(1)     Diminution in value of Pacnorse;

(2)     Losses on the sale of ships for oil;

(3)     Instalments paid on the Dalians where cancellation had been assumed;

(4)     Investment in BW 912.

3.6.38 The balance sheet showed net assets of HK$574 million and the profit and loss account a net profit of HK$1.2 million, which exchange fluctuations and extraordinary items had rescued from a loss of $125 million.  On 5th March, Mr. Cameron wrote to the shipping committee suggesting that provision should be made for these items to be consistent with the balance sheet for 31st March 1984 previously provided to the committee.  At a meeting of the shipping committee on 7th March it was agreed that appropriate provision should be made, the committee noting, inter alia, “our intention to cancel the Dalian newbuildings”.

3.6.39 At the same meeting, the committee learned that Grindlays was still unable to advise when a decision would be taken about World Rainbow.  The committee agreed to pursue this actively “as there were no alternative sources of refinance available”.

3.6.40 The committee then discussed Pacnorse which had had a board meeting on 2nd March.  It noted

“Following the repayment by Jebsens of US$1 million of their shareholders loan they had requested WMI to indicate that it would be taking steps to repay a similar amount of US$1 million which would be sufficient to solve the immediate problem, provided the US$2.5 million was paid on the Namura 865 by MISR Edco.  In view of the fact that Pacnorse had now formally minuted the cash call, it was agreed that it was essential that WMI match Jebsens’ repayment of the shareholders loan.

It was further noted that approaches had been made to all of Pacnorse’s bankers for a re-scheduling of the loans and that a final decision from the relevant lenders was awaited.

[Mr. Campbell] reported that because WMI had not repaid US$1 million of their shareholders loan Pacnorse were not providing the necessary funds to operate the vessels under WMS’ management and that payments totalling US$180,000 had not been made to the crewing agents of the 3 Pacnorse vessels, which if paid by WMI would place an additional strain on the cashflow.”

3.6.41 It was also reported that it was not possible to proceed with a sale and lease with Cable & Wireless for Annalock.  Alternative arrangements were to be sought.  Finally, it was agreed that WMI would have to draw down the remaining $450,000.00 in the facility.  A request was made next day, WMI again citing failure to refinance World Rainbow and Manila Faith and explaining that crewing fees and bunkers amounting to $448,000.00 required urgent payment.  Approval was given by WM on the same day.  Next day, WMI repaid out of Sealock hire $950,000.00 which had been drawn down on 14th February.

3.6.42 Following the Pacnorse Board meeting, Mr. Brothers had drafted a proposal for its creditors under which

(1) Principal and interest would be paid up to 31st March 1984 but thereafter, for two years, interest only;

(2) The shareholders’ loans would be termed out over fifteen years by a series of notes guaranteed by the shareholders, payable quarterly.  Payment could only be accelerated to meet operating expenses and to keep interest current;

(3) After 30th September 1984, interest only would be payable until 31st March 1986 on outstandings due to Grand Marine;

(4) All earnings in excess of the amount required to meet operating expenses and interest would be used to pay principal pro-rata.

3.6.43 The proposal said creditors should agree in principle by 31st March.  It also noted that Mr. Brothers had agreed with Jebsens that

(1) WMI would increase its March payment to Pacnorse from $312,500.00 to $1 million;

(2) WMI during 1984 would subscribe further funds so that the shareholders’ loans would become pari passu;

(3) Until the end of 1984 all payments would be regarded as principal repayments.

3.6.44 Mr. Campbell sent a copy of the proposal to the managing directors under cover of a memo on 9th March with a view to obtaining WMI’s agreement to put the proposal to creditors.  He also provided a Pacnorse cash flow that assumed

(1) No cash from Misr Edco but no further payments to Namura;

(2) Each partner would contribute $1.78 million in 1984 to cover any deficit.

Mr. Campbell noted that WMI had assumed each partner would only pay interest amounting to $1.25 million so an extra $534,000.00 was envisaged.  To date, WMI had paid only $180,000.00 by way of operating expenses for Pacnorse vessels.

(3) Cash in hand at 1st January was $3.8 million.  However, the balance sheet at 31st December 1983 showed a cash balance of only $2 million.  If the latter sum was correct each partner would have to find a further $900,000.00 by August or September.

3.6.45 The shipping committee met on 14th March.  They deferred discussion of the Pacnorse proposal to the next meeting.  They learned that Grindlays were unlikely to refinance World Rainbow but Mr. Brothers would approach Ansbacher; that documentation of the oil deal had been completed on 9th March; and that the Cable & Wireless sale and lease-back for Annalock was proceeding again, delivery being now scheduled for 20th March.  The committee also noted it would be necessary again to draw down US$950,000.00 under the facility.

3.6.46 That draw-down was made the same day, World Rainbow and Manila Faith still remaining unfinanced, and used to pay crewing fees, interest and other operating expenses.  A short-term cash flow provided by Mr. Campbell on 14th March showed trade creditors of $5.1 million, although a further summary 2 days later reduced this amount to $4.8 million.

3.6.47 On 15th March, Mr. Campbell provided the managing directors with a balance sheet for 30th June.  He said he assumed, inter alia, repayment to Pacnorse of $1.78 million but the receipt of $13.75 million from the liquidation of WWW of which:  $5.9 million would be used to repay WM for the facility and payments under the Aquaship guarantee; $6.7 million would be provided as security to LBI for Aquaship; and $1 million would be paid to the Fund against deferred Annalock instalments.

3.6.48 A further assumption was for the receipt of $9.5 million from the refinancing of World Rainbow of which $2.44 million would be contributed to the general funds of WMI.  Mr. Campbell also said that the balance sheet showed that the Fund’s loans exceeded the Danish Kroner deposits by US$25 million.  However, if neither loans nor deposits were disturbed, the deposits would service all but US$9 million of the loans.  There was therefore a potential asset of approximately $16 million.  Taking the remaining WMI vessels at book value of US$168 million, the balance sheet showed that WMI would have net assets of $39 million.  At a market value for the vessels of $123 million, however, there would be a deficiency of about $6 million.

3.6.49 The management committee met on 20th March.  It noted that World Rainbow was still not refinanced, possibly because WMI was trying to borrow too much and because of a fear by some banks about the value of the existing charter.  It also learned in relation to Pacnorse that the Egyptian purchasers of Namura 865 would not complete; that rescheduling was already being discussed with the banks; and that WMI would probably have to repay $1 million to Pacnorse if agreement on rescheduling was to be reached.

3.6.50 The shipping committee met on 21st March.  World Rainbow remained unfinanced with Ansbacher being pursued.  It was agreed that WMI would have to repay $1 million to Pacnorse by the end of March.  $370,000.00 had already been paid for operating expenses and the balance would have to come from refinancing World Rainbow, the proceeds of the oil deal or a second mortgage.  As to Annalock, negotiations for a Cable & Wireless sale and lease-back had broken down so it would have to be delivered to another WMI subsidiary.

3.6.51 On the same day, by circular, WMI directors approved the arrangements for Annalock by which the building contract was novated to a U.K. subsidiary, Mastship.

3.6.52 On 22 March, Annalock was delivered.  Also, Mr. Cameron asked Mr. Campbell to tie up WMI’s accounts for 1983.  The draft accounts showed WMI had extraordinary losses of $56 million and the Group $112 million.

3.6.53 On 26th March, Mr. Brothers wrote to LBI Hong Kong about arrangements he had made in relation to Rangelock while in London.  WMI’s tax advisers were going to look into the possibility of deriving benefits from changes to capital allowance and corporation taxes in U.K.  In the meantime, the proposed sale and lease-back to Severn was to be held in abeyance.

3.6.54 The shipping committee also met on 26th March.  They discussed the 1983 accounts and agreed nothing should be written off the Dalians because it was planned to finance them and take delivery.  The committee noted that Namura had agreed to cancel all four Pacnorse hulls without further payment although amounts already paid would be forfeited.  This would increase Pacnorse’s 1983 losses.  The committee then noted that Grindlays might be prepared to increase their loan on World Rainbow to $7 million while Ansbacher were considering a top-up loan of $3 million

3.6.55 The management committee met next day.  In discussing WMI it noted that there was no progress on rescheduling with the Pacnorse bankers and that “repayment of a total of US$6 million by the shareholders had been mentioned as a pre-condition necessary to influence the banks”.  Mr. Lees advised “that it appears certain WMI would have to take delivery of the two Dalian newbuildings”.  He said, however, that negotiations were proceeding for long-term finance from China and a sale and lease-back with Ansbacher.

3.6.56 The management committee met again on 3rd April.  In discussion about WMI it noted progress with Ansbacher and Grindlays on refinancing Manila Faith and that some $3.5 million cash flow would be generated if the two loans were finalized.  It also noted WMI’s cash flow was critical with bills totalling $720,000.00 to be met immediately.  As the facility was fully drawn down with the earmarking of $1.95m for the Shell guarantee, it proposed that WMI should seek an additional loan of $720,000.00 from WM against an irrevocable commitment by WMI to repay in full out of the proceeds of sale of Manila Faith.  The committee also recommended that WM should lend that sum.

3.6.57 After the meeting, it was thought that as further security WMI should undertake to repay out of the sale of Manila Faith or the financing of World Rainbow whichever was the sooner.  The request was made by WMI the same day because WMI “has insufficient funds to meet the extremely urgent payments detailed in the attached schedule which are extremely necessary to ensure the continued operation of the Group’s fleet” due to failure to refinance World Rainbow and Manila Faith.  The payments included $380,000.00 for bunkers and $125,000.00 for crewing fees and other operational expenses.  Only $58,000.00 was required for interest.  WM approved by circular the same day, the circular being signed amongst others by Irene Cheung and Patrick Poon.  Interest was charged at the same rate as on the $4 million facility.

3.6.58 The shipping committee met on 5th April.  They appeared resigned to taking delivery of the Dalians but on the basis of finance from the Chinese at a modest interest rate which would enable WMI to service the loans by the purchase of bonds by way of smaller loans which would in turn be serviced out of earnings.   The committee agreed that “in view of WMI’s urgent cash requirements” the Ansbacher offer of financing be accepted.  Funds would be forthcoming once the two Sestaos, Odinlock and Thorlock, were delivered on 16th April as part of the oil deal.  Meanwhile, a decision by Grindlays was hoped for in the next week.  The committee also accepted that the balance of $1 million which WMI had undertaken to repay to Pacnorse by 8th April would have to be delayed pending finalization of the oil deal.

3.6.59 Next day, Grindlays made a firm offer of a Yen loan worth US$7 million on World Rainbow.  The management committee on 10th April hoped the refinancing by Grindlays and Ansbacher totalling US$10m could be completed by Easter.  The committee also noted that Shell had lifted US$70 million of oil and payment was anticipated in 60 days.

3.6.60 On 11th April, Mr. Brothers produced the general manager’s report for 1983 in which he said there had been a net operating loss of HK$16 million compared with a loss of HK$863,246.00 for 1982.  The overall net loss was HK$227 million compared with a profit of HK$15 million in 1982, the loss being largely attributable to provision for Pacnorse losses.  He said the year had been extremely difficult, although rates had improved towards the end of the year, and difficult decisions had had to be made.  As to the Dalians, Mr. Brothers reported that

“the vessels are due to be completed in the summer of this year.  It is anticipated that the Group will take delivery of these vessels subject to the Bank of China making available a suitable soft-loan package.”

3.6.61 He concluded:

“Nevertheless although the economic indicators are generally positive, there still exists an imbalance between supply and demand with a large amount of new handy-sized tonnage still to be delivered.  Attempts are being made to reduce unnecessary expenditure by the Group and to utilise its assets to the best advantage.”

3.6.62 The WMI Board met the same day, its first meeting since 30th September 1983, although the shipping committee had met 25 times since that date for which the chairman expressed a vote of appreciation to its members for their hard work and dedication.  The Board considered the general manager’s report.  Mr. Hussey queried how the Pacnorse purchase of four Namuras had been authorized.  Mr. Brothers explained it had been authorized by the Pacnorse Board with the WMI Board being kept advised.  Then

“After further general discussion on the Pacnorse fleet and on current losses Mr. W. J. Lees queried whether it was in the Group’s interest to continue with its investment in Pacnorse.  In reply Mr. Brothers advised that it would be difficult to discontinue the investment at this time although the position would clearly need to be watched closely.  He reported that following the sale of the four Namura contracts Pacnorse exposure was considerably reduced and the earnings would be very sensitive to any improvement in charter hire rates.”

3.6.63 Finally, the report and accounts were approved.  The auditors’ report stated that the accounts

“have been prepared in conformity with accounting principles applicable to a going concern.  Having regard to the group’s loan commitments on vessels, the present level of charter hire rates and the uncertain state of the shipping market the applicability of these principles is dependent upon continuing third party financial support.”

3.6.64 After noting that they could not form an opinion about the provision made for Pacnorse in the absence of audited financial statements, the auditors concluded:

“Subject to the going concern basis being appropriate and subject to the effect of any adjustments which might have been shown to be necessary had audited accounts of the associated company been available, based on our examination and on the reports of other auditors on the accounts of subsidiary companies not audited by us, the accounts set out on pages 9 to 12 give a true and fair view of the state of affairs of the company and the group at 31st December, 1983 and of the results and changes in financial position of the group for the year ended on that date and comply with the Companies Ordinance.”

3.6.65 On 12th April, LBI agreed to roll over the Rangelock loan for a month to 16th May.

3.6.66 The management committee met on 16th April.  It learned the terms of the Grindlays loan for World Rainbow were not attractive and therefore it might be better to leave the existing loan of $5.5 million in place and increase the Ansbacher loan to $4.5 million.  Ansbacher were preparing documentation.  Mr. Leung emphasised the importance of concluding arrangements quickly and said it was imperative that refinancing be concluded even if the terms were less attractive than had been hoped.  There was discussion about selling World Rainbow, which Mr. Brothers said was currently worth US$10 million, and Mr. Leung commented that it should be the intention to sell the vessel when a suitable opportunity arose.  Mr. Brothers confirmed that this was the plan.

3.6.67 As to Pacnorse, Mr. Leung was concerned that it was the weakest link in the WMI recovery programme.  Mr. Brothers said WMI had sufficient resources from back charter-hire to pay the amount requested by Pacnorse.  The committee were also informed that the oil deal, despite various problems particularly over the letter of credit, was close to fruition.  Mr. Brothers also agreed to supply a memo outlining plans for the Dalians.

3.6.68 On 18th April, Grindlays advised that principal of $525,570.00 and interest were due on 23rd April.  It said it would deduct $279,000.00 from retention money and asked WMI to remit the balance.

3.6.69 The shipping committee had a long meeting the same day.  Mr. Brothers explained the proposed financing for the Dalians.  There would be soft loans of $10.25 million and $2.75 million from Bank of China and CSTC respectively.  WMI would purchase bonds for $9.5 million which would fully service the BOC loan.  Each vessel would be sold and leased back for $15 million, $9.5 million being used to purchase bonds.  The balance and top-up loan from Ansbacher would be used to purchase sterling bonds to match the lease payments.  It was accepted that the sale and lease-back would constrain sale of the vessels.  Mr. Leung thought consideration should be given to selling the vessels unless earnings would cover operating expenses and service the loans.

3.6.70 In relation to World Rainbow, Mr. Brothers explained there were two alternatives, being loans from Grindlays of $7 million and from Ansbacher of $3 million, or a loan from Ansbacher of $4.5 million.  He said that notwithstanding the management committee’s opinion to move quickly a proper comparison of the alternatives should be made.  He thought Grindlays might release $564,000.00 from charter-hire retention between then and July.  Mr. Brothers also reported that there were still problems with the oil deal but believed they would be overcome.

3.6.71 Turning to Pacnorse, it was reported that WMI still could not pay $450,000.00 to bring its contribution to $1 million to match Jebsens.  The short-term cash flow would be examined to see when a payment could be made.  Meanwhile, Mr. Brothers said NBNA, a key bank, had suggested shareholders each repay $3 million to Pacnorse and he

“commented that although it would be difficult for WMI to find a contribution of US$3 Million per annum, there may be no alternative since it would not be possible to contemplate raising general funds from the shareholders of WMI unless the obligations of the Group were crystalized.”

3.6.72 Nat West was also an unsecured creditor of WMI for $5 million.  It had proposed that WMI should pay $60,000.00 per month in 1984 and $80,000.00 per month in 1985 provided that principal was reduced to $4 million by December 1984. Mr. Brothers said that he was taking advice from Mr. Shaw.

3.6.73 On the same day, Mr. Brothers received an agitated memo from Mr. Yuen about overdue accounts for Manila Trader amounting to US$89,000.00 and outstanding from as long ago as January 1983.  Of this $39,000.00 were for docking expenses for which Baliwag, a Philippine crewing agent, had given promissory notes to help the owners.  Mr. Yuen said creditors had indicated that supplies would only be made available for cash.

3.6.74 On 19th April, WMI asked Chemical Bank to roll over its loan on the two Sestao vessels from 23rd April until 4th May and to pay interest from retention.  These vessels were part of the oil deal which was still pending.

3.6.75 On the same day, Mr. Brothers wrote to WMI bankers with a copy of the draft 1983 accounts and an explanatory statement.  He outlined the disposal of various vessels and the write-off of Pacnorse goodwill.  He pointed out that of the net loss US$1.9 million was attributable to WMI but US$5.8 million to Pacnorse.  He said it was hoped to put together an attractive financial package for the Dalians and that WMI was seeking ways to improve its financial situation.  He concluded:

“Following completion of these measures, the Group will hold an unique position with six modern third generation Panamax sized vessels plus two 27,000 dwt modern bulkcarriers.  Such older tonnage that remains is all on profitable bareboat charters and the policy will be to dispose of these vessels as and when their respective charters expire.  Although our planning must still be based on the contingency of a long-term depressed condition, the market does look somewhat more encouraging and we can only hope that this trend will continue as the worldwide economies in general continue to improve.  Certainly, a return to profitability for the Group is very dependent upon future earnings and in this we are fortunate in having an active Operations Department well able to maximise on the employment possibilities available.”

3.6.76 On 24th April, Mr. Brothers prepared a memo explaining his plans for the Dalians.  A supporting cash flow showed a substantial deficiency of costs over charter-hire until year ten.  This was discussed at the management committee on 24th April.  Mr. Lees

“advised that although the Group had no alternative to taking delivery eventually of the two ships as legal opinion had been sought and the advice received was that WMI itself (in addition to the contracted subsidiary companies which will own the vessels) had a commitment to the yard, it was for consideration that stalling tactics be adopted rather than crystalise arrangements now.  He emphasized that Pacnorse was a more substantial problem facing the WMI group and it might be sensible to defer taking any decisions on the Dalian newbuildings until the Pacnorse situation became clearer.”

3.6.77 Mr. Leung’s view was there should be further bargaining over  price but Mr. Brothers said the Chinese would resist this.  It was agreed that the best approach was to defer delivery and to try and obtain the best finance possible from CSTC.

3.6.78 On World Rainbow, Mr. Brothers said he now preferred a single loan of $4.5 million from Ansbacher which could be concluded that week.  He also reported that no further payment had yet been made to Pacnorse.  Mr. Leung repeated that the Pacnorse loan was the weakest link in WMI’s recovery and that every effort should be made to eliminate payment of interest as the aim was to reduce the loan not produce income for Pacnorse.

3.6.79 Mr. Brothers reported that NBNA had agreed to term out its unsecured loan in return for payments beginning at $60,000.00 per month which WMI had been making since 1st December 1983.  To keep the bank’s goodwill, he had signed on 31st March a letter of agreement subject to Board approval.  The WMI Board approved the arrangements and ratified Mr. Brothers’ signature by circular on 26th April.  The terms were for payments of $60,000.00 per month in 1983 and 1984 with a payment to reduce the loan to $4 million by December 1984, then $80,000.00 per month in 1985 and the balance paid off by December 1985.

3.6.80 The committee also agreed that shipping committee minutes be made available to it beforehand to avoid duplication of effort.

3.6.81 The shipping committee met next day.  They discussed the Dalians and

“unanimously agreed that, in view of the deficiency projected between receipts for hire and payments for operating expenses and loan service charges, acceptance of the vessels at the present time would place a severe drain on the limited cash resources of WMI and that discussions with the Chinese should be continued to arrange for deferment in deliveries and for improved finance.”

3.6.82 Mr. Brothers then reported that he had concluded that WMI should accept an offer by Grindlays to increase their loan on World Rainbow by $1.5 million and an offer of a new loan of $3 million from Ansbacher.  He was hopeful that draw-down could be made in two weeks.  As to Pacnorse it was reported that WMI still could not pay.  It was the view that WMI would be unable to make further contribution until World Rainbow was refinanced.

3.6.83 The management committee met on 1st May.  It recommended accepting the Grindlays and Ansbacher offers on World Rainbow.  Mr. Brothers reported that he had postponed going to Beijing in view of the decision to defer the Dalians as long as possible.

3.6.84 Also on 1st May, Mr. Campbell produced another balance sheet for 30th June which assumed, inter alia,

(1)     Delivery of the Dalians;

(2)     Payment to Pacnorse of US$1 million;

(3)     Receipt of $13.75 million from the WWW liquidation;

(4)     Re-financing of World Rainbow which would produce $1.9 million for general funds.

3.6.85 With remaining vessels at book value of US$198 million and Pacnorse at US$22 million, WMI would still have net assets of US$39 million.  With the vessels at a market value of US$136 million there would be a deficiency of US$23 million.

3.6.86 The shipping committee met again on 2nd May and learned, inter alia, that Grindlays would allow WMI to take an extra $600,000.00 in relation to World Rainbow as the new arrangements did not require retention until July.  The committee also agreed that repayment to Pacnorse should be made as soon as possible.

3.6.87 The management committee met on 8th May.  Mr. Brothers reported that, although there had been no further repayment to Pacnorse, there were off-setting amounts of almost $1 million.

3.6.88 The shipping committee met next day at which, in relation to the Dalians, Mr. Brothers

“reported on discussions with representatives of the Bank of China on the terms of loans of US$11.25 million per Dalian vessel to be made available by the Bank of China and on additional loans of US$1.75 million per vessel from CSTC.

After general discussion it was agreed that RJFB pursue the possibility of an UK lease for each vessel.  It was noted that upon receipt of the lease details it might be necessary to negotiate further with the China State Shipbuilding Corporation to improve the terms of their finance to ensure that there was no cash drain on the company in respect of the Dalian vessels.

It was noted that the proposed UK leaseback arrangement would involve the need to borrow just over US$6.0 million per vessel to purchase the necessary bonds to match the lease payments.  It was noted on the basis of the commencement of repayments at the rate of US$500,000 per year in the third year a charter-rate of US$7,000 per day per vessel would be necessary to breakeven.”

3.6.89 The committee also noted that there would be a draw-down of World Rainbow refinancing on 18th May.

3.6.90 Mr. Brothers had meetings in Hong Kong with representatives of CSSC and the Dalian yard on 9th and 11th May.  BOC agreed to a loan of $11.25 million at 8% over ten years, first repayments being in year three.  CSSC would advance $1.75 million at 10% repayable in year ten.  BOC would be secured by a first-class bank guarantee while CSSC would be secured by second mortgages and a WMI guarantee.

3.6.91 On 12th May, Mr. Brothers asked LBI to roll over the Rangelock loan for one month.  He also advised that because of irregular receipt of freight payments WMI would only remit $250,000.00 on 14th May instead of the usual $345,000.00.  He hoped for agreement.

3.6.92 On 16th May, ADS asked WMI (UK) to remit on 26th May Dkr503,000.00 in relation to Sealock, being the shortfall between the Danish Kroner deposits and payment due of Dkr8.5 million consequent upon the reduction of the deposits.

3.6.93 On 18th May, Mr. Brothers wrote to WMI (UK) about a forthcoming meeting with the Inland Revenue Department about the Marilock tax arrangement.  He said:

“Both Colin Campbell and I will be in England during that time but in so far as we wish to give every semblance that WMI (U.K.) acts with its own management I think it would be better if neither of us attended that particular meeting.  However, I believe that [Mr. Freeland] will be suggesting that we should hold a “dress rehearsal” and we can certainly sit in on that meeting.”

3.6.94 On the same day, Mr. Brothers received from Norton Rose advice on a possible tax scheme for Rangelock.

3.6.95 The management committee met on 22nd May.  Mr. Brothers advised that he was going to London to negotiate with Amex (leader of the syndicate of lenders to Pacnorse) to try and convert the Pacnorse shareholder loans into five-year term loans payable at $2.5 million per annum.  He would also attempt to agree with other creditors to extend to March 1986 the existing arrangement under which principal on loans on Pacnorse vessels were paid off at $37,500.00 per month.  Because in practice Pacnorse would be unable to fund these payments in full, the shareholders would guarantee payments on the basis that there would be no payment by the shareholders until after five years.

3.6.96 As to the Dalians, Mr. Brothers said the Chinese had confirmed their offer of financing.  If U.K. leasing arrangements could be made, the debt on each vessel would be about $6 million and at worst there would be only a small negative cash flow.  The vessels were for delivery in June and September but he could probably negotiate a deferment until later in the year.

3.6.97 On the same day, the WMI directors by circular resolved to accept the Grindlays and Ansbacher loans on World Rainbow while the WM directors gave a letter of comfort to Ansbacher confirming that WMI was a subsidiary of WM who were general managers of WMI, and that the arrangements would not be changed without notice.

3.6.98 Also on 23rd May, HSS confirmed that it would make available a further facility of $1.5 million to assist with payment of the instalment due to MMB on 14th June in respect of Marilock.  It was accepted by WMI directors by circular on 28th May.

3.6.99 On 24th May, by circular, the WM directors agreed to sell WMC and WMS to WMI for HK$5000 and HK$20 respectively, the amount of the paid-up capital.

3.6.100 On 25th May, WMI over the signature of Mr. Brothers gave a letter of comfort to Nat West which had lent US$19.5 million and US$19 million to Pacnorse subsidiaries for the purchase of vessels.  Pacnorse was guarantor.  WMI now confirmed that it would remain beneficial owner of 50% of the shareholding in Pacnorse and ensure that the borrowers remained wholly-owned subsidiaries of Pacnorse.  The letters were not to be taken as a guarantee or as legally binding.  They were ratified by the WMI directors by circular on 28th May.

3.6.101 At a meeting of the management committee on 29th May, Mr. Lees advised that it was the intention to delay the Dalians as long as necessary to arrange a sale and lease-back.  He said there had been difficulties in refinancing the World Rainbow loans but anticipated draw-down on 31st May, while the first payment under the oil deal was due the next week.

3.6.102 The shipping committee met on 30th May and agreed it might be necessary to defer delivery of the Dalians pending financing arrangements so that there would be no cash drain on WMI.  It noted that some US$88 million of oil had been lifted so far, sufficient to pay for eleven of the twelve ships included in the deal.

3.6.103 On 5th June, NBNA advised that $60,000.00 plus interest due on 6th January had not been received.  The $60,000.00 was paid by 8th June but not the interest.

3.6.104 The management committee met the same day.  Mr. Brothers confirmed that inquiries were underway for leasing arrangements for the Dalians.  The committee noted that the World Rainbow loans would be drawn down during the week.  Mr. Brothers said $67 million had been released to WMI from the oil deal and circulated a schedule showing how it would be dispersed.  He also said a problem had arisen in that Credit Suisse, one of the handling banks, and others were claiming charges amounting to some $180,000.

3.6.105 Mr. Brothers said negotiations with Amex over Pacnorse had turned to examining a request by Amex that four ships be sold.  Pacnorse had suggested the purchase of two modern vessels with the proceeds of sale in order to retain an earnings potential.

3.6.106 The shipping committee met on 6th June.  Mr. Brothers brought them up-to-date on various matters, in particular that the World Rainbow loans were being drawn down on that and the next day and that, while the Inland Revenue Department were still asking questions about Marilock arrangements, recent tax changes in U.K. meant WMI would be entitled to rentals reduced by perhaps one-third.

3.6.107 At this time, Mr. Brothers had prepared for the WM Board a memo on WMI.  In this, he reviewed developments of the past twelve months.  He explained which vessels had been sold and remarked

“Whilst these sales in themselves have not significantly added to the Group’s liquidity, they have considerably reduced the level of the Company’s overall indebtedness and the corresponding cash drain arising from the need to service this debt.”

3.6.108 Mr. Brothers said there had been some improvement in the market and, with the recovery of the world economy, hoped for a consolidation of that improvement.  Meanwhile, vessels would be traded on the spot market.  Mr. Brothers outlined the position on the Dalians and the intention to match earnings to outlays.  He then said US$720,000.00 had been repaid to WM and, with the liquidation of WWW in June or July which should produce US$12-13 million for WMI, the facility would be paid off and the Rangelock guarantee cancelled.  Meanwhile,

“Present strategy is directed towards enabling each vessel to be at or close to cash self-sufficiency as regards operating and loan servicing requirements and in this manner, the limited cash resources of the Group will be preserved as long as possible.  Present indications are that the Group has sufficient cash reserves to meet its obligations through until the second half of 1985.”

3.6.109 This memo was discussed by the WM Board on 7th June, together with a forecast for the year which projected a loss of US$22.7 million compared with a loss in 1983 of US$29.2 million.  Mr. Brothers said “the strategy adopted for WMI Group had been to sell vessels to reduce debt in order that the Group could be placed in a position to stand on its own feet”.  After dealing with the Dalians

“Mr. Brothers went on to say that considerable effort had been directed at managing WMI’s cashflow and that with the refinancing of “World Rainbow” and the liquidation of World-Wide Wheelock there should be a positive cash position until the second half of 1985.  Mr. Brothers then dealt with the 1984 forecast and reported that for the balance of the year, the forecast showed the loss for the WMI Group being stabilised.

Mr. J. Ortiz-Patino expressed concern that WMI was now contemplating taking delivery of the two Dalian newbuildings notwithstanding the fact that it had been decided previously that under no circumstances should WMI take delivery of those vessels.  He also queried how the forecasted loss of US$22 million for 1984 could be viewed as a stabilisation.  In reply Mr. Brothers advised that WMI had a commitment to purchase the vessels but by combining the Chinese financing with possible U.K. leasing arrangements a positive cash position could arise.  As far as the budgeted loss was concerned, a relatively small improvement in market rates would considerably help the situation.  He would certainly strive by any means available to reduce this loss.

In answer to a question on the future of WMI’s investment in Pacific Norse Shipping Limited Mr. R. J. F. Brothers advised it was not advisable to dispose of that investment because the present value based on the current market prices of the vessels was less than WMI’s written down book cost of the shares.”

3.6.110 The Board also noted that $720,000.00 was to be repaid by WMI next day out of World Rainbow refinancing.  Finally, they expressed appreciation for all involved in resolving WMI’s difficulties, particularly Mr. Brothers and Mr. Lloyd.

3.6.111 On the same day, Mr. Cameron wrote to Mr. Campbell:

“I have been instructed that the WMI Group should take prompt action to repay the current account balance due to Wheelock Marden & Co. Ltd. which at 5th June was approximately HK$ 17,554,000.  This amount is exclusive of drawings under the US$4million Secured Facility and the Aquaship Performance Guarantee.

In the first instance, steps should be taken to reduce the balance on the Current Account to the level at say 17th October 1983 when the Secured Facility was made available.  At the time, the amount outstanding was HK$ 9,379,000.00.

Therefore please provide in you[r] cash forecast for the payment to WM of HK$ 8,175,000 ($ 17,554,000 - 9,379,000.).”

3.6.112 Mr. Campbell responded on 15th June that, following discussion,

“It was agreed that

2.1.  the current account balance should not be allowed to increase in the future.  This means that at the very least when WM renders a bill to WMI (for example for accounting services) the amount of that bill must be paid immediately by WMI to WM even though it may be applied against an earlier indebtedness.

2.2.  provision should be made in the WMI cash forecast to gradually reduce the current account balance down to the level at which it stood in October 1983.

2.3.  if the balance on the current account has not been reduced to the October 1983 level by the end of this year then the amount required to bring it down to that level shall be regarded and recorded as an advance under the secured facility.

2.4.  once the balance on the current account has been brought down to the October 1983 level provision should thereafter be made to gradually reduce the current account balance so that the account is maintained in the same way as other similar accounts between WM and other companies.”

3.6.113 Meanwhile, on 7th June, WMI were notified by Grindlays that the new loan of $6.8 million for World Rainbow had been drawn down and applied to pay off the old Grindlays/BNS loan, the balance of $1.3 million being used for partial pre-payment of the six ships loan.

3.6.114 The management committee met on 12th June.  Inter alia, it discussed WWW and learned that Mr. Lee was against liquidation.  Mr. Lees suggested that, once the remaining ships had been sold, cash could be distributed to shareholders even if the joint-venture itself was not wound up.  He felt, however, that WWW should be wound up to avoid technicalities arising from the joint-venture agreement.  It was agreed to pursue this.

3.6.115 The shipping committee met on 13th June.  Mr. Brothers reported the World Rainbow loans had been drawn down and $720,000.00 repaid to WM.  As to Pacnorse, it was only paying interest on its loans.  The committee then agreed to pursue the possibility of loans from WWW on the understanding that it remained in existence.  Meanwhile, various pledges including that to the Fund of the WWW shares held by Glamorgan should be checked to see if there was any prohibition against loans to shareholders.  Finally, Mr. Brothers said BNP had agreed informally that when the existing charter on Inverlock expired they would reduce principal payments to whatever the vessel earned while continuing to release $90,000.00 per month for operating costs.

3.6.116 On 15th June, Mr. Brothers wrote to Mr. Gabrielsen to propose waiving the shareholder loans.  He said:

“4.  As far as the other creditors are concerned I suppose that technically we are in default with everyone since there has been a default declared by Amex.  We do not have to consult them however and the only danger therefore in changing the terms of the loan might arise from a claim for fraudulent preference.  This would have to be examined by the lawyer but in so far as it would be the intention to substitute one commitment for another I do not think that this would pose a particular problem.

5.  My proposal therefore would be for both WMI and [Jebsens] to approach Pacnorse with the request that the current loans be waived.  In consideration for this shareholders will provide Pacnorse with a properly draw-up legal commitment to provide an amount equivalent to the principal and interest waived over a period of six years.  This roughly equates to US$5M total annually.  This loan would not be capable of acceleration.”

3.6.117 Mr. Brothers pointed out the benefits for WMI, Jebsens and Pacnorse, essentially that the certainty would make negotiation with creditors easier and improve balance sheets.  He suggested taking legal advice as to whether it could be done without reference to creditors but

“It might be prudent however prior to doing so to ensure that all creditors are fully up-to-date as regards both principal and interest.  This will have the double advantage of assisting us in our subsequent negotiations with all creditors whilst at the same time providing further protection against the possibility of a charge of fraudulent preference.  We would tell the Amex syndicate what we had done but only after the event.  I see no reason to inform any of the other creditors.”

3.6.118 On the same day, Mr. Yuen wrote to Mr. Campbell about overdue WMI accounts and said:

“We feel now may be the time to give a mid-year review to our trade creditors many of whom although have been very cooperative and waited patiently for the payment of the long outstanding accounts due to them, we feel Owners should do their best to settle the outstandings within a reasonable time, in order to show the shipping world that “Wheelock” is still a good name to do business with.”

3.6.119 Mr. Yuen provided a list of accounts, which he had told pressing creditors would be settled by June, amounting to US$87,000.00.  He also provided lists: of creditors threatening action, for US$28,000.00; and of long outstanding accounts amounting to US$334,000.00.  These lists included sums as small as £16.00 and HK$79.00 as well as items going back to March 1983.

3.6.120 The management committee met on 19th June.  They discussed Pacnorse.  Mr. Brothers said Amex had rejected the proposal for the purchase of two ships but

“with the value of ships continuing to decline (possibly because lenders were tending to pres[s]urise borrowers into selling their ships to repay loans) the estimated sales price of the four vessels was now US$24 million which was insufficient to meet the outstanding debt.  As the Banks were not prepared to accept a loss on their loans they had reviewed the situation and were again favouring the ship substitution plan.”

3.6.121 Mr. Brothers also reported the proposal to waive the shareholders’ loans and replace them with annual commitments.  Mr. Ying queried whether WMI could afford annual payments and was told “that cash flows indicated such payments could be covered this year and next.  Thereafter, an up-turn in the market was required”.  Turning to WWW, Mr. Lees reported that Mr. Lee still believed the joint-venture should remain in existence but that surplus cash should be distributed to shareholders.  There was to be a meeting with Sir Y.K. Pao on 4th July to discuss arrangements. 

3.6.122 On 26th June, the management committee when discussing WWW heard from Mr. Brothers that “WWS remained pessimistic about the market over the short term” and “that ships values had continued to decline fairly steeply and charter rates had improved but even these had recently fallen back on the approach of summer”.  Mr. Brothers also advised that RBS had countered WMI’s suggestion of paying off its loan at $20,000.00 per month with a proposal of $25,000.00 per month for the remainder of 1984 and $50,000.00 in 1985.

3.6.123 At its next meeting on 3rd July, Mr. Brothers advised that Japan Leasing was agreeable in principle to a moratorium on the Pacnorse loans.  However,

“With regard to the Pacnorse loans to its shareholders, WMI had now repaid US$1.56 million but Jebsens had failed to respond definitively to all proposals to convert the loans from their present on-demand status to term loans.  Jebsens were reluctant to take any decision which might jeopardise their relationships with any of their or Pacnorse’s bankers and accordingly WMI had taken the initiative and had advised Jebsens they were not prepared to make any further repayments until the loans were re-structured.”

3.6.124 Mr. Brothers reported that there were still problems with the oil deal but that all WMI ships had been delivered and paid for.

3.6.125 On 3rd July, Wayfoong wrote to Mr. Brothers about Marilock on which they had provided a facility to make up the shortfall to MMB and LBI and a letter of comfort to Cable & Wireless to guarantee WMI (UK)’s obligations under the lease in an amount equivalent to 120% of the purchase price of £14.9 million.  Wayfoong said:

“Before our principals will be able to commit further funds they will need to be reasonably satisfied on several counts.  Firstly, that their exposure on the “Marilock” guarantee obligation will not be substantially increased if the Inland Revenue rules against the tax lease, so increasing the rentals due to Cable and Wireless plc.  Secondly that adequate steps are being taken to counter the forecast cash flow shortfall.  On this point we remain concerned that your assumptions on the earnings of the Panamax ships, and on interest rate levels, are too generous.”

3.6.126 The bank suggested that Panamax rates of $7,000.00 per day be included in cash flows and concluded:

“We are also most concerned that, as far as we are aware, once World-Wide Wheelock is dissolved, no further support for WMI from Wheelock Marden & Co Ltd can be expected.  Further support would of course help us to more favourably consider your requirements.”

3.6.127 Mr. Brothers replied on 13th July and said that, although exposure would be incurred, the amount would be reduced by the combined effect of weakening sterling and tax changes.  He continued:

“The other linked issue is the joint loan from Marine Midland Bank and Lloyds Bank International.  This amounted to US$21,000,000 at the time of delivery and is now US$13,250,000.  We have thus in the past 27 months repaid US$7,750,000.  This has been partly financed by our loan from you, now secured by the m.v. “Asia Culture” presently amounting to US$1,065,553, but otherwise from our own resources.  The other significant change to which you do not refer in your letter has been the sale of the Seville Hull 261.  The original amount to be guaranteed by your principals was US$31,382,000.  We have now been able to dispose of this vessel but with a net cash loss to the Group of US$1,110,000.  We have thus brought the exposure and outstandings down to a level that should be workable even within current market conditions.  I have mentioned the specific figures above only to illustrate how the Company’s resources have been strained.

On your second point, you have sought assurances that adequate steps are being taken to counter the forecast cash flow shortfall.  We are preparing a new cash flow in which we have incorporated two further assumptions:-

i) There is an injection next Spring of fresh funds into the Company amounting to US$15 Million.

ii) The “Inverlock” and the “Fenlock” are sold for a price of U$15 million cash in a year’s time.  (Current valuation US$14 Million).

As regards i), I see this as coming from all shareholders not just the majority stockholder.  I must stress however that at this time this is purely my own personal proposal and the matter has not been discussed or approved by the Wheelock Marden Board.  I do not intend to raise the issue for another two months by which time we will have concluded the financing arrangements for the two Dalien New-Buildings and rescheduled the Pacnorse Loans including terming out the Pacnorse loans to its shareholders.  On earnings, we have recently fixed the “Fenlock” to Showa for a net $7,317.  Our cash flows assume a net earnings of $7,752.  We are trading the vessels ourselves on the spot market and we would under those circumstances expect higher earnings than if we fix for period.  Nevertheless in the new cash flow we are reducing the Panamax earnings projections by about $500 daily and have assumed interest rates at 13% p.a.  We will do a special cash flow for you with the assumptions you have requested.”

3.6.128 On 4th July, LBI advised of a further event of default in relation to Rangelock on non-payment of $1 million due on 13th January 1984.  This letter was countersigned by Mr. Brothers by way of acceptance with authority of the directors given by circular on 12th July.

3.6.129 Also on 4th July, Mr. Campbell notified Mr. Brothers that Pacnorse’s actual losses between January and May had been US$7.3 million while only $4.7 million had been budgeted.  The shipping committee considered Pacnorse the same day.  Mr. Brothers said he proposed to complete negotiations for loan restructuring before any more payments of principal fell due.  He repeated what he had told the management committee the previous day.

3.6.130 In relation to WWW,

“It was noted that WMI needed cash to meet a projected cash deficit on 13th July 1984 and RJFB undertook to review the agreement between  WMI and World-Wide to confirm that WMI could draw upon the surplus cash held by WWW.”

3.6.131 The shipping committee met again on 11th July when Mr. Brothers reported he had just visited Dalian and he expected the yard would agree further to defer delivery provided deferral was to accommodate the making of leasing arrangements.  He said he expected offers from Ansbacher by next week.  On Pacnorse, Mr. Brothers

“Reported that the Amex Syndicate had formally declared Pacnorse in default under its loan and had reserved their position.

He said that he had just spoken to Bruce Lambie by telephone and had confirmed that the creditor banks did not wish to foreclose on their loans but they did consider it important that the loans were up todate before further discussions on restructuring the loans took place.  This restructuring could be by way of vessel substitution or by way of rescheduling principal repayments or possibly by a combination of the two.  Bruce Lambie favoured vessel substitution.

As regards the Shareholders Loans, Bruce Lambie had said that he would be prepared to write a letter as a creditor of WMI to express the view that the loan due from WMI should be put on a proper footing.

Reference was made to a telex from Jebsens urging WMI to contribute further funds so that amounts due to the banks at the beginning of July 1984 could be paid.  RJFB said that he proposed to urge Jebsens that no payment should be made unless the banks first expressed a commitment to discussions aimed at seeking a mutually acceptable solution to current problems and agreed to abandon talk of foreclosure.

RJFB noted that Japan Leasing were presently up todate and appeared ready to consider proposals for substitution of vessels.”

3.6.132 Mr. Brothers next reported that following a meeting with Sir Y.K. Pao it was suggested WWW should pay a dividend to shareholders, alternatively an interest-free advance.  However, any dividend would have to be paid to WM as reimbursement for payments under the Rangelock guarantee totalling $2.26 million.  Assuming a dividend of $5 million of which 51% would be payable to WMI, only $287,251.00 would be available to WMI.  Mr. Brothers also reported that RBS had sought a WM guarantee.  He had advised the bank that it could not be given but did not anticipate any problem in reaching a satisfactory agreement with the bank.

3.6.133 On 13th July, WMI directors by circular approved a request to WM for draw-downs under the facility of $1 million immediately and of $450,000.00 on 31st July to meet a cash shortfall in July.  In a letter of the same date to WM, WMI said the funds were required to meet urgent payments “to ensure the continued operation of the Group fleet”.  At the same time, WMI advised that the potential liability under the counter-guarantee given to HSBC in the oil deal had been reduced to $232,738.00 so that the total draw-down would still be within the facility.  The immediate requirement was for $700,000.00 for bunkers and $300,000.00 for Rangelock charter-hire.  By circular, WM directors agreed the same day.

3.6.134 The WM Board met on 17th July.  They discussed the pledge of WWW shares in favour of WM against the Rangelock guarantee.  They noted WM had paid $2.26 million under the guarantee and that a dividend of $2.55 million was to be paid to Glamorgan and that the pledge was enforceable.  Then

“It was noted that enforcement of the pledge would be a serious step for Glamorgan,  WMI and its other subsidiaries.  The enforceability of the pledge enabled the Company to make demand under the standby revolving credit facility and apply the dividend in or towards payment of the sums outstanding thereunder as well.  Either of these steps were likely to trigger cross-default provisions applicable to other loans made to WMI and its subsidiaries.  This was most undesirable from the Company’s point of view, while it was considered that there was no need to require repayment of the standby revolving credit facility at this stage.

Following consideration of the foregoing matters and upon motion made seconded and unanimously passed IT WAS RESOLVED that the Company do require payment from Glamorgan to the Company of US$2,262,749.25 in satisfaction of the amount due under Aquaship’s Counter-Indemnity and in consideration of the Company’s forbearance to enforce the pledge and that Glamorgan be notified accordingly.”

3.6.135 Glamorgan was notified by letter dated 23rd July in which WM advised that conditional upon payment of $2.26 million it would not enforce its rights under the pledge which would have enabled WM to require payment to it of the dividend in full.  WM did not, however, waive any of its rights.

3.6.136 The management committee met on 24th July and were advised that agreement had been reached with Pacnorse creditors under which the shareholders’ loan would be termed out, with annual payments not exceeding $2.5 million by each shareholder, and Pacnorse would sell four B-type vessels and purchase four new vessels over two years.  The committee also learned that WWS were refusing to agree to distribution of WWW funds until paid by WMI commission of $162,000.00 which WWS believed it had earned in relation to the Sestaos.  The shipping committee also considered Pacnorse next day and felt further information was required before the WMI Board could ratify the agreement.  They also discussed the form of a letter of comfort required by Nat West in relation to a loan to another Pacnorse subsidiary.

3.6.137 Mr. Campbell obtained from Mr. Brothers the same day information needed about Pacnorse.  He reported to Mr. Leung that shareholder payments would not exceed $2.5 million per annum plus any sum required to keep interest on all loans current.  No interest would be chargeable but if, after the shareholder loan was paid off, Pacnorse required further cash the shareholders would inject additional funds not exceeding the interest which would have been payable.

3.6.138 The shipping committee discussed Pacnorse again on 2nd August when

“It was noted that the Wheelock Marden Management Committee had queried whether WMI in its present position could make the commitments required in the Substitution Agreement with the Amex Syndicate as it was in their view essential that WMI avoid any suggestion of misrepresentation.  In reply RJFB advised that the commitments included in the Substitution Agreement represented in fact a substantial easing of what was presently the situation and to that extent felt that they should and could be accepted.  In particular the “terming-out” of the shareholders loan from its present on demand position was a significant beneficial break-through.”

3.6.139 Mr. Brothers advised upon aspects of financing the Dalians, i.e. concluding the leases and arranging for commercial loans to fund the purchase of matching bonds.  He said no difficulty was anticipated in concluding leases at 7% for twelve years in sterling and:

“went on to say that the actual cash requirements from WMI would be zero as the terms of repayment were such that operating costs and loans servicing could be by and large covered by current charter hire rates.  It was noted that the financial arrangements were expected to be concluded in principle within the next 3 weeks with the lease on the first ship commencing in September 1984 and on the 2nd ship in December 1984.”

3.6.140 The committee noted that WMI’s share of the WWW dividend would be almost entirely used to repay WM in respect of Rangelock.  Finally, they discussed future funding

“It was noted that the Company could anticipate a requirement for further cash funding in September.   This was earlier than had been anticipated, due to the fact that the liquidation sale of WWW had not yet been completed.  Earlier long-term cashflows had anticipated World-Wide purchasing the balance of the remaining vessels in the fleet in July.

RJFB advised that dramatic changes had occurred within the Company during the past twelve months.  A large number of ships had been sold and those that remained were either covered by long-term bareboat charters or could be considered as valuable and easily tradable assets with the potential of considerable appreciation on a return to more normal trading conditions.  Latest cashflows showed that whereas additional funds were required to take the Group through the next two years on the assumption that the market remained at near to current level, such funding was at much lower levels than previously projected.  Under the circumstances he considered that the Group should consider seriously discussing with a merchant banker the possibility of going to all shareholders to raise additional equity financing that would again return the Group to a sound financial footing.

After general discussion, it was agreed that consideration be given to the termination of Schroders and Chartered’s retainer and that merchant bankers better qualified to advise on the various methods of raising funds should be sought.  After general discussion it was agreed that only Wardley or Jardine Fleming had sufficient knowledge and background to handle this job.  It was agreed therefore that in the first instance, RJFB would explore with Jardine Fleming the possibility of raising funds from the market on the understanding that no information other than strictly necessary for the discussions should be divulged and that such information would be restricted to WMI only.  Any formal appointment would need to be referred to the Board.”

3.6.141 On 6th August, WMI directors agreed to give, and gave, a letter of comfort to Nat West.  It was almost identical in terms to the earlier letter of 25th May (para. 3.6.100) save that WMI confirmed it would remain owner of 50% of the Pacnorse shareholding but “to that extent will endeavour to ensure” that the borrower would remain a subsidiary of the guarantor.  Later, on 28th August, the letter of comfort of 25th May was substituted by one in similar terms.

3.6.142 On 7th August, Mr. Brothers reported to the management committee that he had settled the WWS claim for commission on the Sestaos and that an increased dividend, of which WMI’s share would be $2.85 million, would be paid by WWW in a few days.  WWW’s two remaining vessels, Crown Award and Golden Daisy, would be sold as soon as possible within a certain price range.  However,

“There then followed a general discussion on both the short-term cash problem of Wheelock Maritime International and the necessity for putting the Company back on a stable basis in the long-term.  RJFB explained that in our previous projections, it had been assumed that World-Wide Wheelock would have been liquidated by July.  The “Crown Award” had been on the market for one month and both World-Wide and Wheelock Marine Chartering were looking for a buyer, however, it was not expected that the vessel could be disposed of prior to the winter.  The delay in disposal of the “Crown Award” was the cause of WMI’s present tight cash position.  RJFB explained that utilisation of the World-Wide Wheelock dividend was crucial to WMI to enable it to meet its commitments and he proposed that rather than to use the dividend to pay down the “Rangelock” guarantee, Wheelock Marden should either hold the money in an escrow account which WMI could utilise or apply the dividend to the US$4 million overdraft facility.  He then pointed out that if this occurred, Wheelock Marden would still be adequately secured.  A schedule showing WMI’s security position with Wheelock Marden was passed to members.

[Mr. Ying] asked a question on the outlook of the shipping market and RJFB replied that one had to assume that there would not be a dramatic increase in the market within the next two years but he would anticipate steady strengthening.  He then said that a new cash flow had been prepared and explained that the cash deficit by 1990 would be US$13 million however US$99 million of debt would have been repaid during that period.  RJFB said that if Wheelock Marden did not wish to increase their overdraft facility to WMI, it would be necessary to call a WMI Board Meeting to discuss the future of the Company.”

3.6.143 The schedule referred to showed WMI’s share of WWW to be $8.7 million, while drawings under the Rangelock guarantee and the facility amounted to $6.2 million.   On the same day, WMI sought and WM agreed to a draw-down of the remaining $500,000.00 under the facility.

3.6.144 Pacnorse, now a major contributor to WMI’s problems, was discussed by the shipping committee on 8th August.  Mr. Brothers advised that it was critical that interest on the Pacnorse loans be kept current and that some principal be paid.  He said:

“Jebsens had put sufficient funds into Pacnorse to enable Pacnorse to meet its urgent payments and had advanced some funds on behalf of WMI.  They had, however, advised that the amounts to be repaid by WMI from their Shareholders’ loans must be made available as soon as possible.  RJFB went on to say that he had undertaken to try to remit US$500,000 that day.  The position would be thereafter kept under review.”

3.6.145 Discussion turned to future funding and

“Following general discussion on the need to urgently resolve the Company’s requirements for additional cash funding in September, it was agreed that priority should be given to the formulation of an overall plan.

It was noted that an approach had been made to the Management Committee of Wheelock Marden that the portion of the WWW’s dividend “earmarked” to repay amounts drawn from Wheelock Marden under the “Rangelock” guarantee be instead released to meet the immediate cash requirements pending the formulation of an overall plan.  It was noted that a formal reply was awaited from the WM Management Committee and that in the meantime the remaining US$500,000 under the U$4 million facility would be drawndown later that day.

A paper showing the value of the remaining security in respect of the WWW shares was tabled at the Meeting and noted.  Since the security from the WWW shares was more than adequate to provide WM sufficient cover for both the US$4 million Secured Stand-by Credit Facility and for amounts that WM has paid and may be expected to be called upon to pay in respect of the m.v. “Rangelock” up to the end of the guarantee period it might, subject to legal advice, be possible to secure agreement from WM for the dividend to be utilised to reduce drawings under the US$4 million Secured Stand-by Credit Facility which could then be redrawn against the Facility up to the total US$4 million.

It was noted that RJFB and [Mr Edwards] had held exploratory talks with Jardine Fleming the previous afternoon on the possibility of WMI raising funds from the market and that they had undertaken to consider the matter and revert within 48 hours to indicate whether or not they would be in a position to assist.

General discussion then followed on the urgent need to secure short term funding to meet WMI’s commitments pending formulation of an overall plan and it was decided that the following be prepared as a matter of urgency to facilitate a formal presentation to the Wheelock Marden Management Committee:-

1. A schedule to show how long the US$2.8 million will last.

2. A revised cashflow based on latest developments.

3. A reconciliation of the actual cashflow with the projected three year cashflow submitted to the WM Board in October 1983.

4. A reconciliation showing how the immediate requirement for cash has arisen.

5. A Proforma Balance Sheet and Profit and Loss Account for the WMI Group as at 30th September 1984.

6. A position statement showing changes in Wheelock Marden’s position and exposure based on the explained assumptions in the long term cashflow.

7. Assumptions on the Shipping market.

8. A schedule showing the possible consequences of Wheelock Marden declining to make further support available to WMI.

It was further agreed that it would be advisable to consult David Shaw on related legal questions as a matter of urgency.”

3.6.146 On the same day, Mr. Brothers drew up a memo concerning benefits to be derived in U.K. from capital allowances (App. 3/24).  It does not appear this was ever formally discussed but it is a useful encapsulation of the thinking of Mr. Brothers and WMI.  In fact, on 9th August, LBI advised Mr. Brothers that realization of tax benefits was a viable proposition and on 17th August LBI’s merchant banking division offered to pursue the matter upon payment of £10,000.00 for work already done and a fee of 0.75% of any concluded transaction.

3.6.147 Mr. Graham met Mr. Shaw after the shipping committee meeting on 8th August and explained that it was now proposed to use part of the WWW dividend to reduce the facility.  Mr. Shaw said, inter alia, there must be no default on the mortgages otherwise waiver by WM would mean the dividend would go to ADS as second mortgagee.  Subject to this, the proposal would be in order, allowing WMI to draw further against the facility.

3.6.148 Next day, Mr. Leung, Mr. Brothers, Mr. Campbell and Mr. Graham met Mr. Shaw.  After Mr. Graham recapped what had taken place the day before, a note of this meeting reads:

“Mr. Leung then advised that the Shipping Committee of WMI required advi[c]e on what the responsibilities of the Directors of WMI would be if WMI continued to trade in the present circumstances.

DJS advised that if the liabilities of WMI exceeded the market value of its assets then this was an ‘amber light’ to the Directors of WMI that the Company was insolvent and that the Directors would require to be extremely circumspect about incurring any new credit (whether trade or bank or otherwise) without a reasonable prospect of meeting such liabilities when they fell due.

CC queried whether it was realistic to have regard to the market value of an asset which could vary from day to day.  DJS advised that it was probably more correct to consider the underlying intrinsic value of any asset, which would presumably lie somewhere between the market value and the book value of that asset.”

3.6.149 On the position of WMI’s lenders, Mr. Shaw

“advised that if WM’s reply to WMI’s request for support was in the negative then the normal situation would be for WMI to approach its lenders to advise that WMI was facing a short term cash shortfall saying that WMI had exhausted all other avenues of obtaining additional finance and asking the banks what they would be prepared to do.  In those circumstances, they might, he said, be prepared to release some charter hire to enable payments to be made to trade creditors.  DJS stressed however, that once the reply had been received from WM in the negative, WMI would have to make an approach to its lenders without further delay and request them for their forebearance in the short term to enable WMI to explore and investigate other possibilities for raising funds to meet its short term cash deficiency.

General discussion then followed on the possible attitude of the banks and RJFB advised that there was a big difference between WMI’s position today and that of a year ago because the number of lenders and the number of vessels had been significantly reduced, interest on the loans was being kept current and repayments of principal were being made on time.  After further discussion it was noted that if the banks were not prepared to give WMI any assistance then they would presumably have to exercise their rights and take over the shares of the respective owning Company of each vessel and continue to operate such vessels themselves so that interest and principal repayments under the loans could be met.”

3.6.150 Discussion then turned to the requirement to pay US$1.7 million to Pacnorse.  If it was not paid, Mr. Brothers pointed out that WMI would have an equally serious problem with Pacnorse.  There was also a problem with WMI’s own vessels of which six were trading on the spot market and seven were on medium bare-boat charter.  Some accommodation was needed from WMI’s banks to meet expenses on time-charter vessels until “additional finance could be raised from shareholders”.  Mr. Brothers

“then referred one specific problem, that was the imminent delivery of the 2 Dalian newbuildings.  He reminded that good finance had been arranged on these vessels and that on the leasing arrangements currently envisaged there would be zero cash requirement from WMI.  He enquired whether on that basis it would be within the powers of WMI to take delivery of those vessels and by so doing incur new credit.  In reply DJS advised that a criteria to be followed is that the Board should do what is reasonable and responsible in the circumstances it would be incorrect, he said, for the Directors just to throw in the towel.  He went on to say, it would be a matter for the full Board to decide whether or not WMI should take delivery of the two Dalian newbuildings.

General discussion then followed on the steps that might be taken by WMI if WM were unwilling to allow WMI to have the whole of the WWW dividend, and, it was noted that in the absence of any alternative funding or any forebearance of the banks it would not be possible for the Directors of WMI to incur any new credit if they knew that WMI had no means of meeting those debts when they fell due.”

3.6.151 The shipping committee met on 15th August.  Mr. Brothers said there was interest in leasing the Dalians but there were queries “one of which was the method by which [WMI] could fund its possible deficit in March 1985”.  He also reported problems with Amex over the new shareholder loan arrangement.  The committee also noted that the WWW dividend had been paid and was being held in a WM suspense account, pending a decision by WM to allow WMI to retain it.

3.6.152 In the meantime, there had been talks with Jardine Fleming who on 17th August produced a report.  In his covering letter, Mr. Bruce of Jardine Fleming explained the paper was “an outline of strategy rather than a firm proposal” and said that:

“we do not believe that it would be possible to embark on a fund raising exercise without a firm commitment being obtained from Wheelock Marden and Company Limited, both in terms of funding and underwriting.”

3.6.153 The Jardine Fleming paper was entitled “Capital Reorganisation/ Funding”.  It referred to WMI as “Cutlass” and WM as “Sabre”.  It stated “while Sabre is understood to be unwilling to commit further funds to Cutlass, we do not believe that the future of Cutlass can be secured without some commitment on Sabre’s part”.  Concerning WMI’s balance sheet, Jardine Fleming said:

“Following the continued rationalisation of the Group, the latest published balance sheet (as at 31st December, 1983) bears little resemblance to the present position.  Long term debt is understood to be in the region of US$136.5 million (US$130 million secured and US$6.5 million unsecured) while net asset value, at current market prices, has been tentatively estimated at HK$0.50 per ‘A’ Share.”

3.6.154 On that basis, Jardine Fleming thought shareholders funds would be HK$30 million.  As to capital reorganisation, Jardine Fleming said:

“Since shareholders are being asked to provide new funds for the Group, it would be desirable for them to be presented with up-to-date information regarding the financial position of the Group.  This would involve, inter alia, a revaluation of the Group’s fleet.  Assuming that such a revaluation was taken into the books, resulting in a substantial revaluation deficit, it would be desirable to write this deficit off against share capital so that Cutlass’ ability to pay dividends in the future is improved.”

3.6.155 To raise funds, Jardine Fleming suggested the issue of HK$78 million/US$10 million convertible cumulative preference shares of HK$1 each paying 14% per annum, wholly underwritten by WM.  They concluded:

“We consider that the proposals outlined above are advantageous to the Company and give shareholders a strong incentive to take up their preference share entitlements.  The following points should be noted:-

(i) The issue of equity rather than debt will strengthen Cutlass’ balance sheet.  Cutlass will not have to service the preference dividend until such time as it has returned to profitability (cf. a debt issue).

(ii) Preference shareholders will be the first to participate in any return to profitability and the conversion rights will enable them to participate in any future earnings growth and share price appreciation.  Shareholders who do not take up their rights will be most unlikely to receive any return on their existing investment for a long time to come (i.e. not until Cutlass has generated enough profit to pay arrears of preference dividend and is in a position to pay ordinary dividends) and will be heavily diluted in equity and voting terms.

If shareholders (including Sabre) do not provide further equity (or some other form of funding) it appears probable that they will lose their investment in Cutlass since the assets will be taken over by the lenders.”

3.6.156 On 18th August, LBI declared a further event of default in relation to Rangelock by non-payment of $1 million on 13th July.  It advised it had applied some $3 million from the earnings account to settle all interest and towards outstanding principal.  This notice was accepted and agreed by WMI directors on 29th August.

3.6.157 On 20th August, Jebsens and WMI signed the agreement terming out the Pacnorse shareholder loans of which $10.5 million was outstanding.  It was clear, however, that WMI still faced serious difficulties.  There was a flurry of meetings.

3.6.158 The WM Board met on 21st August.  They considered WMI’s request for the WWW dividend to be used in reduction of drawings under the facility.  Mr. Brothers said if the dividend was used to satisfy the amount paid by WM on the Rangelock guarantee “there would be no opportunity for [WM] to make further secured advances to WMI due to the existence of the second pledge over [the shares] in favour of [ADS]”.  Then

“Mr. Petrus Tang cautioned the Board on whether in the event of WMI being subsequently liquidated the Company could justify applying the WWW dividend against the Facility which would have the effect of diminishing the value of the remaining security of the WWW shares to the detriment of the other secured lender, DSKF, and unsecured lenders who might have a claim against WMI.  He went on to say that the Company’s position in this respect would be particularly difficult because of its role as General Managers of WMI and the Company would in the event of WMI going into liquidation be accountable to DSKF for depriving them of their security.”

3.6.159 It was agreed Mr. Shaw should be asked for advice on the matter and that the dividend remain in the suspense account pending a recommendation from the management committee.

3.6.160 The shipping committee met on 22nd August when Mr. Brothers reported that RBS had declined to act as lessor in relation to the Dalians “probably because a request, that (WM) guarantee the Royal Bank’s unsecured loan to WMI, had been declined”.  He said Ansbacher were discussing arrangements with Chemical Bank but “due to the present uncertainties surrounding WMI, he would request Ansbacher to slow the negotiations down”.

3.6.161 In relation to Pacnorse, Mr. Brothers said Amex had changed its mind and was proposing the purchase of only two vessels for which it would provide guarantees of only $650,000.00 each instead of $1 million.  He continued:

“that following telephone discussions with Jebsens an understanding had been reached that if Pacnorse did not have the full support of all its lenders, it could not continue.  He advised that the present thinking was that a Pacnorse creditors meeting be held before the end of next week to place the problem before creditors to ascertain what they were prepared to do.  It was noted that this would result in the Pacnorse creditors becoming unsecured creditors of WMI to the extent of the outstanding balance of the loan advanced by Pacnorse to WMI.

Until this matter was resolved and WMI had a solution to its own funding problems, it would not be feasible to make any further payments to Pacnorse.”

3.6.162 The management committee met on 23rd August and had the documents which the shipping committee at its meeting on 8th August had asked to be prepared.  A short-term cash flow to 31st March 1985 showed a deficit of US$2.5 million.  There was a reconciliation between the cash surplus of $4.9 million, predicted in October 1983 for September 1984, and the current prediction, i.e. $1.1 million which now included the $4 million facility.  The major contributors to this change were Pacnorse, amounting to $3.3 million, and a shortfall of $5.3 million on the sale of seven ships for oil.  A long-term cash flow incorporating a $10 million injection in March 1985 showed a cash shortfall in December 1992 of $12.5 million while a balance sheet of the same date showed net assets of $38 million.

3.6.163 At the meeting, Mr. Brothers

“emphasised that the cash flow circulated to Members should only be regarded as indicating the trend over the next ten years.  More importantly the cash flow position over the next one to two years was a far more definitive guide.  If the proposed equity issue by WMI was to be successful, the participation of WM was essential and RJFB expressed the view that in these circumstances it was reasonable for WM to provide its share of a little over US$5 million to enable WMI to continue operating.  For the avoidance of any doubt RJFB stated that the cash flow as prepared, assumed full repayment of the US$4 million Secured Standby Facility in addition to all amounts drawn under the “Rangelock” guarantee.”

3.6.164 However, Mr. Poon indicated that he, Mr. Ying and Mr. Hsu could not agree to the dividend being used to repay drawings under the facility.

3.6.165 On 24th August, WMI (UK) advised WMI that ADS was seeking certain financial information and had queried the projected liquidation of WWW.  On the same day, Mr. Brothers drafted a note, which was apparently to be used (but never was) as the basis of an approach to HSBC for a loan.  The note began:

“Whilst not wishing to provide financial support to WMI, it is believed that [WM] might be prepared to waive repayment of the US$4 million facility in return for a buyer taking over its shares in WMI and injecting fresh equity capital.”

3.6.166 Mr. Shaw provided his advice in a letter of 28th August.  He reviewed the documentation and said:

“Therefore, the key question is whether WMI or Glamorgan have, in fact, failed to observe or perform any obligations under the Second Pledge or whether WMI has defaulted in performing any of its obligations under the ADS Guarantees.  If the answer is that there has been no such failure or default at the time of the dividend payment, then ADS would not be entitled to receive the dividend, and accordingly a waiver by WMC [i.e. WM] would enable the amount of dividend waived to be received by Glamorgan/WMI.  Having reviewed the terms of the Second Pledge, there are to be a limited number of obligations to be observed and performed by WMI and Glamorgan - attention is, however, drawn to the comments in 8 below.”

3.6.167 Mr Shaw went on to repeat the advice he had given previously about fraudulent preference and the need to show a dominant intention to secure funds rather than prefer a creditor, ie WM.  Paragraph 8 of Mr. Shaw’s letter then drew attention to the fact that the second pledge in favour of ADS described WMI as beneficial owner and Glamorgan as registered owner of the WWW shares, whereas Mr. Shaw understood that Glamorgan was both beneficial and registered owner.  Mr. Shaw said that, if correct, there was a breach of representation and warranty which might constitute a default.

3.6.168 The WMI Board met the same day.  Mr. Brothers explained there was a requirement for funding in September due mainly to the delay in disposing of WWW and the lower than expected proceeds of sales and that

“It had, therefore, become necessary, he said, to consider a formal approach to the parent Company, Wheelock Marden & Co., Ltd. (“WM”) for assistance in meeting the Group’s short-term cash requirements and also to seek an indication from WM whether or not they would in principle subscribe pro-rata to their portion of a contemplated US$10 million new capital issue to be called from shareholders early in 1985.

FORMAL APPROACH TO WM:    Mr. Brothers advised that there were two issues which required to be referred to WM.  The first was, he said, the Company’s short-term cash requirement.  He reminded the Board the Group had been operating under considerable cash restraints during the past 12 months with a large number of ships being sold.  Those that remained were, he said, either covered by long-term bareboat charters or could be considered as valuable and easily tradable assets with the potential for considerable appreciation following a return to more normal conditions.  He went on to say that the sales and cancellations of vessels had improved the long term position of the Group, but had exacerbated the short-term difficulties.  In view of the fact that sales of vessels had been made on the falling market, this had resulted in a greater than expected demand on short-term cash facilities.”

3.6.169 Mr. Brothers then dealt with WWW and said:

“that it might, subject to legal advice, be possible to secure agreement from WM that the entirety of the WWW dividend be utilised to reduce drawings under the US$4 million Secured Stand-by Credit Facility, which could then be redrawn up to a total of US$4 million.”

3.6.170 Mr. Shaw’s letter of advice was considered.  Mr. Poon queried whether using the dividend to reduce drawings would constitute an additional advance under the facility and whether it would diminish the pledge to ADS.  The Board felt the remaining value of the security in the shares would be reduced but the ADS pledge would only take effect in a default situation when ADS would have a claim against any dividend paid.  Mr. Brothers advised the remaining value of the security would be at least $1.9 million.  However, an additional $2.8 million under the facility would provide sufficient funds for WMI until it could formulate a plan for future funding by a $10 million capital issue.  Mr. Brothers said Jardine Fleming had indicated raising $10 million in the market to be feasible.  Then

“Mr. Brothers referred to the attached three year cash flow graph which was tabled at the meeting and drew the Board’s attention to the assumptions used in the preparation of that graph as detailed in Attachment D to the letter to WM.  He referred to the proposed financial and leasing arrangements for the two Dalian Newbuildings and noted that whilst no cash injection was required by the Group it would not be possible to proceed with those arrangements until the long-term future of the Group was assured.

He went on to say that the cash flow graph assumed full repayments of principal and interests as and when due.  He advised that if WM agreed to take up its share of the contemplated US$10 million new capital issue it should be feasible to approach the Group’s main lenders with a request that they forego principal repayments on certain loans for a period of two years.  This would, he said, result in the cash flow graph remaining positive after 1986.

Mr. Brothers advised that cash flow graph had been prepared up to 1986 only because it was felt that 1986 was as far as the Group could reasonably look ahead.  He went on to say, that if the cash flow graph were to be projected beyond 1986 without a rescheduling of the loans then the graph went lower and did not turn until the end of the decade.”

3.6.171 After Mr. Brothers had explained plans for further sales of older ships coming off charter

“Mr. W. J. Lees queried what could be done if WM declined the Company’s formal request for support.  In reply Mr. Brothers advised that if they did decline it would be extremely unlikely that the Company would be able to secure alternative outside support in the limited time available.  In the circumstances it would therefore be unable to take delivery of the two Dalian newbuildings and the Directors would have to give serious consideration to whether or not it would be possible for the Company to continue trading.

In answer to a question on Directors’ Liability, Mr. D. J. Shaw advised that the same test would apply as previously advised to the Board.  That  was, he said, if the Directors were unable to look forward to see how the Company could meet new credit when it fell due then it would not be possible to incur any new credit whether bank, trade or otherwise.  In the event of WM declining the Company’s request then the Directors would, he said, have to look at the situation again very carefully.

Mr. Brothers advised in conclusion that the overall position was complicated by Pacific Norse Shipping Limited (“Pacnorse”).  He went on to say that the cash flow included repayments of the shareholders loans made by Pacnorse at a rate which would enable Pacnorse to meet payments of interest as they fell due.  He advised that discussions between Pacnorse and its own lenders on a proposed rescheduling of its loans had reached a difficult stage and that an ultimatum would be given to those lenders that unless they agreed to a rescheduling the shareholders of Pacnorse would cease to make any repayments of their loans.  It was noted that the matter of Pacnorse would have to be resolved before any new capital issue was made.

After general discussion Mr. Patrick Poon queried what the Company would do if WM Directors’ asked what the position would be beyond 1986 and in reply, Mr. Brothers advised that a 10 year cash flow was available but that the situation beyond 1986 was subject to so many imponderables that it could only be considered to represent a best indication of the likely trend.”

3.6.172 Finally, the Board approved a form of letter to be sent to WM seeking support.  It was sent the same day and asked for the WWW dividend to be used to reduce drawings under the facility.  Attached was a copy of Mr. Shaw’s advice which had been provided that day.  WMI also said:

“As part of the strategy for the future funding of this Company a US$10 million new capital issue is contemplated to be called from shareholders in early 1985.  For such an issue to succeed an indication of parent company support would be essential and we would accordingly request that WM indicate whether or not it would be prepared in principle to subscribe pro-rata to such an issue, subject to acceptable terms.”

3.6.173 WMI provided documents that had been supplied to the management committee and concluded

“We would stress that the situation this Company would face next month would be extremely serious and the Company would face the possibility of being unable to continue in business in the short-term unless WM agrees to our request to utilise the dividend from WWW in the manner described and in the long-term if an indication of support to the new capital issue is not forthcoming.  Your early response is requested.”

3.6.174 The WM Board met that afternoon to consider WMI’s request but adjourned to 7th September to allow some directors time to study it and “to see if there were any other ways of saving WMI”.  The Board also “noted that WMI was in a position to continue to trade until [WM] had had time to consider”.

3.6.175 Also on 28th August, ADS’ solicitors put WMI on notice that liquidation of WWW would require ADS’ consent.  Norton Rose replied on 3rd September explaining that ADS would be asked for consent when a firm decision had been made.  In the meantime, they advised ADS’ solicitors about the technical breach concerning beneficial ownership of the WWW shares and asked that it be waived.

3.6.176 The shipping committee met next day and noted, inter alia, that WMI would not pay its remittance of $600,000.00 in reduction of its Pacnorse shareholder loan pending agreement between Amex and Pacnorse.

3.6.177 The management committee met on 4th September when it was reported that Nat West had agreed a two-year moratorium of principal on the Pacnorse loan.  Other banks were expected to follow.  Then Mr. Lees confirmed that

“according to the cash flows WMI could probably continue to operate for a further four to six weeks but that if its request to WM for the World-Wide Wheelock Shipping dividend to be applied as a partial repayment of the US$4 million Standby Credit Facility is rejected then it appeared WMI could not survive long enough to seek an injection of funds by way of a new issue to shareholders in March, 1985.

Current Account Balances:   [Mr. Ying] requested that in RJFB’s absence Mr. Colin Campbell be instructed to prepare as quickly as possible a statement of the current account balances between WMI Group companies with the rest of the WM Group.   HWL indicated that although the figures were not immediately available, the WMI Group’s current account with WM was in excess of US$2 million.  PP suggested that in the circumstances no further payments or credits should be made or given forthwith by WM on account of the WMI Group.  WJL pointed out that in reviewing such figures it should be appreciated that a significant proportion of such balances referred to non-cash items.  In addition it would be for consideration whether certain charges were justified in view of WM’s position as General Managers.”

3.6.178 On 5th September, Mr. Brothers advised the shipping committee

“that WMI would not be making any further loan repayments to Pacnorse until its own position had been sorted out.

It was further noted that provided NatWest did not get their US$200,000 principal repayment on 10th September 1984 there would be no further requirement for calls upon Pacnorse’s shareholders until February 1985 and that Pacnorse would be able to fund Wheelock Marine Services’ with the expenses for running Pacnorse’s vessels managed by them.”

3.6.179 On 6th September, Mr. Campbell produced for the managing directors a schedule of amounts owing by WMI to WM on 31st August.  This amounted to US$7.8 million of which US$2.6 million was on current account.

3.6.180 Next day, the WM Board resumed its meeting; in attendance were Mr. Freshwater and Mr. Norman of Slaughter & May, who had been appointed WM’s solicitors.  After a vote, Rothschilds were appointed financial advisers.  There was then discussion about WMI’s apparent indebtedness of $4 million within the Group and

“After further general discussion it was resolved that the Company and the Group should not make any cash payments or incur any liabilities in favour of third parties on behalf of WMI in excess of HK$200,000 during the next two weeks unless otherwise specifically authorised by the Board.

Mr. Petrus Tang then voiced concern about the difficulties in which the Company could find itself as General Managers of WMI if WMI were found to have been trading fraudulently during the period when the Company’s financial advisers were preparing their report on WMI’s request for support.

It was agreed, after advice from Mr. Freshwater, that the Company as General Managers would be justified in allowing WMI to continue trading provided the Board were assured that by doing so there was no danger of WMI trading fraudulently in the meantime.

After further general discussion it was resolved that Slaughter and May draft a letter from the Company to WMI to express concern that for Wheelock Marden to continue to act as General Managers of WMI during the period that advice was being obtained might involve Wheelock Marden and its officers in liability in the event of WMI being found to have been trading fraudulently, that is incurring liabilities which it had no reasonable expectation of being able to meet, and requiring confirmation that WMI would not be trading fraudulently by continuing to carry on its business in the normal way and incurring the normal day-to-day liabilities until 22nd September 1984.”

3.6.181 WM wrote formally to WMI on 8th September.  They said:

“The request contained in your letter is being considered by this Company as a matter of extreme urgency.  However, the question involves the obtaining of outside advice and the most careful consideration by the Directors of this Company of where the best interests of this Company lie.  Accordingly, it is not expected that a final decision can be made until the week ending 22nd September, 1984.  As soon as a decision is made, it will be communicated to you.

Meanwhile, we are concerned that for Wheelock Marden and Company Limited to continue to act as General Managers of your Company during this period may involve this Company and its officers in liability in the event that your Company were found to have been trading fraudulently, i.e. incurring liabilities which it has no reasonable expectation of being able to meet.  Whilst we have no reason to believe that this is the case we should be grateful if you could confirm to us without delay that your Company will not be trading fraudulently by continuing to carry on its business in the normal way, incurring the normal day-to-day liabilities, until 22nd September 1984.”

3.6.182 That letter was signed by Mr. Marden.  The WMI Board met on 10th September to consider the letter.  Mr. Shaw

“advised that WM had not indicated what their decision would be and therefore the Directors were unable to form a view on what they might decide.  However, the Directors would have to have regard to the fact that unless they felt able to give the required confirmation to WM the Company should not in any event be continuing trading.”

3.6.183 A draft reply was discussed and amended.  Then

“After general discussion on the question of fraudulent trading, Mr. D. J. Shaw advised that there was no reason why the letter should not be sent to WM in the amended form provided Directors were able to form the view that as of to-day’s date they were justified in incurring new credit because there was a reasonable prospect of meeting that credit when it fell due.”

3.6.184 After agreeing to send an amended reply, the Board decided to ask S&C “to investigate both the immediate position of [WMI] and the alternatives that might be available to it to meet its cash requirements”.

3.6.185 WMI’s reply to WM that day read:

“In your letter, you asked us to confirm that this Company would not be trading fraudulently during the period up to 22nd September 1984.  We believe that, as General Managers, you are fully aware of the financial position and commitments of the Company, and to that extent you are able to form your own view as to this Company’s current financial position.  However, we can confirm to you that the Directors are conscious of their responsibilities and that there is no intention of incurring liabilities which there is no reasonable expectation of being able to meet.  Based on their present knowledge and their present view of the Company’s financial position, the Directors are of the opinion that the Company can properly continue for the time being and at least up to 22nd September 1984 to carry on its business and incur normal day to day liabilities.”

3.6.186 That reply was signed by Mr. Brothers.

3.6.187 Also on 10th September, WM wrote to Rothschilds with terms of reference:

“1. To acquaint yourselves with the financial position of WMI and the proposals which have been considered for solving its difficulties.

2. To acquaint yourselves with the relationship between Wheelock Marden and WMI and the special problems to which that relationship gives rise, particularly having regard to the companies having similar names and being identified together in the market, the substantial existing investment of Wheelock Marden in WMI (by way of equity, loans, guarantee and current account), the fact that Wheelock Marden are General Managers of WMI, and the cross directorships.

3. To consider and report on alternative courses of action which may be available to Wheelock Marden.

4. In particular, to consider on various different assumptions as to such matters as deferral of debt, interest rates and charter rates, whether the existing investment in WMI can be preserved and, if so, what further cash investment would be required to preserve it having regard to WMI’s request that Wheelock Marden indicate whether or not it would be prepared in principle to subscribe pro-rata to a contemplated US$10 million new capital issue to be called from WMI shareholders in 1985.

5. To advise whether or not it would be in the best interests of Wheelock Marden to accede to WMI’s request of 28th August 1984.”

3.6.188 On 12th September, WMI asked S&C

“1. To review the immediate financial position of the Company with particular regard to the points contained in Wheelock Marden’s letter of 8th September 1984 referred to below and the proposals which have been put forward for solving our difficulties.

2. To consider and report on alternative courses of action which may be available to the Company to resolve its short term cash difficulties.

3. In particular, to review the various different assumptions as to such matters as deferral of debt, interest rates and charter rates used in the Company’s cashflow and what further cash investment would be required to resolve the Company’s cashflow difficulties.

4. Generally to advise the Directors as how the Company should proceed in the light of its present financial position.”

3.6.189 On the same day, Mr. Cameron wrote to Wheelock Travel and three other WM subsidiaries directing that

“With immediate effect you are requested to refer to me, in the first instance, for subsequent referral to the Managing Directors, any request received by you for the provision of credit to Wheelock Maritime International, its subsidiaries, Wheelock Marine Chartering, Wheelock Marine Services, and the Pacnorse group of companies.

Such credit is only to be provided when approved by either of the Managing Directors of myself.”

3.6.190 Mr. Cameron said the instruction did not apply to Allied, Beauforte or their subsidiaries.

3.6.191 On 17th September, MMB indicated that HSBC was prepared to take over the Marilock loan from MMB and LBI thus concentrating all security for this loan in HSBC which would advance US$13.25 million against bonds worth £13.4 million.

3.6.192 On 18th September, the management committee heard that Mr. Jebsen had been in Hong Kong.  He had predicted a substantial improvement in charter rates by the end of the year, a view which Mr. C.H. Tung, then another Hong Kong shipowner, had strongly supported.

3.6.193 The shipping committee met on 19th September.  They heard Mr. Brothers was discussing finance for the Dalians in London but was not “intending to go ahead until WMI’s future was clarified”.  They also learned that Amex had agreed to the sale of four Pacnorse vessels and the purchase of two more, while three banks were considering a two-year moratorium.

3.6.194 On 21st September, LBI set out the terms on which it was prepared to defer until 31st October an interest payment of $1.1 million due in relation to Annalock on 24th September.  Essentially, it was to be a short-term loan.  LBI would also agree to HSBC refinancing the Marilock.  Mr. Brothers replied on 24th September indicating general agreement but pointing out certain terms were beyond WMI’s control, for example, agreement by MMB similarly to defer interest on Sealock.

3.6.195 The WM Board met that day.  A report from Rothschilds was not yet available.  However, the chairman said:

“that following negotiations carried out in London by Mr. R. J. F. Brothers on behalf of WMI, there had been a significant change in WMI’s present position.  The Chairman then invited Mr. Brothers to report on his negotiations in London.

Mr. Brothers reported that he had explored the potential tax credits on three of WMI’s vessels and that the potential in connection with those credits had helped in enlisting the banks’ support for a request made by WMI for assistance with its short term financing requirements over the next few months.  He went on to say that the support of WMI lenders was extremely important and that Lloyd’s Bank International and Marine Midland Bank had stated that they together with Hong Kong Shanghai Shipping Limited would be prepared to provide the financial support that WMI had requested.  This would, he said, enable WMI to give an assurance that there was no danger of it trading fraudulently for the time being.

He further advised that the outstanding amounts due to WMI in respect of the sales to the Iranians had been settled and that useful discussions had been held on the financing arrangements for the Dalian newbuildings which would as presently structured not involve WMI in any cash outlay.”

3.6.196 The meeting then adjourned.  WM wrote to WMI on the same day to advise WMI it could not give a decision.  The letter continued:

“Meanwhile, we remain concerned that for Wheelock Marden and Company Limited to continue to act as General Managers of your Company during this further period may involve this Company and its officers in liability in the event that your Company were found to have been trading fraudulently, i.e. incurring liabilities which it has no reasonable expectation of being able to meet.  Whilst we have no reason to believe that this is the case we should be grateful if you could confirm to us without delay that your Company will not be trading fraudulently by continuing to carry on its business in the normal way, incurring the normal day-to-day liabilities, until 30th September 1984.”

3.6.197 Mr. Brothers signed a WMI reply the same day in which he said:

“you asked us to confirm that this Company would not be trading fraudulently during the further period up to 30th September 1984.  As previously advised we believe that, as General Managers, you are fully aware of the financial position and commitments of the Company, and to that extent you are able to form your own view as to this Company’s current financial position.  However, we can confirm to you, as previously stated there is no intention of incurring liabilities which there is no reasonable expectation of being able to meet and that, based on their present knowledge and their present view of the Company’s financial position, the Directors are of the opinion that the Company can properly continue for the time being and at least up to 30th September 1984 to carry on its business and incur normal day to day liabilities.”

3.6.198 There is an element of tongue-in-cheek about these exchanges between WM and WMI.  Mr. Lees, Mr. Leung and Mr. Brothers knew the score and, therefore, so did WM.

3.6.199 WMI received S&C’s report on 21st September, a report based upon information supplied by WMI management.  After reviewing the immediate financial position, the report stated:

“The short term cash flow projections supplied to us which have been prepared assuming Lloyds Bank International and Marine Midland Bank agree to defer payment of interest show the Company to have approximate cash balances of between US$0.1 million and US$1 million through to March 1985.  By the end of March 1985 the Company is forecasting a deficit of US$2.8 million.  Thereafter the medium term cash flow projections show, assuming no new equity, a continuing deficit of up to US$10 million until the end of 1986 which then steadily increases, as loan repayments are made, to a maximum deficit of around US$40 million in 1990.  The Company is predicting a cash surplus by 1994.”

3.6.200 The report recorded that a balance sheet for 30th June showed net assets of US$35.4 million based upon book values.  It stated, however, that using market values net assets were close to nil; while if Pacnorse was written down to its likely realizable value, WMI was “likely to have a negative net worth”.   S&C said options available to WMI were:

“To meet the immediate short term cash deficit we believe Wheelock Maritime effectively only has two options open to it, both of which it is already exploring.  These are (a) for funds to be provided by Wheelock Marden or, (b) for Lloyds Bank International and Marine Midland Bank to agree to defer the payments immediately due to them or, as an alternative, for Wayfoong Shipping to advance funds (which will be repaid after six months) to the Company for the payments due to Marine Midland Bank, thereby releasing funds for other purposes.”

3.6.201 S&C said that if WM released the WWW dividend there would be a cash surplus until 22nd March 1985 while option (b) would produce a surplus until 15th March.  But either way, the cash flows showed a substantial deficit was predicted after March 1985.  S&C continued:

“We consider that the long term viability of Wheelock Maritime will only be assured if the following take place:-

(i) there is a substantial injection of new equity;

(ii) the Company’s bankers agree to reschedule their debts; and

(iii) there is a recovery in the world shipping market.

We consider that if new equity can be raised then there is a good prospect of the banks agreeing to reschedule their debts, in any event the injection of new equity into the Company would only be made conditionally on the banks rescheduling.  We are still examining the medium term cash requirements of the Company to determine the amount of equity and the most appropriate rescheduling for the Company to seek and will report on this as soon as possible.  However, at this stage, we can say that we do not believe that institutional investors would be prepared to provide new equity for the Company.  There are in our view only two potential sources of new equity which are either Wheelock Marden, which is already considering the matter, or a special investor, almost certainly involved in shipping, who is prepared to make an investment and take a view that the world shipping market will recover.

Continuation of business

In the light of all the above information, very careful consideration needs to be given by the Directors as to whether the Company should continue to carry on its business in the normal way and in particular incur new liabilities.  If either Wheelock Marden or Lloyds Bank International and Marine Midland Bank and/or Wayfoong Shipping agree to the requests made of them as outlined above, then the short term cash flow projections appear to show a cash flow surplus in the Company until March 1985.  However as already mentioned, the cash flow projections, under either set of circumstances, show the Company to run into a substantial cash deficit after that date.  In our view the viability of the Company is dependent on the raising of new equity and doing so in the foreseeable future.  At this stage, we do not know of any potentially interested outside parties; that is not to say that such a party does not exist.  The Directors must form a judgement as to whether such an investor does exist and if there is a reasonable prospect of the Company being able to raise new equity.  If they believe that there is a reasonable prospect and the immediate short term cash deficit can be overcome by one or other of the methods described above this may form a basis on which the Directors can form a reasonable expectation of the Company being able to meet new credit incurred.”

3.6.202 On 26th September, Rothschilds produced their report for WM.  They recapped events leading to the provision of the facility in October 1983 and the subsequent sale of eight vessels at a book loss of $14 million, a loss due to disposal “in a very depressed shipping market”.  Rothschilds went on

“As the fleet has contracted, the problem now facing WMI is less complex.  Total debt has been reduced from US$310 million to US$249 million during the six months to 30th June 1984.  However the financial position of WMI has deteriorated quicker than predicted by the cash flow forecasts produced in October 1983 primarily because:  (a) the actual proceeds from vessels sold were less than previously expected;  (b) charter hire rates were lower than those previously estimated; and (c) there were timing delays in the liquidation of WWW assets.  The surplus of facilities over borrowings predicted in October 1983 for the 30th September 1984 of US$4.9 million before taking into account the US$4 million stand-by facility was revised on 25th September, 1984 to a surplus of approximately US$0.8 million after taking into account the US$4 million drawings available under the Facility.”

3.6.203 Rothschilds then referred to a cash flow for the period 12th September 1984 to 29th March 1985 and said:

“From the short term cash flow it can be seen that WMI requires facilities of approximately US$3.5 million in order that it can continue trading to the end of March 1985.  The short term cash flow shows that WMI will be unable to fund its requirements by the middle of February 1985, though there are few days before that time when WMI theoretically has a cash deficit.  The long term cash flow projections for the period from 1st April, 1985 to 31st December, 1987 reveal that the company will require further funding to meet its future obligations.

We have been informed that agreement has been reached between WMI and certain banks to roll over principal and interest payments totalling US$2.87 million otherwise due during September 1984.  The total amount of the deferral is made up of US$1.77 million due to Marine Midland Bank which has now been taken over by The Hongkong and Shanghai Bank Limited and rolled over for an indefinite period and US$1.1 million due to Lloyds Bank International which has been rolled over until the end of October 1984.  The amounts of US$1.77 million and US$1.1 million are in respect of interest and principal payments due on the Marilock and Annalock respectively.  Apart from these payments, we have been advised that WMI has, to date, met all their other loan payment schedules.  Certain of the bank loans contain earnings cover covenants and consequently, as these have not been met, the loans can technically be declared in default by the respective banks which would of course force WMI into liquidation.”

3.6.204 Rothschilds referred, however, to the possibility of the sale and lease of Rangelock, Sealock and Annalock to take advantage of capital allowances in U.K. which would improve further the financial position of WMI.  In relation to WMI’s request to be allowed use of the WWW dividend, Rothschilds said:

“Obviously a refusal by Wheelock Marden to this request will result in WMI being unable to meet its obligations by March 1985 and consequently lead to liquidation unless other facilities can be arranged in a very short period of time.  In addition to this short term problem, WMI has requested that Wheelock Marden participate in a US$10 million issue of fresh capital in early 1985, pro-rata to its holding, which will involve a cash outlay of approximately US$5 million.  These two factors will, according to the cash flows forecasts, enable WMI to meet its financial obligations up to the end of 1986.”

3.6.205 Rothschilds then examined various cash flows it had had prepared.  As to the short-term cash flow referred to above, they said:

“The deferral of the two repayments in September 1984 totalling US$2.87 million enables the company to trade within its existing facilities until the middle of February 1985, though there are some days before this date when, in theory, WMI has a cash deficit.  However the position after this date deteriorates rapidly, culminating in an anticipated cash deficit of approximately US$3.5 million at 29th March, 1985.  WMI has, to date, been very adept in its cash management and has managed to survive on a day to day basis in recent months.  This is clearly a position which cannot be expected to continue for very long.”

3.6.206 A long-term cash flow assuming funding of $10 million in March 1985 showed WMI able to trade up to December 1986 after which the cash flow would deteriorate to a deficit of $9.2 million at the end of 1987.  Assuming a $10 million funding and agreement with bankers to defer payment of principal amounting to $13 million between September 1985 and May 1986, then

“The deferral of such amounts obviously has a significant beneficial impact on the cash flow projections of WMI.  We are not aware whether any discussions have taken place with the banks concerned to see whether they would be amenable to such a proposal.  If both the capital issue in March 1985 and the deferral of debts are achieved, the company should be able to support itself during the period under review and, indeed, the projection forecasts a surplus of bank and other facilities over borrowings at December 1987 of US$5 million.”

3.6.207 Assuming however no funding and no deferral of debt, there would be a consistent deterioration to a cash deficit of US$25.5 million in December 1987.  Further, by reducing assumed charter-hire rate increases from 15% to 10% and increasing projected interest rates by up to 1%, the cash deficit would be $30.3 million in December 1987.  Even with low interest rates and annual charter-hire increases at 20%, there would still be a deficit of $16.4 million in December 1987.

3.6.208 Rothschilds warned that long-term cash flows could only be an indication of future funding requirements and warned

“The long term cash flows assume the sale of seven vessels in the period from April 1985 to December 1987 for an aggregate consideration of US$50 million.  The valuation letter prepared by Wallems indicates that the likely sale proceeds will be ap[p]roximately US$8.0 million to US$9.7 million lower than that predicted in the long term cash flows, at between US$40.3 million to US$42 million.  If the actual sales proceeds correspond to the Wallems valuation, the cash deficit forecast for WMI will worsen considerably.”

3.6.209 After dealing with WMI’s current results, Rothschilds said they had obtained from Wallems an up-to-date valuation of WMI’s fleet which estimated the value at US$109 million as against WMI’s book value of US$191 million.  On this basis, WMI had a net deficit of US$44 million.

3.6.210 Rothschilds’ review of trading prospects based on various shipping industry views did not give much encouragement.  They reported, however, that Mr. Lloyd had informed them that rates had improved dramatically in the last month and WMI was well placed being on the spot market.  Based on their review, Rothschilds said WM had four alternatives:

“a) to withdraw any support and allow its subsidiary WMI, in the absence of obtaining outside support, to go into liquidation;

b) to give limited support within an agreed short term time frame whilst seeking ways to dispose of its interest in WMI;

c) to give further limited support, so as to allow WMI to continue trading for a period of 12-24 months; and

d) to give sufficient support to ensure WMI’s future existence.”

3.6.211 As to (a) Rothschilds said:

“This would be a drastic step to take as we believe, following discussions with officers of Wheelock Marden, that WMI may be forced into liquidation within a very short period of time unless it can arrange further facilities to cover its expected cash deficit.  If external support cannot be obtained, the directors of WMI would be put in a difficult position as they could become personally liable to legal action by creditors in respect of fraudulent trading.  Obviously such a step would mean Wheelock Marden’s significant investment in WMI would have to be written off and we have estimated that this could total some US$25 million.  In addition Wheelock Marden would be liable, under the Rangelock performance guarantee, to make up any shortfall on charter rates for a further 16 months.  There may be a possibility that the vessel cannot be chartered and we have been advised that the total liability that would be incurred by Wheelock Marden in accordance with the Rangelock performance guarantee would amount to an additional US$5.55 million, making a total paid and payable under that guarantee of approximately US$8.15 million.

There are two remaining contracts with the Dalian yard and the inability of WMI to take delivery of those newbuildings would give rise to acute political embarrassment and adverse commercial consequences.  We have been advised by Wheelock Marden that the purchase of these two ships will not have any adverse cash flow effect on WMI.

In general, there are no legal obligations on the directors of a parent company to provide or arrange financial support for its subsidiary, the directors’ only responsibility being to take whatever action is in the best interests of the parent company.  As we have previously stated in our report dated September, 1983, the ramifications of withholding support for a subsidiary could be far-reaching for a parent company with damaging effects on its reputation.  This could be reflected in withdrawal of credit lines and loss of future contracts, not to mention the adverse publicity which such a move might attract as occurred in the case involving Esperanza PLC, a public company in England.

The position of Wheelock Marden is further complicated by the fact that it is not only the parent company but also the General Manager of WMI, for which it receives a fee and an annual commission.  Whilst we are advised that this position does not in itself impose any legal obligation on the Board of Wheelock Marden to extend support to WMI, we believe that criticism, particularly from the minority shareholders and creditors of WMI, may be a possibility if support is withheld.”

3.6.212 As to alternative (b) limited support, Rothschilds said WMI would require about $3.5 million to continue trading to March 1985.  They said:

“This support would be given on the understanding that no further support will be made available and that WMI will have to seek a more permanent solution to its problems including a formal agreement with its bankers for a moratorium of debts and/or a reconstruction of the company.  It could also be made clear that Wheelock Marden will consider ways of reducing its investment in WMI by seeking a third party to take over its shareholding for a nominal consideration and ultimately the management of the company.  US$2.26 million of the US$3.5 million of short term funds required under this option could be provided by Wheelock Marden waiving its right to the full amount of the WWW dividend that it is entitled to receive under the First Charge.”

3.6.213 As to (c) support to ensure survival for 12-24 months, Rothschilds referred to their reports of September 1983 and said:

“In arriving at the decision to support WMI, in October 1983, the Board of Wheelock Marden agreed to support WMI for a period of two years to provide a breathing space within which to assess whether the market was likely to to improve sufficiently.  The shipping market has shown signs of improvement in 1984 and Wallems has expressed the opinion that “it is not unreasonable to anticipate the 1981 time charter rate levels to be reached again in about 1988 ....” (refer Appendix C).

Given the Board’s decision twelve months ago, it would be quite logical to consider giving WMI further support to continue trading for 12-24 months so as to give time for the shipping cycle to improve.  Based on the information available, we confirm that a further cash injection, possibly in the form of a capital issue, of approximately US$10 million should enable WMI to carry on trading until December 1986.  As the deterioration in the financial position of WMI is predicted to continue and the company is unlikely to be able to generate a return on this investment unless there is a sharp improvement in the shipping industry, the Board of Wheelock Marden will have to consider whether further support of this amount is justifiable.”

3.6.214 Finally, on (d) support to ensure WMI’s continued existence, Rothschilds said:

“As stated previously, the provision of US$10 million in March 1985 should enable WMI to continue trading until December 1986.  However we believe that US$10 million will not be sufficient to ensure, with any degree of certainty, the continued survival of WMI after that date.  As we would have to review forecasts covering a period many years hence, it is not practical to investigate in detail the total amount of equity financing that would be required to ensure the future viability of WMI.  However, following conversations with officers of Wheelock Marden and a brief review of WMI’s future requirements, we believe that WMI would need approximately US$25 million - US$30 million over a period of up to 5 years to ensure its continued survival in the foreseeable future.  Wheelock Marden’s proportional contribution of this amount would, of course, be approximately US$12.5 million to US$15 million.

After reviewing the future prospects of WMI, we do not believe that Wheelock Marden should agree to provide further financial support other than that required to keep the company solvent in the immediate future.  A further significant investment in WMI is unlikely to provide an adequate return on the basis of currently available information.”

3.6.215 In conclusion, after reminding WM of “possible commercial damage of not supporting WMI”, Rothschilds said:

“If Wheelock Marden is not prepared to support WMI further, the company would be likely to go into liquidation almost immediately unless it reach an accommodation with its bankers.  To give WMI sufficient breathing space to negotiate a rescheduling of debt with its bankers and to avoid the serious consequences of allowing a subsidiary to go into liquidation, we recommend that Wheelock Marden consider permitting WMI to retain in full the balance of the dividend totalling US$2.26 million paid by WWW which is presently held in a suspense account.  As shown in paragraph 11(b) above, the release of this dividend will still give Wheelock Marden a measure of security on its existing commitments.  Consideration should also be given to providing a further US$1.24 million but only on the basis that WMI had reached agreement in principle with its bankers.  We also recommend that Wheelock Marden should inform the Board of WMI that no further support would be made available and that Wheelock Marden would be willing to dispose of its shareholding in WMI as part of a reorganisation of the company for a minimal consideration.  Wheelock Marden would be in no worse position financially by following this recommendation than if it permitted WMI to go into liquidation, but it would have the significant commercial benefit of avoiding the stigma of allowing its subsidiary to follow that route.”

3.6.216 The WM Board resumed its meeting on 26th September.  Mr. Young of Rothschilds went through his report in detail.  The Board adjourned to the following day to consider the report.  It met at 10:30 a.m. on 27th September when it decided further to adjourn to 1st October.  In the meantime, Mr. Freshwater confirmed that a further letter from WMI confirming its ability to trade to 1st October was not required.

3.6.217 The WMI Board met at 11:30 a.m.  They approved the accounts for June 1984 but decided to delay an interim statement to shareholders pending WM’s response to their request for support.  A draft statement explained that the facility was fully drawn down earlier than anticipated and said:

“Wheelock Marden has indicated that it is not prepared to consider any further advances and accordingly additional financial facilities are being negotiated with certain of the Company’s bankers for working capital purposes.”

3.6.218 The WMI Board went on to discuss S&C’s report, helped by Mr. Elliott who

“noted that the short term cashflow indicated that if the entirety of the WWW dividend of US$2.856 million were released to the Company it would have sufficient funds to continue until March 1985 but that the long term viability of the Company was dependent upon the injection of new equity.  He went on to say that Directors would have to make a judgment on whether a new investor could be found and if they did believe such an investor could be located then they would be justified in forming the view that the Company could continue to incur credit.”

3.6.219 Mr. Brothers reported outstanding payments to Nat West and RBS had been made, that LBI had agreed to deferral of interest on Annalock, and that MMB would be asked to do likewise for Sealock.  He said he agreed with S&C’s conclusions on how the long-term viability of WMI could be assured.  Then

“Mr. D. J. Shaw advised that Directors had to have regard to two questions, namely the immediate cashflow requirements of the Company and the requirements beyond March 1985.  Directors had, he said, to be able to form the view that the Company could meet its cashflow requirements in the future.

In reply Mr. Brothers advised that the injection of new equity would be a matter that the Company would have to actively pursue and Mr. Elliott advised that S&C would be prepared to assist in locating a new investor.  The Chairman thanked Mr. Elliott for his offer and said the matter would be considered.

Mr. Lees then advised that it was understood that Wheelock Marden intended to make full provision against their investment in the Company thereby reducing the value of their shareholding to HK$1, such provision to be made and incorporated in their accounts at 30th June 1984.

Mr. Brothers went on to say that S&C would shortly be requested to investigate proposals on how best to re-organise the equity of the Company.”

3.6.220 The WM Board met again on 1st October when Mr. Lees reported that the management committee recommended acceptance of Rothschilds’ recommendation that WM waive the balance of $2.26 million on the WWW dividend

“because they considered that WMI should be given sufficient breathing space to enable it to find a longer term solution for its financing requirements.  As regards WMI request that the Company indicate whether it would be prepared in principle to subscribe pro-rata for its portion of the proposed US$10 million new share issue.  Mr. Lees reported that the Management Committee were unable to recommend this but proposed instead to suggest to WMI that it seek a new investor.”

3.6.221 After advice from Mr. Freshwater,

“Mr. W. J. Lees then advised that based on the advice of the Company’s legal advisers and Counsel’s opinion the Management Committee would make the final decision as to the best method of making the US$2,856,000 available to WMI.  He noted that if the Company did not give this support to WMI then the Board of WMI would be close to a point where they would have to consider the appointment of a Receiver.  In such a case there was, he said, apart from the consequences of WMI’s liquidation to the Company and the Group, the danger that the m.v. “Rangelock” would be unable to trade which would result in the Company being called upon in full for the balance of its outstanding guarantee to LBI - potentially US$5.5. million.  Mr. Lees advised that the Management Committee recommended that on commercial grounds the entirety of the WWW dividend of US$2.856 million be released to WMI”

3.6.222 The Board then resolved to waive the dividend and to write to WMI indicating

“(i) the decision of the Company not to exercise its right to claim any part of the dividend of US$2.856 million paid by World-Wide Wheelock Shipping Inc. to Glamorgan Carriers Inc. or, alternatively, to enable such sum to be redrawn by WMI under the Facility;

(ii) that WMI should seek with the utmost urgency a longer-term solution to its working capital problems, possibly by seeking a new equity investor and/or by renegotiating the terms of its borrowings; and,

(iii) that the Company would in principle be prepared to sell its shareholding in WMI for a nominal consideration as part of any reconstruction or rescheduling scheme, although any proposal made should not require the provision of further finance by the Company.  (my emphasis)

It was agreed that prior to determining which of the alternatives in (i) above should be followed, the Management Committee should obtain confirmation from WMI that there had been no breach or non performance by WMI or Glamorgan Carriers, Inc. of any of their obligations to ADS.  Subject to such confirmation from WMI, the letter should then be sent advising the determination by the Management Committee upon advice from Slaughter and May.”

3.6.223 Such letter was sent on 8th October and circulated to WMI’s directors on 18th October.  WM received confirmation that there had been no breach of any obligations towards ADS by WMI or Glamorgan and that ADS was not taking any point about beneficial ownership.  In the meantime, a memo of 4th October by Mr. Campbell to the managing directors indicated that informally he had been authorized to use the funds to pay $1.12 million interest due to LBI on Annalock and all interest outstanding on drawings by WMI under the facility.

3.6.224 On the same day, WM made its interim announcement in which it said directors “have considered it prudent to make full provision against [WM’s] involvement in WMI”.  WMI also made its interim announcement.  It now said that in spite of the $4 million facility, it still faced liquidity problems and was in discussion with advisers and banks “with a view to placing the Group in a financially viable position for the longer term”.  Mr. Brothers sent a copy to CSTC on 1st October explaining that WMI could not take on additional capital commitments pending a longer term solution.

3.6.225 The management committee met on 2nd October.  Mr.Lees explained there had been a series of ad-hoc meetings leading to the recommendation made to and accepted by the WM Board the day before.  He said after discussion and consideration of Rothschilds’ report, the committee

“had decided that it was appropriate to assist WMI to meet its cashflow requirements for a period which would enable it to seek a longer-term financial solution.  In reaching this decision the Committee had been very much aware of the fact that if WM did not assist then the Board of WMI would be close to a point where they would have to consider the appointment of a receiver.  In such a case WJL advised there was a danger that the m.v. “Rangelock” would be unable to trade which would result in WM being called upon in full for the balance of its outstanding guarantee to LBI (potentially US$5.5 million).”

3.6.226 Two matters required follow up:

“(i) it had been envisaged that the sum of HK$300,000 which WM had agreed to make available for cash payments or liabilities in favour of third parties on behalf of WMI would be extended until the end of 1984.  However the matter had inadvertently not been specifically confirmed by the WM Board.  The Committee therefore endorsed the proposal of the extension of the credit of up to HK$300,000 until 31st December, 1984.

(ii) the current account balances between the WMI Group and other WM Group companies would now be analysed with a view to determing the extent of charges raised on the WMI Group which were not fully justified.”

3.6.227 Finally, Mr. Brothers said that after informing all bankers about the situation, he was going to London to start work on spinning off WMI (UK) because

“It appeared advantageous to re-organise the WMI group structure so that the U.K. companies were effectively separated from the rest of the Group.  This involved four vessels, namely m.v. Annalock, m.v. Marilock, m.v. Rangelock and m.v. Sealock which because of the significant tax benefits they could potentially procure for a third-party U.K. company, it was envisaged that by separating them from the rest of the WMI Group there was an excellent chance a purchaser could be located.  Discussions would be held with Turnbull Scott to continue to manage the vessels where necessary.  If these plans were successfully concluded RJFB intimated that the WMI Group would become a more streamlined and viable entity which could well be of greater interest to new investors.”

3.6.228 On 4th October, the WMI directors by circular approved the arrangement for HSS to grant a further facility of $3.3 million in relation to Marilock.  $343,121.00 was to be drawn down on 28th September to meet the LBI/MMB interest payments.  The balance was to be available by 30th December on condition that HSS had by then taken 100% participation in the $13.25 million loan by LBI/MMB to Newark.  The loan was to be repayable by 30th March 1986 subject to an overriding right to demand immediate payment.  HSS made a formal offer on 9th October which included the condition that there was no event of default in the WMI Group unless agreement for a moratorium had been reached with lenders.  The offer was open until 30th November.  On 10th October, WMI directors approved the detailed arrangements.

3.6.229 On 12th October, WMI directors by circular approved an agreement under which WMI was to pay the outstanding $1.95 million to RBS by sixteen monthly instalments, with a final instalment of $1.25 million on 31st December 1985.  On the same day, WMI (UK) made a further demand on WM for $202,000.00 in relation to Rangelock while LBI declared a further event of default by non-payment of principal and interest.  LBI followed up on 17th October saying that in accordance with WMI instructions they had applied $621,000.00 in the earnings account to settle all interest but that principal of $3.45 million was still outstanding and payment was awaited.

3.6.230 On 16th October, LBI formally recorded terms on which it had agreed to roll over the Annalock interest from 20th September to 5th October.  These included a pledge of shares of WMI (UK) or other owner of Rangelock, assignments of charter parties of over three months in relation to Rangelock and Annalock, and cross collateralization of the Rangelock and Annalock loans.

3.6.231 The shipping committee met on 24th October.  It was reported that Amex no longer wished to proceed with the ship substitution arrangement for Pacnorse but would be prepared to grant a moratorium.  It also noted an information pack had been prepared and sent to Mr. Brothers in London for potential investors.

3.6.232 By now, Mr. Brothers had begun the process of reorganising WMI (UK) as a first step towards realizing benefits from U.K. capital tax allowances.  His proposal was for a new holding company, Deltahold Limited, wholly owned by WMI.  To this would be transferred Adleship, owner of Sealock, and Mastship, owner of Annalock.  Deltahold would form a third subsidiary, Hardyship Limited, to which WMI (UK) would transfer Rangelock and the LBI debt.  By telexes of 25th October and 26th October, Mr. Brothers sought approval from BW and the Fund.  On 31st October, ADS formally asked WMI (UK) for Dkr one million shortfall on the Sealock payment due on 26th November.

3.6.233 At a shipping committee meeting the same day, it was learned that LBI was retaining the latest Annalock freight of $446,000.00 without release of any voyage expenses.  Mr. Brothers was to put pressure on LBI to make a release.

3.6.234 The proposed reorganisation of WMI (UK) and the need for the Fund’s approval now set off a round of correspondence being, with hindsight, probably the first shots in this battle.  On 2nd November, Mr. Brothers sent HFW a telex explaining what had been going on in relation to WWW.  On 8th November, HFW asked Norton Rose for an explanation of why the Fund had not been informed about payment of the dividend which should have been used in part payment of the deferred instalments.  They also wanted details of the oil deal including how the proceeds of sale were applied and the effect of the sale on WMI’s short and long term positions.  Norton Rose replied next day explaining that there was no restriction in the second pledge on declaring a dividend, a dividend which had provided needed working capital to continue normal trading.  They also sent details of the oil deal showing that net cash was very small, only $222,000.00, but a substantial reduction of WMI’s commitments.

3.6.235 On 14th November, Mr. Lyngsie and Mr. Faergemann telexed Mr. Brothers direct, saying replies so far given were inadequate.  They said:

“We must demand a satisfactory explanation from WMI why they hadn’t informed us of the place and time of the shareholders meeting when it was decided to pay dividend by World Wide Wheelock.  Also why part of the dividend was not applied in prepayment of the deferred instalments due to ourselves.  We understand from the information received that most of the loan from Wheelock Marden has been repaid.

It is clear from your reply, that what has in fact happened is that the continuing operating expenses of WMI have been met by the dividend paid by World-Wide Wheelock, rather than either generated out of operations or advanced by the shareholders.  This is contrary to the spirit of the negotiations leading to the Fund’s agreement to leave outstanding the deferred instalments until the end of the loan periods in respect of the ‘Sealock’ and ‘Annalock’

We consider that it was implicit in our negotiations that any further funds becoming available to you would be applied in prepaying, or providing security for the payment of, the deferred instalments.”

3.6.236 After asking for more details of the oil deal, they continued:

“As you know, it has been a concern of ours to obtain financial information as to WMI.  In practice that information has been sketchy and late.  It now appears that it has been inadequate and we feel that we should have been informed before the dividend was paid by World-Wide Wheelock, or dissipated in meeting the operational expenses of Wheelock Maritime International.”

3.6.237 They made it clear that, until they were satisfied on these matters, WMI could not expect any help with the reorganisation proposals.  Further, the Fund expected some benefit from the exercise.

3.6.238 Mr. Brothers replied on 15th November.  He said there had been a misunderstanding and that

“1) Yr information that most of the loan from Wheelock Marden has been repaid is entirely incorrect.  The dividend from World-Wide Wheelock was urgently required to provide additional working capital for the WMI Group and was used as such undoubtedly to the benefit of all creditors.  We are not aware of any requirement for WMI to keep you informed of the place and time of shareholders meetings of World-Wide Wheelock but would have no objection to doing this if we had so been requested.

2) I believe the position of Wheelock Marden as a 51% shareholder in WMI has always been very clear and they have never made any commitment or undertaking to provide funds to WMI.  It is a regrettable fact that current market conditions are such that revenue from operations simply do not cover the current commitments of the Group as a whole and if this dividend had not gone to WMI in its entirety the Group would have been insolvent and would have ceased trading.  This we are sure would have been to no one’s benefit and we sincerely believe that we have at all times complied in all respects with “the spirit of the negotiations leading to the Funds agreement to leave outstanding the deferred instalments”.

3) We concur with your understanding that should surplus funds become available from the operations of the vessels or from any other source that had not been pledged in any way to other creditors they will be channelled towards prepaying or providing additional security for the payments of the Fund’s deferred instalments.”

3.6.239 As far as information on WMI was concerned, Mr. Brothers wrote:

“To the best of our knowledge you have been receiving exactly the same information as all our other creditors.  The cash flows we have forwarded to you are extremely detailed and we do not feel that they can be in any way be described as “sketchy”.  We regret if you feel that they have been sometimes late in coming and we will certainly try to improve on this in future.  Nevertheless you may be assured that there has been a tremendous amount of work and effort during the past year in improving the position of the Group (and therefore its creditors) and if we have any excuse to make at this time it is because of the pressure of work resulting from these measures.  As stated earlier there is no reason why we did not inform you of the dividend being paid by World-Wide Wheelock, simply that it has not been our practice in the past nor did we anticipate a need in this particular instance.  We cannot accept that WMI was any way in default in this matter.”

3.6.240 Finally, Mr. Brothers said it was difficult to say what proceeds of the reorganisation there would be but that they would go to clear the first mortgage and then to the Fund.  Even if there was insufficient to clear the first mortgage, the reduction in debt would enhance the value of the Fund’s mortgage.  WMI expected nothing from the proceeds.

3.6.241 Mr. Lyngsie followed up, although his telex is not available.  Mr. Brothers replied on 20th November and said:

“My only comment is that we have always endeavoured to provide all information financial and otherwise as required of us by our creditors.  We have as a matter of policy also tried to provide additional information so that our creditors can have a proper prosective (sic) of the overall position.  Clearly we have failed to do this in your case which I regret.  It is easier for us to maintain regular dialogue with the creditors either in HK or London than in Copenhagen although during past nine months we have had several meetings with Mr. Schroeder from B+W at which time we have always brought him fully up-to-date with our current position.  The picture is an ever changing one and what was applicable one month is not necessary the case in the next.  (The current plan for reorganisation is a good example.)  I am sure you do not doubt that our efforts and energies have always been directed towards improving the Group’s financial position.”

3.6.242 Mr. Lyngsie replied the same day.  He did not pursue the issue about information but gave another clear indication that WMI could not expect help unless the Fund shared in the £9 million anticipated from the reorganisation and realization of capital allowances.

3.6.243 Meanwhile, on 7th November, the shipping committee learned that P&O were considering taking an interest in the Dalians, that negotiations were still continuing for Pacnorse to get a moratorium from its bankers, and that LBI was now releasing some funds from Annalock charter-hire.

3.6.244 On 13th November, the management committee was told by Mr. Lees that WWS had arranged the sale of Crown Award, one of WWW’s remaining vessels, for US$10.645 million.  Although this price was less than forecast, Mr. Brothers felt it was good in the present market and WMI’s share of some $5.2 million would be used to pay off outstanding debt to WM.  Mr. Brothers also advised that there might be a proposal from P&O for long-term charters for the Dalians.

3.6.245 Mr. Brothers then reported that discussion between Pacnorse and its creditors was continuing and that

“On the positive side earnings were well up on earlier results and it now appeared that all creditors had accepted the principle of a moratorium on principal for at least the next twelve months.  The ship substitution proposal had been dropped as it had been turned down by senior management within AMEX.  Nevertheless, there was still a cash shortfall and RJFB had informed Jebsens that from the end of the current year, WMI would no longer be able to contribute any further funds into the operation until it had been able to rearrange its own financial affairs.  Jebsens had accepted this position and had indicated that for a limited period funds could either be advanced from the Pool or from Jebsens.  It had been agreed that there was little point selling any vessels at this time.  Instead it was intended to examine closely the proposal to restructure Pacnorse whereby the value of its vessels would be written down to their current market value and if possible agree with creditors that a portion of their debt be converted into some form of preference shares.  This would hopefully bring Pacnorse back to a position from which it could trade profitably with the debt reduced to a realistic level.”

3.6.246 Mr. Brothers reported that LBI had agreed to release charter-hire for expenses in relation to vessels other than those mortgaged to LBI.  He also reported on arrangements for reorganising WMI (UK) in order to obtain the tax allowances.  He said:

“The book value of the three vessels concerned was £64 million and an upper estimate of the value of the free depreciation was £22 million although it was RJFB’s belief that a figure substantially lower than this is more likely.  There could be little doubt, however, that latent value did exist within the company and that the exercise was well worthwhile.  He hoped that the first stage would be completed within the next 10 days and thereafter the marketing exercise could be commenced.”

3.6.247 WM held a board meeting on 20th November and noted the arrangements being made in U.K.  They also noted that Pacnorse creditors had agreed a one-year moratorium, and that a ten-year charter for the Dalians with P&O was hopeful.  This was followed up by the shipping committee next day when Mr. Brothers said the Dalian yard had been told during his recent visit that WMI could not take delivery for the time being.

3.6.248 Meanwhile, on about 14th November, Mr. Brothers had been to see Mr Cheung at Mr Cheung’s request.  Mr. Brothers said Mr. Cheung had told him that if Mr. Marden liked WMI so much he should take it over.  To assist, Mr. Cheung told Mr. Brothers he would agree to WM making US$5 or $7 million available.  After discussion with Mr. Lees and Mr. Leung, Mr. Marden and Mr. A. Marden, it was agreed that Mr. Brothers should prepare a discussion paper which he produced in late November.  The paper reviewed the current position explaining that the proceeds of sale of the two remaining WWW ships would enable WMI to pay off both the facility and Rangelock payments but

“the Cash Flow Projections for the Wheelock Maritime Group show that it will be unable to meet its ongoing trading and loan commitments from the end of February next year and clearly a decision must be taken within the next month as to the future of the Group.  This discussion paper attempts to examine the three main alternatives that appear to be available.”

3.6.249 The first alternative was a shareholder’s loan of US$5 million on preferred terms which, with some debt restructuring and a modest improvement in the market, would enable the Group to survive for a number of years.  The paper said:

“Thus the first alternative would be to lend US$5 million to WMI on terms to be agreed but that would rank ahead of the equity holders.  At the time this loan was given, it would be publicly announced to all the Group’s creditors that its purpose was to enable the Group to trade out of its problems but that if this was not possible, no further assistance would be provided.”

3.6.250 The benefits of this proposal would be that WM would participate in any recovery in the market and would not be committed to any further support.  Negotiations with creditors would be facilitated because they were until then resentful that WM had given no meaningful support.  Against this proposal was the possibility of doubts about WMI’s ability to repay its loan obligations and the possibility of continuing liabilities.

3.6.251 The next option was the sale of the WMI Group coupled with a loan of $5 million.  The paper said:

“Due to its existing long-term loan liabilities and the current pessimism surrounding the Shipping Industry, it is not considered that it will be feasible to sell Wheelock Marden’s stake in Wheelock Maritime to an unconnected party even for a nominal amount unless there are strings attached.  A Scandinavian Buyer however has been located who would be prepared to purchase the holding for a nominal sum but only on condition that Wheelock Marden should lend WMI an amount of US$5 million.”

3.6.252 This option would overcome adverse factors such as the stigma of a parent allowing its subsidiary to fail.  It would ensure full repayment of WM, remove a substantial commitment of management and obviate the need for further provision.  Conversely, WM would have no chance of benefiting from a recovery in the market and might be open to criticism for selling on too favourable terms.  Approval of creditors for sale would be required and might prove difficult.

3.6.253 Finally, there was liquidation because

“WMI is unable to raise new money in its own name and its sources of finance are thus limited either to its shareholders or existing creditors.  The possibility of raising money from existing creditors must be considered to be remote.  If the shareholders therefore do not provide support, the Group will have to go into liquidation.”

3.6.254 This proposal would be beneficial to WM because most observers considered shipping had a bleak future for some years, so that WMI’s ability to repay its loans was questionable while the drain on WM would be eliminated.  Against that, liquidation would lay WM open to various liabilities, to criticism and to damage to its reputation.

3.6.255 Mr. Brothers’ paper finally said that the WMI (UK) reorganisation should be considered because

“It is in the U.K. side of the Group where most of the debt is concentrated with the three ships concerned having an aggregate debt of approximately US$62 million.  The three individual shipowning subsidiaries have “Unutilized Capital Allowances” due to the fact that in the UK, 100% accelerated depreciation is permitted in the first year of ownership but in our case has remained unclaimed.  The value of these allowances is estimated to be worth to WMI between US$14 million at the low end and US$28 million at the high end.  Assuming a sale at the low end, the net resulting position could be as follows :-

	(all  US$’000’s)
Current market value . . . . . . . . . . . . . . .	43,000
add value of allowances . . . . . . . . . . . .	14,000
Aggregate sales proceeds. . . . . . .	57,000
less repayment of outstanding debt . . . .	62,000
Remaining deficit. . . . . . . . . . . . .	(5,000) =====

The ships will be chartered back to WMI (UK) at current market levels fixed for 12 years after which the ownership reverts back to WMI(UK) for a nominal payment.  The U.K. group therefore will be self-sufficient from now onwards.  On this assumption and also that the two [Dalian] newbuildings will not be taken into the Group, a three year cash flow is attached by way of further reference.  This illustrates that given a modest increase in freight rates and before any shareholder’s loan there will be a modest deficit of US$3 million at the end of 1987.  At that time all ships will have been sold and there will remain outstandings of US$1 million to Pacific Norse Shipping and US$1 million to unsecured creditors.  The remaining investments will be in WMI(UK) which, with any market improvement, will be a net contributor and Pacific Norse Shipping.”

3.6.256 Later, Mr. Brothers drafted a fourth alternative which effectively creamed-off self-supporting assets into a new company and left the others to sink or swim.

3.6.257 After delivery of the paper to Mr. Cheung, Mr. Brothers had further talks with him and later with his representatives, Mr. Poon, Mr. Tang and Mr. Lo.  In the event, nothing came of them.

3.6.258 Independently, Mr. Brothers was also looking for investors.  One possibility was a Belgian bulk carrier group, Bocimar, to whom Mr. Brothers sent an outline of the WMI Group’s position.  In this outline, Mr. Brothers said:

“Current Situation:  The group is up-to-date on all payments of principal and interest to its creditors.  This situation cannot continue indefinitely however without an injection of cash ($5 million) from it shareholders or the sale of assets.  Wheelock Marden & Co. Hong Kong has indicated that it will not subscribe to a “rights” issue leaving the sale of assets as being the logical a[l]ternative.”

3.6.259 On 6th December, the Fund advised WMI that the payment due on 26th November in respect of Sealock had been received only on 3rd December.  It indicated it could under the loan agreement charge interest amounting to Dkr428,000.00 on the whole loan outstanding but would settle for interest of Dkr7,719.00 on the payments outstanding on 25th May and 26th November if they were paid within seven days.  If that amount was not so paid, negotiation on the WMI (UK) reorganisation might be affected.

3.6.260 On 10th December, Mr. Campbell made a note that in spite of a request and oral agreement for the Sealock loan to be rolled over for two weeks from 11th December, MMB’s head office had agreed to one week only.

3.6.261 Next day, Mr. Brothers telexed the Fund to advise it of the default situation in the WMI Group.  He said there were two default situations, both in relation to Rangelock, being the Aquaship guarantee and the LBI loan.  The latter default, Mr. Brothers said, was disputed.

3.6.262 On 12th December, the shipping committee met.  Mr. Brothers reported that, apart from a one-year moratorium agreed by Pacnorse lenders, all lenders except one had now agreed upon a two-year moratorium.  Meanwhile, WMI would fund the expenses of Pacnorse vessels managed in Hong Kong until 31st December, but not thereafter until WMI’s financial position stabilized.  Mr. Brothers also reported that the Fund was causing problems about reorganisation in U.K. because it wished to improve its position.  However, it had agreed to go to the first stage in respect of Rangelock and Sealock.

3.6.263 The committee noted that Crown Award had been sold and loans by WWW to shareholders were being calculated.  It was decided, in view of the Fund’s attitude, to take advice from Mr. Shaw before WMI paid anything to WM.  This was echoed by Mr. Tang at a WM Board meeting next day when he cautioned that any repayment by WMI should not be construed as a fraudulent preference.

3.6.264 On 19th December, the shipping committee was informed by Mr. Lees that WWS had been advised against distributing the proceeds of sale of Crown Award to WWW shareholders and that it was unlikely that surplus funds would be released before the end of January 1985.

3.6.265 Mr. Shaw produced advice on 21st December.  His opinion was that payment of a further dividend to WM would not be a fraudulent preference because WM had an unqualified right under its first pledge to receive any dividend.  On 2nd January 1985, however, he advised that use of a WWW loan to shareholders was not beyond doubt as a fraudulent preference and that a dividend would be strongly preferable.

3.6.266 On 31st December, Mr. Yuen resigned from WMI and WMS Boards.  This appears to have been part of a retrenchment exercise by WMI.  Thereafter, Mr. Yuen made an independent way.

3.6.267 Also on 31st December, Mr. Gabrielsen responded to WMI’s notification that it could no longer fund Pacnorse operating expenses although it anticipated making repayment of $900,000.00 on its shareholder’s loan by the beginning of February.  Mr. Gabrielsen said that, subject to freight payments, Jebsens could repay $350,000.00 to WMS and fund operating expenses until the end of January but not beyond.

3.7    1985

3.7.1 The shipping committee met on 2nd January 1985 and noted that the Fund had provisionally agreed to the U.K. reorganisation and that Morgan Grenfell had valued depreciation at £13 million for three vessels.  It also noted that the final WWW ship, Golden Daisy, had been sold for US$3.125 million and that it had been agreed that the capital of WWW be reduced so that funds could be released to shareholders pending formal liquidation.

3.7.2 Later the same day, Mr. Leung, Mr. Lees and Mr. Brothers met Mr. Shaw to discuss two plans for WMI.  Plan A was a WM loan to allow WMI to continue trading until profitable conditions returned.  Plan B was for the establishment of a new company, funded by WM, which would purchase all WMI assets except Rangelock, Sealock and Annalock.  Both plans depended on the reorganisation of WMI (UK) and a moratorium on interest and principal by all unsecured creditors including Pacnorse until WMI earnings were sufficient to recommence payments.

3.7.3 As to plan B, a note of the meeting records that Mr. Brothers

“felt that from WMI’s point-of-view, the sale of assets could be justified on the grounds that it was a continuation of the rationalisation programme that had been followed over the past two years and the discussions with the remaining creditors would be greatly simplified following the sale of assets thus increasing the overall chance of WMI’s long term survival.  Clearly however WM as majority shareholder and General Managers of the Company were in a position whereby it would have to be sure that any purchases of this nature were such that they would be beyond reproach.”

3.7.4 Mr. Shaw voiced concern that the unsecured creditors would oppose the plan, although they would eventually agree because to take action would only jeopardize their position.  Mr. Shaw said it was important to get the agreement of all creditors and that

“it was vital to be able to prove that the sale of assets was in the best interest of WMI.  If the sale was at market price only, it might be questioned and there should be therefore an element of a premium in the price to the extent that no liquidator of WMI would have turned down the same offer.  He appreciated that the paying of a premium made the investment decision more difficult for WM to justify.  Nevertheless, provided such premium was not unduly large, this could probably be justified as it could not be in the best interests of WM to let its subsidiary go into liquidation or the very least, WM would wish to ensure that such liquidation resulted in the minimum amount of damage to the Group.  The WMI Board should have no difficulty in agreeing to the sale of these assets provided it was convinced that unless such sale was concluded, the overall future of the Company would be jeopardised.

The key to the success or otherwise of Plan B would clearly be the Unsecured Creditors in particularly Pacnorse.  WMI was in a slightly unfortunate position in so far as the Secured Creditors were concerned in that by and large, the secured creditors had adequate cover and thus would be less inclined to cooperated in any moratorium arrangements lest it could be shown clearly to be in their best interests.  As regards the Unsecured Creditors it would be necessary to offer them some “sweetner”.”

3.7.5 Finally, Mr. Shaw said S&C should be kept up-to-date so they could advise at short notice, if necessary.

3.7.6 Mr. Brothers met Mr. Banner and Mr. Sun of S&C on 4th January.  He informed them that the market had not moved and that the next “crunch” would be in March when an interest payment was due on Annalock.  He explained the WMI (UK) reorganisation but said it would not solve the liquidity problem.  He said three solutions had been suggested for the long term:

(1) The sale of WMI with US$5 million from WM;

(2) WM to put $5 million into WMI;

(3) A new company funded by WM to buy all WMI assets except Rangelock, Sealock and Annalock.

3.7.7 There was discussion about unsecured creditors who would be prejudiced by a sale of assets.  Mr. Brothers thought they should not be paid off as they “would not receive anything anyway in a liquidation”.  Finally, Mr. Brothers said he needed S&C’s advice regarding the position of WMI directors, particularly in relation to “the ability of WMI to continue to trade”.

3.7.8 Following the meeting, on 7th January Mr. Brothers provided S&C with the latest short-term cash flow dated 4th January.  It opened with a credit balance of some US$1 million on 15th December 1984.  By 29th March, there was a deficit of $2.3 million following interest and loan payments totalling $1.38 million for Annalock on 22nd March. 

3.7.9 Mr. Banner wrote to Mr. Brothers on the same day to say he had reviewed proposals discussed at an earlier meeting.  He said shareholder approval, which might not be forthcoming, would be required for selling assets to a new company.  He suggested, therefore, that initially the new company be a subsidiary of WMI.  Shares in the new company could be offered to all WMI shareholders.  Assuming reasonable support, a listing might be possible.  Sale of shares would need to be underwritten by WM who, Mr. Banner understood, were prepared to subscribe US$5 million by way of new equity in the new company.  Mr. Banner inquired whether this amount could be increased to US$7 million on the basis that the public might subscribe US$2 million.

3.7.10 Mr. Banner then spelt out the crucial position of the four unsecured lenders, i.e. Nat West, RBS, Pacnorse and WM.  He felt that to get their agreement would require payment to them of all funds raised and charges over all unsecured assets.  Thought should be given to converting their debt to preferential stock because then “the chance of WMI being liquidated was minimal”.

3.7.11 The management committee met on 8th January when, in relation to Pacnorse, Mr. Brothers advised that subject to the views of the shipping committee, WMI would have to cease all repayments to unsecured creditors in 1985 as the cash flow indicated these could not be met.  He said with careful management WMI would still be able to meet its predictions of being able to continue operating without financial assistance until March.  Mr. Brothers made a similar report to the shipping committee next day but there seems to have been no discussion or decision.  Mr. Lees said there had been a meeting with Mr. Shaw last week “at which WMI’s position was reviewed to ensure the directors were still justified in allowing WMI to continue to operate in its present circumstances”.  Mr. Brothers advised that LBI had given formal approval to the U.K. reorganisation and the Fund’s approval was expected shortly.  Mr. Lees reported that WWS had confirmed that WWW would be liquidated.

3.7.12 Also on 8th January, Mr. Brothers wrote to the Dalian yard to explain WMI’s latest thinking.  He said:

“Very regrettably, Owners are continuing to experience the financial problems.  Market trading conditions have not improved and there at present does not appear to be any prospect of an additional capital injection from shareholders.  The current market value of each of the newbuildings is estimated at not more than US$8.5 million and there are thus no early prospects of selling the contracts to others.”

3.7.13 Mr. Brothers went on to give details of the U.K. leasing arrangements which could take advantage of tax benefits and how these could fit in with the existing financial proposals.  He concluded:

“It will be appreciated that it can only be achieved by taking advantage of the U.K. Tax leasing benefits which will only be available until the end of March 1985.  If therefore you feel that this proposal is acceptable, we would greatly appreciate your early advice so that we can progress the matter on a firm basis.”

3.7.14 The Dalian yard replied on 6th February, saying BOC would not agree the proposals but looked forward to further discussion with Mr. Brothers during his next visit.

3.7.15 Also on 8th January, Mr. Brothers met RBS to ascertain their attitude to the idea of forming a new company.  RBS was concerned as to whether its position as unsecured lender would be improved.  Mr. Brothers wrote to RBS next day to clarify the position after formation of the company and the assets likely to be available to provide security.  In his letter, Mr. Brothers emphasised that “it is absolutely critical for the ongoing viability of WMI that the current reorganisation plans in London are followed through successfully over the next two months”.

3.7.16 On 10th January, Jebsens, representing Pacnorse, met Amex to discuss Pacnorse.  According to a report of the meeting in New York, Mr. Jebsen said:  “1985 should see a continued freight market improvement and therefore for a variety of reasons we had probably seen the bottom of the ship building prices”.  Amex responded by saying they were prepared to help and take a long-term view.  The chairman of Amex said he “appreciated the very frank and open way we had dealt with them that they were not about to pull the rug out from under us and that because of their financial strength they were prepared to find a way to work this out even if it took as long as ten years”.

3.7.17 On 11th January, LBI advised WMI(UK) that it was renewing the Rangelock loan from 14th January to 14th February and that US$3.45 million principal would be overdue on 14th January.  Meanwhile, interest of US$563,175.00 due on 14th January had been debited to the retention account.

3.7.18 On about 11th January, a cash flow was prepared for the three years from January 1985 to December 1987 to illustrate the effects of the reorganisation of WMI in which: the new company, Wheelock Shipping, would take over eight WMI vessels; Rangelock, Sealock and Annalock would be sold off; and WMI would be left with remaining assets such as Pacnorse.  For Wheelock Shipping, it was assumed there would be an equity injection of US$5 million and that there would be some deferment of payments on Marilock, Inverlock and Fenlock.  Then, assuming US$13 million from sale of three vessels and charter-hire to increase at 15% per annum over three years, there would be a surplus of $10 million at December 1987.  However, if the proceeds of sale were only $8.1 million, and there was no increase in charter-hire rates, then the cash flow would break even.

3.7.19 For WMI, it was assumed that Rangelock, Sealock and Annalock and their debt would effectively be self-contained and that WMI would receive a loan of US$7.6 million from WWW which would be used to repay the WM facility and part of WM’s payments under the Rangelock counter-guarantee, and that no interest or principal would be paid to Pacnorse.  On the basis of realistic charter-hire rate there would be a deficit of US$2 million in December 1987.  By incorporating payments to Pacnorse, the deficit would be $17.4 million.

3.7.20 There was a WM Board meeting on 15th January when Mr. Lees said Mr. Brothers was in London trying to finalize reorganisation there which “was of major importance because it would release ‘free depreciation’ in respect of the three U.K. shipowning companies which had been valued by Morgan Grenfell at some £13 million”.  According to the minutes, Mr. Lees then

“reported on the up-to-date position of WMI.  He advised that a capital injection of US$5 million would be required before the end of March.  Before this injection could be made however it would be necessary for WMI to demonstrate some improvement in its present financial position.  The following steps would, he said, probably form a pre-requisite for any further capital injection:-

1. The successful restructuring of WMI (UK) in order to obtain the release of the “free depreciation” from the three U.K. shipowning companies.

2. An accommodation with WMI’s unsecured creditors.

3. An agreed hiving off of WMI’s remaining fleet under a capital reconstruction scheme.

 He further advised that WMI’s Merchant Bankers were fully in the picture and were preparing a report for the consideration of the WMI Board.

Mr. W. J. Lees commented that if it proved impossible to successfully process the aforementioned matters and in the absence of a realistic prospect of obtaining an additional injection of capital, it would be necessary for a Directors Meeting of WMI to be convened to consider the appointment of a provisional liquidator.”

3.7.21 The WMI Board met on 21st January.  In bringing directors up-to-date

“Mr. Brothers reminded Directors that at the last Meeting, Schroders Asia Limited had expressed the view that the long term viability of the Company could only be assured if one or more of the following took place:-

(i) there was an injection of new equity

(ii) the Company’s bankers agreed to reschedule their debts, and

(iii) there was a recovery in the world shipping market.

Mr. Brothers advised that there had not been a recovery in the shipping market and if anything the market was slightly weaker.  Asset values had also fallen due to a number of factors including forced creditor sales and the weakness of the Japanese Yen.  As far as bankers agreeing to a reschedule their debts, Mr. Brothers advised that a plan had been initiated to achieve this taking into account the fact that not all bankers were in the same security position.  In particular the unsecured creditors namely, National Westminster Bank of U.S.A., Royal Bank of Scotland, Pacific Norse Shipping Limited and to some extent Wheelock Marden & Co. Ltd. (“Wheelock Marden”) were in a different position to the secured lenders who by and large had adequate cover for these loans.  He went on to say that as a first step, all the unsecured lenders had been advised that the Company would discontinue principal and interest repayment as from the 1st January 1985.

Mr. Brothers went on to say that this left the remaining Schroders’ recommendation that there should be an injection of new equity.  In this respect, a plan that was, he said, in the process of being prepared which he believed had a good chance of being accepted.”

3.7.22 Mr. Brothers explained the proposal for reorganizing WMI(UK) and forming, as a subsidiary of WMI, Wheelock Shipping, where a rights issue should raise about US$5 million which should see WMI through until the end of 1987.  He did not foresee any problem about transferring assets but thought unsecured creditors might need to be offered a portion of the proceeds of sale to secure their agreement to the plan.  Asked where an investment of US$5 million might come from, Mr. Brothers said he “believed that it would be possible to put a case to shareholders that there was sufficient justification for their making such an investment”.  Mr. Brothers, in reply to Mr. Leung, also said the break-even point would effectively be set by unsecured creditors.

3.7.23 Mr. Banner then commented that there was little likelihood of support from any investor other than WM and “therefore WM might have to be prepared to put up the funds”.  He said confirmation of the transaction by shareholders at a general meeting might be necessary and the agreement of all creditors would be needed, of whom Pacnorse would be most difficult because of its own cash shortage and creditors.  Assuming approval, Mr. Banner thought the necessary documentation would take about ten weeks but it might be three months before the arrangements were fully implemented.

3.7.24 It was agreed that the S&C’s report be referred to the shipping committee for it to make a recommendation to the Board.  Then,

“Mr. Lees noted that if it were considered difficult to raise the necessary new equity in the immediate future, serious consideration would have to be given by the Board on the steps that should be taken.  After general discussion, it was agreed that it would be preferable to have the Company’s financial and legal advisors present at the next Directors meeting in order that all the legal and financial implications of the proposed course of future action might be given full consideration.

After further general discussion, it was agreed that if there was a reasonable prospect of an injection of new equity, then the Directors would be justified in continuing to trade.  It was also agreed that as any injection of new equity would depend to a very great extent on the attitude of Wheelock Marden that the financial advisers of Wheelock Marden be given full details of the plan for comment as soon as practical.”

3.7.25 Mr. Banner wrote to Mr. Brothers on 23rd January with a report incorporating discussions both at the WMI Board meeting and subsequent thereto.  In his letter, Mr. Banner said:

“We are also concerned, in the light of recent developments, whether dealings in WMI shares on the stock exchanges should be allowed to continue.  Since we were last closely involved in discussions with you in September a number of developments have taken place.  At that time Mr. Rodrey Wright was commissioned to explore the possibility of finding potential investors in WMI; we understand that he has to date been unable to find any interested investors.  You have informed us that with effect from 1st January, 1985 you have told the major unsecured creditors of WMI that they will receive no further payments of principal or interest at least until a successful reorganisation can be implemented.  Also you have recently supplied us with a pro-forma balance sheet of WMI at 31st December, 1984 which shows, when vessels are included at their current market values that WMI has a substantial deficit of liabilities over assets.  Finally, whilst the reorganisation proposals being discussed may enable Wheelock Shipping Limited, the new shipping company, to have a viable future we believe that the shares of WMI after such reorganisation are likely to be of very little value; indeed there is a real risk that WMI may be wound up following the reorganisation.

Although infrequent, dealings do still take place in the shares of WMI and in the light of all the above factors, we believe that there are now strong grounds for suspending trading in the shares.  It is possible that a suspension of WMI shares would cause creditors to take action against the Company.  However, we understand that all major creditors are appraised of the Company’s situation and accordingly this may not happen.”

3.7.26 The report outlined the proposal thus

“2.1 It is proposed that a new company, WSL, would be formed, initially as a wholly-owned subsidiary of WMI.  WMI would transfer eight vessels, together with associated liabilities, to WSL.  Shares in WSL would then be offered for sale by way of rights to shareholders in WMI.  The offer for sale would be underwritten by WM.  If a sufficient spread of shareholders in WSL were achieved, a listing would be sought for the shares of WSL on the stock exchanges.

2.2   Following the offer for sale, WMI would own three vessels (Rangelock, Annalock and Sealock) and would retain the four major unsecured creditors.  It is proposed that these unsecured creditors would accept a moratorium of all payments of both interest and principal until such time as surplus net revenue was generated by the three vessels.”

3.7.27 The three vessels, of course, were to be sold and leased back.

3.7.28 S&C expressed the view that shareholder agreement in a general meeting, as well as agreement by creditors, would be required.  They continued:

“As a minimum for all unsecured creditors, it would be necessary to reach agreement for a complete moratorium of payment of interest and principal until such time as WMI could generate sufficient cash to recommence payments.  We would stress that whatever agreement is reached with creditors it would have to be sufficient to ensure the continuing viability of WMI for a reasonable period.  In particular if a winding-up order were made against WMI within 6 months of the offer for sale, then the liquidator would be duty bound to examine the sale of WSL by WMI and would have the power to set the transaction aside in certain circumstances.  We do not consider that the reorganisation could proceed if there was a significant risk of this happening.  We would advise WMI to consult its legal advisers in relation to this matter.

2.7   In the light of the substantial remaining deficit of liabilities over assets and the continuing negative cash flows in WMI, a simple moratorium of creditors may not be sufficient to enable WMI to survive for any length of time.  Unsecured creditors may have to be willing to write off virtually the whole of the amounts they are owed in exchange for a small cash payment and/or an issue of equity.  The existing share capital of WMI on this basis could only have nominal value.  We have not been a party to the discussions which have taken place with WMI’s creditors over the last few months and therefore cannot judge at this stage what they might be willing to accept.”

3.7.29 The report then dealt with documentation and concluded that the expense of implementation would be about HK$4 million and that following all necessary agreements, the documentation alone would take about ten weeks to prepare.

3.7.30 The shipping committee met on 23rd January.  In view of the cost of a public flotation, they asked S&C to submit a plan to raise new equity without a flotation. On 25th January, Mr. Banner wrote to Mr. Brothers giving his views on a modified proposal involving the formation of an independent company capitalized at US$5 million, the funds assumed to be coming from WM.  This company would acquire eight vessels from WMI.  Mr. Banner saw the financial effect on WMI as identical to the original proposal but that as there would be no need to prepare a prospectus, the costs would only be HK$1.8 million.  He pointed out that an up-to-date valuation of vessels would be required, as well as shareholder agreement, but that shareholders would not have an opportunity to participate in the new company.

3.7.31 Mr. Banner then suggested:

“that the Board of WMI should give consideration to a simpler scheme whereby the funds of US$5 million which are assumed to be available are injected into the existing WMI and a reconstruction and rescheduling of WMI’s debts was agreed at the same time.  As stated in our previous report, if the disposal route were followed it would be essential to ensure that not only the new company but also the remainder of WMI were both financially viable.  This effectively means that WMI would need to reach agreement with its creditors, particularly its unsecured creditors, to a restructuring and reorganisation of their debts in any event.  We believe that such agreement could be made more difficult and complicated by superimposing the disposal of the eight vessels.  Accordingly, therefore, serious consideration should be given to leaving WMI as an entity and attempting to reach agreement with creditors in return for an injection of new funds.

Several variations exist but we believe that unsecured creditors would need to be persuaded to convert a substantial proportion of their debts to equity.  One possibility would be for unsecured creditors to be offered a small cash payment now of say 10 cents in the dollar, for the balance of their debt to be converted to preference capital and perhaps for them to be offered options over some of WM’s shares in WMI.  Clearly this would be a radical restructuring of the unsecured creditors debts and we cannot judge at this stage whether it would succeed.  However, by removing the disposal of the eight vessels from the proposals, it would simplify the reorganisation and we believe increase its chances of success with creditors.”

3.7.32 The shipping committee, on 23rd January, also heard from Mr. Brothers

“that a meeting had been held with the Amex Syndicate during his recent visit to London.  He advised that the Midland Bank one of the members of that Syndicate were going through an extremely difficult time and for that reason were keen to dispose of any potential problem loans by selling the four vessels in the Amex Syndicate.  However they had not been supported by the other Syndicate members and the situation therefore was presently one of impasse.

RJFB went on to say that he had taken the opportunity of advising those present at the meeting that WMI would not be in a position to make any further payments of interest or principal to Pacnorse until the market conditions improved.  He went on to say that under such circumstances Jebsen had initially indicated to him that they wished to reduce their payments proportionately although they had advised certain Pacnorse’s creditor banks that they would continue to make payments to Pacnorse at the agreed level for 1985 amounting to US$2.5 million.  RJFB noted that if Jebsens did indeed do so, then Pacnorse should continue to be supported by the creditor banks as they would be receiving approximately 90% interest on loans in amount far larger than the current sale value of their security.”

3.7.33 Mr. Brothers explained his London visit had been primarily to discuss the reorganisation with creditors.  He said he thought Jebsens would accept the position if WMI put US$1 million into Pacnorse in 1985, that NBNA would probably accept it provided they received interest for 1985, while RBS had indicated they were prepared to approve if their debt was reduced to US$1 million.  MMB would accept hiving off, but LBI were more concerned to get stage 1 of the U.K. reorganisation finalized first and were not prepared for Lloyds Leasing to purchase the shipowning companies.

3.7.34 The committee also noted that Mr. Graham had written to Mr. Shaw on 18th January seeking advice about the distribution of WWW funds and whether ADS’ consent was required under its second mortgage.  Mr. Brothers said ADS had in fact consented in 1984.  On 24th January, Mr. Shaw clarified that ADS had in fact signed a side letter to their mortgage giving consent to liquidation of WWW provided their interests applied to the proceeds.  He said, however, he felt it necessary to raise the proposal with, and explain it to, ADS in view of the discussions going on about the U.K. reorganisation.

3.7.35 At a management committee meeting on 29th January, Mr. Brothers expressed disappointment with S&C’s January report “which he believed had failed to take into account sufficiently the Group’s circumstances and WM’s stance regarding WMI”.  In view of the substantial expenses, he said the proposal would have to be disregarded in view of “prohibitive costs”, i.e. HK$4 million.  He submitted a “synopsis” which incorporated parts of the report amended so as to produce a scheme with a better chance.

3.7.36 It must be said that this passage is difficult to understand because by then Mr. Brothers would have received Mr. Banner’s letter of 25th January with the modified and cheaper proposal.  In any event, Mr. Brothers went on to say that there was no longer any pressing reason why the new company should not be in the WMI Group.  Any loan by WM should be to the new owner of the subsidiary rather than the subsidiary itself.

3.7.37 On 6th February, the shipping committee noted that there had been discussion with Mr. Jebsen and Mr. Gabrielsen in Hong Kong concerning hiving off WMI assets, Pacnorse being an unsecured creditor.  As it might be necessary for Pacnorse to refer to its creditors, there could be considerable delay.  Meanwhile, Pacnorse had remitted US$150,000.00 of the promised US$350,000.00 to WMS and Pacnorse would be asked for funds to meet ongoing expenses of Pacnorse vessels managed by WMS.  The discussions with Mr. Jebsen and Mr. Gabrielsen resulted in proposed amendments to the Pacnorse shareholder agreement.  The amendments included bringing all debt interest current to 1st January 1985, to be achieved by payment of US$1 million each by the shareholders in reduction of shareholder debt.  WMI’s $1 million was to be by way of qualified loan from WM as part of its own restructuring arrangements.

3.7.38 The committee also noted that the first stage of the U.K. reorganisation was to take place that day and that, as the second stage, Morgan Grenfell and Ansbacher would be asked to market the three companies for sale.

3.7.39 The first stage was completed that day so that each of the three vessels became owned by a U.K. company, each being a subsidiary of another subsidiary of WMI.  Two days later, as part of the arrangements, the loan on Marilock was transferred to HSS.

3.7.40 At a management committee meeting on 12th February, Mr. Lees told Mr. Poon that the WMI restructuring scheme was proceeding on the basis that Pacnorse creditors would have to be approached.  Mr. Brothers said it was hoped to have advice about the scheme from Rothschilds and Mr. Freshwater shortly.  Mr. Poon asked Mr. Brothers “to emphasise to [Mr. Freshwater] the Directors’ concern regarding fraudulent trading particularly in relation to [WM’s] position as General Managers of WMI”.

3.7.41 On the same day, WMI(UK) made a further demand on WM for US$119,322.00 in respect of Rangelock.

3.7.42 On 13th February, the shipping committee learned that almost US$11 million of WWW funds was on deposit and that the proceeds of sale of Golden Daisy were about to be received.  Steps to liquidate WWW were proceeding.

3.7.43 In the meantime, Mr. Marden had been in discussion with Tan Sri Khoo Teck Puat (TSK), a banker with interests in Malaysia and Brunei, and had agreed to sell his shareholding in WM to TSK.  TSK was to make a general offer for the remaining WM shares, the idea apparently being to take out Mr. Cheung.  Mr. Marden would buy back some shares, continue as chairman of WM, and continue to run WMI.  Mr. Brothers, Mr. Lees and Mr. Leung were made privy to this news before a WM Board meeting on 14th February, convened to consider an announcement that day by Rothschilds who had been retained by Falwyn Company Limited, TSK’s investment vehicle.  The announcement disclosed the acquisition of Mr. Marden’s shareholding and made a general offer for all other A and B shares.  At the meeting, Mr. Marden confirmed his interests had been sold to Falwyn.  Trading in WM shares had been suspended.  The Board agreed that EAW be appointed financial advisers to WM in relation to the offer, while Rothschilds’ appointment as advisers be terminated in view of their conflict of interest.  It was also agreed that advisers, possibly EAW, be approached about an injection of new equity into WMI which “was of vital importance to its future viability”.  The meeting then adjourned to 15th February when a bid committee was set up to deal with any offers and to make recommendations to the Board.  The committee was Mr. Lees, Mr. Leung, Mr. Brothers, Mr. Hsu, Mr. Poon and Mr. Ying.  EAW were appointed in place of Rothschilds to advise in connection with WMI.

3.7.44 Next day, Sir Y.K. Pao’s company, Wharf, made a higher offer for WM shares and a take-over battle developed.

3.7.45 On 18th February, Mr. Brothers wrote to the Fund, LBI, MMB, HKB and BNP to advise them of the position.  He said that as far as WMI was concerned it was business as usual.  Meanwhile, bidding for WM’s shares continued.  On 26th February, Wharf announced it had acquired shareholding carrying 38% of voting rights in WM and made a revised offer.

3.7.46 On 28th February, the WMI Board met.  Mr. Brothers said WMI’s “reorganisation plans had reached an advanced stage” but a possible take-over meant WM could not yet make any decision about the plans.  He then

“advised that due to the Company’s fragile financial position, it had been necessary to formulate a holding plan to enable the Company to continue to trade until the outcome of the take-overs was known.  He reported that the holding plan was on a basis which would avoid any suggestion of fraudulent trading by the WMI Group.  It was proposed, he said, that each shipowning company in the Group approach its respective bankers to establish a retention account into which all charterhire payments would be paid on the understanding that all the operating costs for the vessel concerned would be met from that retention account.

He noted that as all the charterhire earnings would effectively be tied up in future, it would be necessary to approach Wheelock Marden to request it to advance sufficient funds to enable the Company to meet the fees payable to its legal and financial advisers, to its auditors etc.  He went on to say that he had discussed the proposal with East Asia Warburg Ltd., the advisers to Wheelock Marden who had indicated that they would be prepared to put forward such a proposal to Wheelock Marden.”

3.7.47 Mr. Elliott of S&C agreed that retention accounts were the best method of seeing WMI through the present position, it being essential to establish a mechanism to allow trading to continue while WM remained subject to take-over offers.  Then Mr. Shaw

“noted that the Board had allowed the Company to continue to trade on the basis that there was a reasonable prospect of meeting credit when it became due.  However, the Company had, he said, entered a new phase because it was not known whether the proposed reorganisation would be approved by Wheelock Marden and for this reason the Directors and the Group’s operating Executives had to be sure that they could meet trade new credit when it became due.”

3.7.48 Mr. Leung raised three queries.  First, as to the directors’ position pending a WM decision; second, how routine operating expenses were to be met when WMI had no funds; and third, the position as to unsecured creditor banks.  In answer, Mr. Shaw said it was desirable to get an answer from WM as soon as possible.  Mr. Brothers said operating expenses were up to the banks concerned, while unsecured banks had been told in January not to expect to receive anything for the time being.  After more discussion, Mr. Shaw

“advised that it was most important not to incur any new credit unless there was a reasonable prospect of meeting that credit when it fell due.  In answer to a query he advised that it would be necessary to tell the banks that they would not receive any interest payments but that as far as unsecured trade creditors were concerned, it would not be necessary to tell them that they would not be paid for the time being.  However he cautioned that care should be taken not to mislead such creditors if the Group continued to do business with them and incurred new credit.”

3.7.49 A committee of the Board consisting of Mr. Lees, Mr. Leung, Mr. Poon and Mr. Brothers was then established with full power, inter alia, to make arrangements with banks and other creditors appropriate for securing payment of trade credit; to approve proposals to WM for limited financial assistance; and to secure WM’s continued acting as general managers.

3.7.50 After reporting on the U.K. reorganisation, Mr. Brothers said:

“that as far as cash position of the Group was concerned, mid March was a critical period and it was hoped that the steps being taken would enable the Company to get past that critical period.

General discussion then followed during which it was noted that it would be possible for any trade creditor to issue a writ against a Group company which owed it money and that there was also a danger of a vessel being arrested.

Mr. C. B. M. Lloyd then raised a query in connection with negotiations with charterers on vessel fixtures and it was noted that care would have to be taken during this critical phase not to misrepresent the Group’s position to charterers in any way.”

3.7.51 On the same day, the Amex Syndicate issued a writ in London against Pacnorse seeking recovery by Pacnorse of its loans to shareholders.

3.7.52 On 1st March, WMI wrote to WM seeking assistance in the form of:

(1) Funds to enable credit, apart from operating expenses of vessels but including professional fees, to be met.  Fees were estimated at US$214,350.00.

(2) Continuing to act as general managers without charge and without claiming in respect of existing outstanding accounts.

(3) Agreement that WMI need make no further repayment under the facility.

(4) Making all necessary arrangements for these purposes and giving notification if WM should decide to discontinue.

3.7.53 The letter concluded by emphasizing the urgency of the matter and asking for a reply as soon as possible. 

3.7.54 Also on 1st March, WMI’s shipowning subsidiaries sent telexes in an approved form to their respective bankers explaining the proposal for retention accounts and asking for agreement.

3.7.55 On 4th March, the U.K. shipowning subsidiaries did likewise.  On 5th March, Nat West declared an event of default for failure by WMI to make the agreed payments of US$80,000.00 per month since January and to pay interest.  The bank required payment of $3.99 million plus interest within three weeks or it would petition to wind up WMI.  Mr. Brothers responded by pointing out that he would have to disclose this notice to WM when it met on 6th March to consider WMI’s request for assistance.  The bank withdrew its notice and demand next day but without prejudice to reinstatement.

3.7.56 Also on 5th March, BOA gave notice of default to WMI.  In a covering letter to Mr. Brothers, the bank expressed surprise that, considering all the work that had been done on restructuring WMI, WM was not prepared to make decisions notwithstanding the take-over.  The bank said it believed it was still worthwhile investigating certain possibilities because a loan default would be serious for the bank and other creditors and that

“Some of these creditors may question whether indeed the takeover offer for WM can be considered to have such significant importance that it is reasonable for the directors of WMI and its subsidiaries to change their management direction so dramatically.  Or in other words, if it is now considered inappropriate to continue trading wasn’t it already inappropriate to do so some time ago?”

3.7.57 Finally, on 5th March, Sir Y.K. Pao wrote to Mr. Marden following a meeting that day.  He asked for himself and another to be appointed to the WM Board.  He expressed concern that in a depressed market “[WM] and its non-shipping subsidiaries should not increase their investment in or exposure to shipping”.  The WM Board met at 10:30 a.m. on 6th March.  It decided not to accede to Sir Y.K. Pao’s request for nomination to the Board because the Securities Commission was unlikely to allow it, and to leave the bid committee to deal with the other point after a decision had been reached on WMI’s request for assistance.  Mr. Boyce of EAW said that factors to be considered in relation to WMI’s request were:

(1) WMI’s liquidation might affect the take-over situation in that shareholders might be more willing to sell.

(2) Although WMI’s current account of HK$56 million would probably have to be written off, the bidders might have proposals for improving WM’s chances of recovery.

(3) WM’s fees as general managers should not be waived but rolled up.

(4) Any agreement by WM to provide support should be subject to:-

(i) an assurance in writing from WMI to the effect that the sum of US$250,000 would cover all moneys required by WMI up to 30th April, 1985.

(ii) confirmation being received from all interested banks (including unsecured creditor banks) of their agreement to the proposal that each ship-owning company operate on a distinct ‘retention account’ basis.

(iii) (at the suggestion of Mr. Poon) confirmation being received from WMI that no new credit would be incurred.

(5)  The announcement WMI wished to make about WM’s decision could lead to an offer being withdrawn.

(6)  Directors were under some moral obligation to deliver the WM Group to the successful bidder in substantially the same condition as when the bid was made.

(7)  WMI only required a modest amount of money.

3.7.58 Mr. Boyce said “it was EAW’s advice that [WM] should provide the support required by WMI provided the conditions set out [as factor (4)] were met”.

3.7.59 There was then discussion.  Mr. Poon was concerned about directors’ personal liability for advancing money.  Mr. Tang queried whether it would be prudent to make a commitment until the attitude of creditors and of the Commissioner for Securities had been ascertained.  In any event, he said, the Board had previously resolved not to give any further financial support to WMI and there had been no change of circumstances such as to justify it now.  He felt support was a matter of principle, not of the modesty of the amount involved, and WM should not act hastily.  Then Mr. Boyce advised that

“the interests of the Company’s shareholders would not be best served if the market price of the Company’s shares declined because either WMI went into liquidation or due to uncertainties surrounding WMI’s future.  He advised that it was a matter of very fine judgement to decide whether or not to agree to WMI’s request but that the balance of such judgement was that it would be more in the shareholders’ interest to make a modest amount of US$250,000 available as requested.  Not to do so would probably result in WMI having to go into liquidation which would mean that the Company would have to write off the whole of the Wheelock Marden Group’s current account balance with WMI amounting to some HK$56 million.  The requested advance would, he said, maintain the status-quo.”

3.7.60 There was further discussion from which it became clear that Mr. Tang, Mr. Ying and Mr. Lo were against giving support while Mr. Lees, Mr. Leung and Mr. Marden felt the legal and financial advice that had been given should be followed. A vote by directors who were not also directors of WMI was against support by six votes to two.  A short letter was despatched to the directors of WMI advising them simply that WM “was not prepared to accede to your request”.  The WMI Board met at 3:30 p.m. to consider WMI’s position.  It was agreed that a public announcement should be made and all lenders advised of WM’s decision.  There was discussion about the nature of the winding-up in the event of liquidation.  Mr. Shaw advised that under the Companies Ordinance, if directors were of the view that their company could not continue to trade, they were empowered to appoint a liquidator, but he advised that putting WMI

“into liquidation was not a step to be taken lightly and the Directors were justified in seeking the advice of independent accountants to decide whether or not this was necessary.”

3.7.61 The meeting adjourned to the following day.  In the meantime, the then firm of Ernst & Whinney was appointed to advise whether any alternatives other than liquidation were open to WMI.  WMI and WM made public announcements.

3.7.62 Next day, Mr. Timso of EW advised the Board that the WMI Group had two alternatives (not surprisingly) - to continue to trade or to be placed in liquidation.  He

“reported if the Group continued to trade this would involve having available sufficient cash, both at the parent Company level and at the subsidiary level where new credit would have to be incurred.  The procedure would, he said, be for each shipowning subsidiary to contact its bank lenders with a request that cash/accommodation be provided by the lender in order that the shipowning subsidiary might continue to trade and incur new credit.  At the parent Company level, it would be necessary, he said to investigate methods of raising sufficient cash to meet any new credit when it fell due.”

3.7.63 Mr. Timso said his view was that

“the Directors were justified in allowing the company and its subsidiaries to continue to trade in order to achieve the following objectives:

1.   to secure time to allow the future owner of the parent Company, WM to decide what to do with the WMI Group,

2.   to allow time for discussions with the major creditors of the Company and its subsidiaries to establish whether the Company’s shell could be preserved,

3.   to allow sufficient time to investigate the feasibility of a ‘hive-off’ of subsidiaries or assets to a new holding company.  Such a ‘hive-off’ might be complicated and costly because of the existence of negative pledges and the well secured position of most of the lenders to the shipowning subsidiaries.

The Chairman queried the potential liabilities of the Directors if the Group were to be allowed to continue to trade.  In reply, Mr. Timso said that it would be necessary to get confirmation from all the lenders to the shipowning subsidiaries that they were prepared to make the required cash/accommodation available.  He noted that at the parent company’s level the creation of new credit was not considered to be a problem as it merely involved fees for professional services and general expenses.

Mr. Elliott noted that the one material development over the past 24 hours which had changed the attitude of the Group’s lenders was the announcement by WM that it would not provide any further assistance to the Group.  He went on to say that up until that moment Group and its lenders had always had in mind that WM would give assistance.  Their negotiating position had therefore been that they would be helpful and would await clarification of WM’s own position before making any final decision.”

3.7.64 Mr. Elliott added that a meeting of secured lenders should be called immediately to see if they would accommodate the shipowning subsidiaries without WM funding.  Mr. Brothers then reported a successful arbitration claim which should provide some US$100,000.00 for WMI, and the possibility of a dividend of HK$350,000.00 from another WMI subsidiary.  On this basis, WMI would have sufficient funds to meet any new credit over the coming weeks.  Finally, Mr. Timso agreed it was reasonable for the Board to explore all avenues with creditors rather than take the irrevocable step of liquidation.  The committee of the Board was then empowered to deal with EW and allied matters.  The committee met later in the day and approved a press announcement about the appointment of EW.

3.7.65 On 7th March, the Amex Syndicate issued a further writ in London, this time against Pacnorse, Jebsens and WMI claiming that the agreement reached between Jebsens and WMI on 20th August 1984 was in breach of the agreement between the Syndicate and Pacnorse.  It was marked “not for service out of the jurisdiction” and Mr. Shaw thought it was “a try-on”.

3.7.66 On 8th March, Mr. Shaw advised Mr. Freeland of the position and concluded by saying:

“Although the odds must still be on liquidation, it remains a possibility that some solution could be found which would enable WMI to continue in being without liquidation.  Although the WM decision was a bodyblow, it has had the effect of crystallising the situation and enabling a third party to become involved so that creditors now have a clear choice as to whether they are prepared to co-operate or whether they wish to see WMI liquidated - until now, with WM in the background they have never really accepted that they have needed to make that choice.”

3.7.67 On 9th March,  BOA wrote to Mr. Brothers saying that, although it had that day again made formal demands for repayment, it was still prepared to discuss an overall solution.  The bank commented that “hindsight being so very clear, it would probably have been better to hold a creditor’s meeting back in early 1983 when a moratorium on debt was first proposed”.

3.7.68 On 15th March, the WM Board learned that Wharf now held 50.1% of voting rights in WM.  Sir Y.K. Pao and Peter Woo (Mr. Woo) were appointed directors.  Mr. Marden resigned as chairman and Sir Y.K. Pao was appointed in his place.  Sir Y.K. Pao and Mr. Woo were also appointed managing directors with powers of chief executive and deputy chief executive respectively and were appointed to the management committee.  A public announcement was made that day.

3.7.69 On the same day, Falwyn announced it was accepting Wharf’s offer in respect of its holding of WM shares.

3.7.70 The WM Board met on 18th March to discuss WMI.  The WM Group’s exposure to WM amounted to HK$55 million and US$7.2 million secured against WWW shares.  Mr. Brothers said banks would be unwilling to call contingent liabilities but if they did, WMI would probably have to cease trading.  Further, BOA had not agreed to a retention account for Fenlock, was treating the request for retention as a default and might arrest the vessel.  If that happened, cross-default provisions could collapse WMI.  It was agreed to advise WMI that WM would, without prejudice, waive non-payment of amounts due to it if WMI agreed WM as general manager could give immediate notice of resignation rather than the six months as their general manager agreement provided.  WM would then be in a position to resign immediately if necessary.  It was also agreed EAW should monitor WMI’s position daily.  Finally, Sir Y.K. Pao endorsed the Board’s decision not to provide further financial assistance to WMI.  It was agreed no further advances were to be made in respect of WMI.

3.7.71 A letter was sent that day to WMI asking for agreement to the amendment of the general manager’s agreement.  The letter was passed to EW who advised WM on 19th March that WMI could agree provided WM would continue to provide services for three months.  WM’s response next day was in effect take it or leave it, but softened their attitude by saying they had no immediate intention of resigning before 31st March.

3.7.72 On 19th March, EW produced their report.  They relied on information from WMI’s management and latest unaudited financial statements.  Their conclusions were:

“2.1 In the present shipping recession, the WMI Group has suffered large operating losses and negative cash flow.  The Group cannot survive in its present form without significant financial support.  We understand that WM will not provide such support and, given its financial condition, WMI could not expect to raise the necessary finance from any other source.

2.2   The financial statements of WMI and most of the subsidiaries, after adjustments for write-down of underlying assets, indicate that many of the legal entities are insolvent.  Accordingly, the directors of each company must consider whether that company can continue to trade or incur new liabilities.

2.3   In these circumstances the directors of each company must decide whether cessation of business and liquidation are the best courses of action for the company, its shareholders and its creditors.

2.4   In a liquidation of all or part of the WMI Group, secured creditors would suffer significant losses and unsecured creditors could expect little, if any, recovery.

2.5   As a result of our review of the financial affairs of the WMI Group (the details of which are contained in the Supplementary Reports), and taking into account the security held by certain banks, we believe that some banks are likely to take unilateral action.

2.6   However, we are of the opinion that a restructuring of the Group’s operations is in the best interests of all creditors.  Under the restructuring options proposed in this report, the secured creditors have an opportunity to maximise their recovery while retaining their other options.  The unsecured creditors, which category includes any unsecured guarantee claims by the secured creditors, also have an opportunity to improve their position.

2.7   While restructuring could be time consuming, it is a practical option for the following reasons:

a.   The liquidation option is unattractive and irreversible.

b.   The secured shipping creditors would suffer significant losses on realisation of their security or become ‘reluctant’ ship owners/operators.

c.   Despite the current depressed market conditions, all of the ships’ earnings are in excess of daily operating costs and are making a contribution to debt servicing.

d.   While opinions vary on the timing of any improvements in the market sector, it is generally believed that charter rates are at, or near, the bottom of the long-term trade cycle.  Therefore, secured creditors would have the upside potential of a future market improvement with consequent increased earnings and asset values.  However, it is not possible to accurately forecast when the banks could expect to be repaid either from earnings or more favourable asset disposals.

e.   Shipping trade creditors are relatively insignificant.

f.    The total number of creditors (both secured and unsecured) is relatively small.

g.   Most ships are considered to be well maintained and could be operated for the foreseeable future without extraordinary repairs/maintenance cost to the owners.”

3.7.73 The restructuring options were:

(1) To maintain the present structure, regarded as ideal because it offered maximum potential for creditors.

(2) Hiving off all subsidiaries to new holding companies, which was probably most easily achieved.

(3) A variation of (2): some secured lenders would remove their vessels but participate in a WMI public shell.

3.7.74 As to (1), EW noted

“As no funds would be available from WMI, the secured lenders would have to give a moratorium on interest and principal payments (not covered by net operating income) until a longer term solution is available through a favourable disposal of the vessels or the takeover of WMI by an acceptable ship owner/user.  It is not possible to accurately forecast the length of this interim period.”

3.7.75 EW also said that “the WMI operating cash needs are minimal”, and:

“6.3 This report also highlights the various problems which would arise in the inevitable liquidation of WMI (and consequently other parts of the Group) should the creditors fail to agree on a restructuring plan.  We have already advised the WMI Board of Directors on their duty to the Company, its creditors and shareholders if a restructuring is not achieved within a reasonable time period.”

3.7.76 The committee of the WMI Board met on 23rd March.  Mr. Timso reported two meetings with creditors at which some unsecured creditors had said they would not “precipitate the demise of WMI”.  There was something of a wait-and-see attitude.  Secured creditors, however, had asked for clarification by Sir Y.K. Pao on important issues which had been set out in a letter dated 21st March from Mr. Hussey to Sir Y.K. Pao:

“(i)   What future management and financial support, if any, is it intended to be provided by WM, the parent company, to its subsidiary?

(ii)    Is WM prepared to transfer ownership of its shareholding in WMI for a nominal consideration and for the benefit of unsecured creditors in a proposed restructuring?

(iii)   In further support of the proposed restructuring, is WM prepared to waive all unsecured indebtedness due it by WMI or any of its subsidiaries?

It will certainly be helpful in the context of being able to achieve an early and satisfactory solution to the Group’s present financial difficulties to have a definite statement on WM’s position at this time and I am sure all concerned would be most grateful for your early response.”

3.7.77 Mr. Timso said a reply before the next meeting of secured creditors on 25th March would be preferable.  The reply did not come until 28th March.  Of the three issues, Sir Y.K. Pao said:

“(i)   As announced to the press on 6th March, WM will provide no further financial assistance to WMI.  This policy was re-affirmed by the WM Board after my appointment as Chairman.  This should be clearly understood.

Furthermore, operating costs relating to services provided by the WM Group - such as agency fees and disbursements, insurance and travel - should not be regarded as management services but should be paid for on an arm’s length basis as part of the operating costs of the vessels.

Nevertheless, in order to enable the search for a solution to WMI’s problems to continue, I would be prepared to recommend to WM that it continues to provided such secretarial and administrative assistance (including modest out of pocket expenses) as may be required to enable WMI to function while discussions among the creditors continue, provided (a) that the discussions are completed within a reasonable period and (b) that any company in the WMI group which does not have a reasonable prospect of paying debts which it incurs immediately ceases trading.  A fee for these services would be accrued but would not be payable until either a solution is found to WMI’s problems or it ceases trading.

The services referred to above should be provided under a new arrangement.  The existing General Managers Agreement will be terminated at once.  This is because only WMI can make the day-to-day judgment that it is able to carry on trading; WM is not in a position to make this judgment and therefore cannot accept a management, as opposed to a purely administrative, role.

(ii)    WM is prepared in principle to transfer its shares in WMI.  The terms and conditions of such a transfer would have to be discussed, but the transfer should be part of an arrangement with creditors which meets the requirements of (i) above and (iii) below.

(iii)   The unsecured indebtedness owed by the WMI group to the WM group falls into two categories, the trade debt (arising from agency fees and disbursements, insurance, etc.) on the one hand and intercompany balances and the excess of secured debt over the value of the security on the other.  So, far as the trade debt is concerned, WM must be treated as any other trade creditor - these amounts are part of the operating costs of the vessels.  So far as the other amounts are concerned, I do not think that WM should be prepared to waive the indebtedness; however, it would, I feel sure, view constructively any proposal put to it along with the other unsecured creditors of WMI.”

3.7.78 On 26th March, EAW wrote to WM saying:

“we understand that the financial condition of Wheelock Maritime is now so bad that we do not believe it is in the interests of Wheelock Marden and all its shareholders to put additional funds into Wheelock Maritime.

It seems to us that Wheelock Maritime is so close to final collapse that there is every likelihood of a liquidation in the not too distant future and in these circumstances an additional investment now could well be virtually wholly irrecoverable.

Nevertheless, as you know, Wheelock Marden currently provides Wheelock Maritime with management and secretarial services in accordance with the management agreement between the two companies.  It is clear that, without these services, Wheelock Maritime would collapse, as it does not have sufficient funds to pay for similar alternative arrangements.  In these circumstances, we would recommend that, unless there is a danger that Wheelock Maritime is trading fraudulently (see later in this letter), Wheelock Marden does not itself precipitate a collapse by the withdrawal of such services, since, despite the proposed change to the management agreement, this does not yet seem to be a necessary action and is one which could be strongly criticised by creditors, in the context of Ernst & Whinney’s proposed restructuring.

....

As far as fraudulent trading is concerned, clearly this is something which Wheelock Maritime directors will have careful regard to on a day by day basis at the present time, and should be receiving legal advice upon; but, as long as new credit is not incurred without the ability to pay, Wheelock Maritime should be able to continue to trade, particularly with the prospect of the arrangement with creditors.  In our view, though we would expect Slaughter and May to confirm this, Wheelock Marden itself would not be a party to fraudulent trading merely because it continued to provide Wheelock Maritime with the services it had previously provided, even in the expectation that its costs would not be recovered, as long as there was reasonable expectation of other new creditors being paid, because it would be considered only reasonable that Wheelock Marden itself should not be seen to precipitate a collapse.  There may, however, be circumstances in which Wheelock Marden could be a party to fraudulent trading.

Nevertheless, Wheelock Maritime’s position is now so parlous, that we believe that if we are to monitor the position properly, there should be set in hand a system whereby we are regularly kept informed of any potential new commitments for credit, any writs or any other events which might trigger collapse.  This could take the form of a daily verbal report from, say, Colin Campbell.”

3.7.79 On 28th March, LBI gave notice of an event of default in relation to Annalock, the event being non-payment of principal of US$317,312.00 and interest of US$1.073 million on 22nd March.  The bank did not, however, make any demand.

3.7.80 It is not necessary to go into the same amount of detail from this point on.  On 2nd April, Mr. Brothers was seconded by WM to WMI where, subject to control by the Board, he was to be responsible for day-to-day management thus formalizing what had been the position for some time.  On the same day, the committee of the WMI Board discussed the position with Mr. Timso and agreed to press on with restructuring because, apart from BOA, banks had expressed interest in pursuing the proposals.  On 4th April, the shipping committee was disbanded while WM recommended general acceptance of Wharf’s offer.  On 24th April, WM agreed to provide accounting and secretarial services only to WMI up to 31st May.  It would not take part in any management.

3.7.81 Then WMI began to haemorrghage its assets.  On 29th April, MMB declared an event of default in relation to Sealock, exercised its rights to change the Boards of Adleship and Dovehold and “went it alone”.  Fenlock was arrested by a former charterer, Showa, and was later sold by BOA.  On 11th May, LBI declared a default in relation to Rangelock and a cross-default in respect of Annalock and called the loans on 15th May. 

3.7.82 On 15th May, EW produced their draft scheme of arrangement.  In setting out the background, they stated that early in the depression in the shipping industry “WM declared it was unwilling to offer any financial support to its subsidiary although it did in fact provide a US$4 million secured loan facility”.  Details of the proposals were sent to creditors who were advised that WM was prepared to pay HK$7 million for the clean shell of WMI as well as $700,000.00 to help finance the scheme.

3.7.83 On 23rd May, ADS gave notice of default for non-payment of its legal fees and on 31st May, notice of default for non-payment on 28th May of interest on the Sealock and Annalock loans.  ADS as well as LBI remained obdurate and would not signify their agreement to the EW scheme in spite of EW’s best efforts.  On 3rd July, the WMI Board decided to call an EGM for the purpose of passing resolutions for winding up and for the appointment of liquidators.  On 29th July, ADS made demand for its loans on Rangelock, Sealock and Annalock.  On 2nd August, WMI was placed in voluntary liquidation.

4.    FEATURES OF PART 3

4.1 It will be helpful to clarify or emphasise certain features that emerge from Part 3.

4.2    Acknowledgement of crisis

4.2.1 As the documents undoubtedly show, WMI was in a desperate position from late 1982 onward.  It is now accepted that it was dependent on support from WM to survive.  More importantly, it appears from the documents that WMI’s directors recognised at the time the fragility of WMI’s position because their letters and minutes make references to urgency, being unable to carry on and liquidation. 

4.2.2 It was a feature of the evidence, however, particularly that of Mr. Lees, Mr. Leung and Mr. Brothers (whom I shall call the working directors), that these references were either exaggeration or inaccurately recorded.

4.3    ADVICE

4.3.1 From February 1983 onwards legal, and later financial, advice was obtained by and available to WMI’s directors.  Notwithstanding Mr. Brothers’ evidence, there can be no doubt that from the beginning the advice concerned fraud and that the directors were concerned about fraud.  It is difficult to accept Mr. Brothers’ evidence that the advice, at least as far as it related to fraudulent trading, was somehow gratuitous and that he was not concerned about it.

4.3.2 The real concern raised is whether the directors acted properly in the light of the advice or simply gambled that something would turn up.

4.4    Cash flows

4.4.1 A cash flow is simply a management tool which will give an indication of trends in a company’s cash situation on a “what if” basis, i.e. it will be based on a number of assumptions.  It will not provide an answer to the problems that may emerge from it.  Nor does it provide a complete financial picture of the company’s health because it will not, for example, show any benefit to be derived from equity build-up.

4.4.2 Equity build-up, of which more when I deal with the accounting experts in Part 5.14, is simply a recognition that as a company pays off debt on a ship or other asset it will gain equity in that asset.  In turn, the company will be able to obtain fresh finance from that available equity if it is required and thus improve what might otherwise be an adverse financial picture.

4.4.3 The shorter the period covered by a cash flow, the more accurate it is likely to be.  Over a long period, e.g. 10 years, a cash flow can do little more than show a trend, especially if it involves assumptions of factors such as charter rates.

4.4.4 It is, however, agreed that the assumptions, including assumptions as to charter rates, the life-blood of WMI, used by WMI in its various cash flows were reasonable. WMI had therefore given its best assessment of what these rates were likely to do in the future.  It was, therefore, impermissible for Mr. Brothers or any other director to rely on or hope for any increases in rates other than those already assumed.  Yet the documents I have reviewed indicate that, from time to time, this is exactly what occurred.

4.5    U.K. CAPITAL ALLOWANCES

4.5.1 Under the U.K. tax system, a company provides in its financial statements for the depreciation of any capital assets.  The depreciation is not, however, an allowable deduction in the calculation of a company’s taxable profits.  Instead, there may be an entitlement to claim capital allowances which are in effect a substitute for the depreciation when corporation tax is being computed.  Capital allowances are available in respect of expenditure on, inter alia, plant and machinery, a category which includes ships.  At the relevant time in the early 1980’s, capital allowances were available in two forms:  first-year allowances and writing-down allowances.  It is with the former allowance that I am concerned.

4.5.2 First-year allowances were introduced in 1970 at a rate of 60% which increased to 100% for expenditure after 21st March 1972.  The allowance continued at that rate until 30th March 1984 when the rate decreased to 75% then to 50% a year later and the allowance disappeared after March 1986.  The object of such an allowance was to provide an incentive to invest in new capital assets.  The elimination of the allowance was accompanied by a decrease in corporation tax from 45% in 1984 to 35% by March 1986.  The 100% first-year allowance remained available, however, for expenditure incurred after March 1984 and before April 1987 in respect of a contract entered into before 14th March 1984.

4.5.3 There were special rules for new ships.  The allowance could be carried over in whole or in part from the accounting period in which the expenditure was incurred.  This became known as “free depreciation”.  The allowance could, at the company’s choice, be carried forward for use in a subsequent year or years to relieve profits earned in those years or to relieve profits of other companies in the group to which the company belonged.

4.5.4 Under the U.K. tax system, although each company within a group is taxed on its own profits, the legislation allows the losses of one company within the group to be set off against the profits of another so that the latter’s tax liability is reduced.  This relief is available where one company is the 75% subsidiary of the other or both are 75% subsidiaries of a third company.  Where such a relationship exists, the tax relief available by way of free depreciation can be surrendered from one such company to another.  The advantage to the ship-owning company surrendering its free depreciation is that it was paid at a discount to the amount of tax saved by the profit-making company, a discount which ranged from 10% to 30% depending upon the perceived likelihood of the Inland Revenue accepting the losses and granting the appropriate allowance. 

4.5.5 By the time WMI became interested in free depreciation, the law in relation to ships had become understandably restrictive.  Legislation required that the ship be owned by a U.K. tax-paying ship operator.  Case law had evolved to the effect that any transaction in a series of transactions which had no purpose other than to avoid liability to tax would be disregarded for fiscal purposes.  Initially, as I understand it, WMI intended simply to make use of WMI (UK) and its subsidiaries in order to take advantage of free depreciation on its newbuildings against profits anticipated to be generated from the operation of these vessels.  Then it became looked at as a possible method of finance to reduce overall financing costs.  After discussion between Mr. Brothers and Mr. Freeland, it was decided to adopt a U.K. leasing scheme whereby the vessel would be sold direct from the yard to a third party U.K. company which would charter-back to a member of the WMI Group.  It was intended to use this scheme in relation to Marilock, Rangelock, Sealock and Annalock.  In the event, such a scheme was only put into place in respect of Marilock which was purchased by C&W who then chartered the vessel to WMI (UK).  WMI (UK)’s obligations were guaranteed by WMI and the HSBC.  From the transaction, C&W, by utilising the full amount of the free depreciation in the accounting period in which the vessel was acquired, would obtain a large cashflow benefit from the tax saving.  Some of that benefit would be passed to WMI (UK) by way of reduced rentals under the lease of the vessel.  It is estimated the benefit to WMI (UK) would have been something in the region of a 3% or 4% per annum reduction in the overall cost of financing which over eight or ten years would have a significant effect on WMI (UK)’s cash requirements. 

4.5.6 The proposed leasing schemes for the other vessels failed to materialise, at least in part as far as Rangelock was concerned, because of the amount of time taken and difficulties encountered by C&W in persuading the Inland Revenue that the arrangement, under which it acquired and leased Marilock, was genuine.  It was not, I believe, until 1986 that C&W successfully persuaded the Inland Revenue to accept the allowance.

4.5.7 The free depreciation in respect of Rangelock, Sealock and Annalock remained with WMI (UK) or its subsidiaries but could not, of course, be used because these companies had no profits against which to offset the free depreciation.  The availability of this free depreciation was not forgotten and, following advice from Norton Rose and Price Waterhouse, WMI embarked upon the re-structuring of WMI (UK) to enable the ship-owning subsidiaries to be sold off to buyers who could make use of the free depreciation.  In order to avoid the stigma of pure tax avoidance, it was necessary to carry out the scheme in two stages.  First, there was the re-structuring which, as I have already set out, was completed on 6th February 1985.  Second, after a suitable interval which would be measured in months, there would be the sale of the ship-owning companies.  It was thought that approximately £13 million or US$15 million at then rates of exchange might be generated for WMI.

4.5.8 The viability of such a scheme generated experts’ reports on each side.  Much to my relief it became unnecessary to consider the reports or to call the experts because agreement was reached between the parties in the following terms:

“1. The Plaintiff accepts:-

(i) that the Rangelock, Sealock and Annalock had been acquired by WMI (UK), or English subsidiaries of WMI (UK), in order to leave open the possibility of benefiting from capital allowances under UK tax law;

(ii) that the Defendants were advised in November 1984 that the re-structuring of WMI (UK) Ltd and its subsidiaries subsequently effected on the 6th February 1985 created the possibility of a subsequent sale of the shares in Adleship Ltd, Mastship Ltd and Hardyship Ltd reflecting the value of the benefit of unused free depreciation and other capital allowances available in respect of the vessels owned by those companies, and the Defendants reasonably acted on that advice.

2. The Plaintiff accepts Paragraph 379.4 of the Witness Statement of R Brothers.

3. The Plaintiff and the 1st and 5th Defendants agree that any such sales could only be achieved if:-

(i) A bank guarantee or other security in favour of the lessors had been obtained in respect of the obligations of the lessees under the leases of the vessels;

(ii) The consent of the Plaintiff had been obtained to any such sale (as second mortgagees of each vessel and as second pledgees of the issued shares in each company).

The other Defendants were not aware of the details of or the requirements which may have been necessary to implement the scheme.

4. As between the Plaintiff and the First Defendant the only issues are as to the prospects of 3(i) and (ii) being obtained, and in the case of 3(ii) the likely terms on which such consent would be given.”

4.5.9 In the course of cross-examination, Mr. Brothers also accepted that the only issues are as set out in paras. 3(i) and (ii).  A further dispute as to whether WM and Mr. Brothers relied upon the prospect of the fruits of free depreciation for continuing to trade until November 1984 was nipped in the bud by a supplemental agreement as follows:

“Since 1982 - when the Marilock was put into WMI (UK) - it was honestly believed there were prospects of taking advantage of the provisions of the UK tax legislation relating to capital allowances so as to obtain financial benefits for WMI which would improve its long-term position.  This possibility was not relied upon before the delivery of the Annalock as a factor in deciding whether to continue or to cease trading or to take credit from the Fund.  However, as stated at the WM Board meeting on 21 September 1984 (C27-71), Mr. Brothers had recently explored in negotiations in London the potential for utilising the available capital allowances (referred to in the minutes in terms of potential tax credits).  That potential had helped in enlisting the support of LBI, MMB and HSS for assistance with WMI’s short-term funding requirement over the following few months.  This bank support was a factor in justifying the assurance given by WMI to WM that there was no danger of WMI trading fraudulently in the period while WM was considering WMI’s request for further support.  After Price Waterhouse advised on 2 November 1984, as stated in the agreement between the Plaintiff and WM on capital allowances, the Defendants reasonably acted on that advice.”

4.5.10 These issues, in my judgment, really stand or fall together.  The banks involved - HSBC, MMB and LBI, together with ADS - faced what they clearly regarded as an increasingly precarious position in view of WMI’s financial health or lack of it.  Assuming therefore that any benefit at all was to be derived from the scheme, the banks and ADS would have to support each other.

4.5.11 As far as the banks were concerned, their part would undoubtedly have been to provide a guarantee of the lessees’ obligations if the scheme went forward whereby new owners would acquire the three vessels and lease them back to the WMI (UK) Group.  The new owners would require such a guarantee and it was unlikely in the extreme that any other guarantors could be found.  The advantage to the banks would be that the existing loan arrangements would be taken over by the new owners whom the banks would be able to vet for financial stability.  Alternatively, the new owners would provide their own financing thus enabling the banks to be paid off.  ADS would equally benefit from having a more substantial owner responsible for existing commitments.  If the banks’ loans were in fact paid off, ADS’ security in the form of the second mortgage over the vessels would become more valuable.

4.5.12 The correspondence showing the course of negotiation between WMI, the banks and ADS in relation to the re-structuring of WMI (UK) demonstrates that the banks and ADS were proceeding with great caution and, at least on the part of ADS, some reluctance.  The fact remains, however, that stage one of the scheme was set in place.  It seems to me, therefore, improbable in the extreme that, absent the takeover and consequences thereof, the banks and ADS would not have gone on to the second stage assuming suitable purchasers for the vessels could be found.  No one has suggested what conditions ADS might have required but I have no doubt that, having come this far with WMI, ADS would not have insisted on conditions which would have destroyed the scheme.

4.5.13 There was a suggestion that the banks might require a WM counter-guarantee for their guarantees.  Clearly, WM would not have accommodated them.  At the end of the day, however, I am satisfied that the banks would not have insisted on such a counter-guarantee.  Their positions, as I have suggested, would have been improved by the implementation of this scheme.  Their contingent liabilities under their guarantees would not be so onerous as might otherwise have been the case because of the reduced rental that would be charged to the lessees in return for the acquisition by the new owners of the free depreciation.

4.5.14 I am satisfied, therefore, that the Defendants were entitled to take some comfort from what was a not unreasonable anticipation of real benefits flowing from this scheme.

5.    FRAUDULENT TRADING

5.1    THE LAW

5.1.1 A director’s liability for fraudulent trading is created under section 275(1) of the Companies Ordinance (App. 4).  ADS’ primary claim is that all Defendants were knowing parties to the business of WMI having been carried on with intent to defraud its creditors.  To establish that, ADS must show (1) WMI’s business was being carried on dishonestly by way of fraud upon its creditors; and (2) that the Defendants were parties to that dishonesty and fraud.

5.1.2 According to ADS the first issue, whether someone was carrying on WMI’s business with intent to defraud creditors, is established objectively.  ADS says no authority is needed for that.  On this point, the parties are in headlong collision.

5.1.3 On the first issue, Mr. Terence Cullen Q.C. for ADS put it thus in opening:

“There are two stages: firstly, was WMI’s business being carried on dishonestly, that is answered objectively for two reasons.  Firstly, as we have looked at, the section envisages two stages - the business is being carried on with intent to defraud.  That envisages someone carrying on business.  That is an unknown person is carrying on business and that is a matter that has to be decided objectively, because you do not know who the person is.

Then the second stage is deciding if a defendant was knowingly party to it.  Of course, in simple cases, my Lord, with only one director, the two stages are rolled into one - one finds simple cases where the two issues are not looked at, but the second reason for an objective case is this, and it is an evidential one: in order to test a defendant’s state of mind, his belief that there was a reasonable prospect, his evidence can be weighed against what an honest and reasonable director would have believed.  Each defendant is looked at subjectively and that is in our skeleton argument - we set out the two stages.  One: Was it being carried on dishonestly - answered objectively; two, the defendants knowingly prior to this understood - answered subjectively in relation to each defendant.”

5.1.4 As I understand it, the task I would have to perform would be to draw from established facts the inference that someone must have been carrying on WMI’s business in fraud of its creditors.  I have some difficulty in accepting that for the same reasons as given by Mr. David Johnson Q.C. for W.M. in opening:

“We agree it is a two-part inquiry.  The first part: what the Court should consider is whether the individuals actually carrying on the business in question did so with intent to defraud.  Such fraudulent intent, obviously, requires mens rea, a fraudulent intent, possessed by those individuals actually carrying on the business.  This talk of unknown persons carrying on, with respect, is absolute nonsense, because you are dealing with a particular situation.  Your Lordship has to decide who was carrying on the business and then decide in relation to those people whether they had this dishonest state of mind and this dishonest intention.”

5.1.5 Depending upon whom I find to have been carrying on the business, the submission ran, there may be an overlap with some or all of the Defendants; for example, if I find WM and Mr. Brothers to have been carrying on the business fraudulently it would not be necessary for me to go on and consider them again as part of stage 2.  It would only be necessary to consider whether any other Defendants were parties to what was going on and dishonest in their participation.

5.1.6 It is trite that a company has no mind or intent of its own.  Intent must be found in the minds of those responsible for carrying on its affairs.  It is also trite that, as far as the criminal law is concerned, a person intends to commit an offence only if he has the aim or purpose to bring about the elements of that offence.  Intent is not necessarily to be inferred by reason of the fact that the result is the natural and probable consequence of that person’s actions but to be derived from a consideration of all the facts and circumstances.  See 4th ed. Halsbury’s Laws, vol. 4, paras. 10, 11 and 16.

5.1.7 Section 275 may give rise to criminal sanctions.  The considerations relevant to the criminal aspect of this offence are therefore equally appropriate in civil proceedings.  It is necessary first, to identify who was carrying on any business of WMI and second, to consider whether he or they had the necessary fraudulent mens rea.

5.1.8 In Hardie v. Hanson [1960] 105 CLR 451, the High Court of Australia was dealing with section 281 of the Companies Act of Western Australia which was in all essentials the same as section 275(1) before its amendment.  At p. 456, Dixon C.J. said:

“Next it will be seen that words connoting a real intent to defraud are used.  So far there is no reference to the officers of the company in whose minds the intent must exist but it is obvious that it is an intent that must accompany the carrying on of the business in question.”

5.1.9 The passage is phrased thus because the company concerned was effectively a one-man company run by the appellant.  So, as Dixon C.J. said at p. 461:

“The question is whether he carried on the business, which in effect means the trading business of the company, during the final period with intent to defraud creditors.”

5.1.10 At p. 466, Menzies J. reminded the court of the decision of Maugham J. in In re Patrick and Lyon Ltd. [1933] Ch. 786:

“His Lordship, in stating that he was not justified in coming to the conclusion that the company had been carried on for a fraudulent purpose said :  “The business of the company, so far as it was carried on during the latter part of its career, was carried on in order to clear up the position by getting in debts and by effecting sales of stock, and not with a view to securing by purchases on credit assets available as security for debentures.  I am not clear in my mind that the first respondent was deliberately intending to carry out any fraudulent purpose or to defraud creditors.  That is a matter which cannot be left to conjecture.  I must be perfectly satisfied that there is enough evidence to justify the charge”.”

5.1.11 Menzies J. then dealt with the decision of the trial judge whose decision was under appeal and said:

“His Honour however, was not prepared to find “dishonest fraud” (see In re Patrick and Lyon Ltd.) on the basis of these findings by themselves and in this, in my judgment, he was right.  To obtain goods on credit with the intention of not paying for them is dishonest; to obtain goods on credit when it is known that there is no chance of paying for them may amount to much the same thing; in either case the unpaid creditors could be said to have been intentionally defrauded.  It is different however if no such intention can be imputed to the buyer or if he does intend to pay for goods but in the event fails to do so.  In such a case the degree of fault depends upon the buyer’s estimate of the probability or improbability of payment at the time when the goods were purchased, but even if the chances of payment of all creditors in full were so remote that it belonged to the realms of hope rather than belief, it seems to me that the fault, grievous though it may be, falls short of fraud unless it is coupled with something else, such as misrepresentation of the position or an intention to use goods purchased on credit for the purposes of dishonest gain, which gives it a fraudulent character.”

5.1.12 Mr. Cullen accepted that in a simple case such as Hardie v. Hanson where there is a one-man company there will not be the two-stage exercise for which he contends but one subjective stage.  I find it difficult to accept that depending on the size of the company there can be such a distinction of principle.

5.1.13 In passing, I mention that Hardie v. Hanson seems to suggest that that Maugham J.’s general proposition in In re William C. Leitch Brothers Ltd. [1932] 2 Ch. 71 is without more insufficient to establish fraudulent trading.  At p.77, the judge said:

“In my opinion I must hold with regard to the meaning of the phrase carrying on business ‘with intent to defraud creditors’ that, if a company continued to carry on business and to incur debts at a time when there is to the knowledge of the directors no reasonable prospect of the creditors ever receiving payment of those debts, it is, in general, a proper inference that the company is carrying on business with intent to defraud.”

5.1.14 My own view is that, upon a careful reading of Hardie, the High Court was not in fact departing from that general proposition but simply saying that each case has to be looked at in the light of its own facts and on the facts of their case something more would have been needed to establish the necessary fraudulent intent.  The correct law I find to be that laid down in Grantham (para. 5.1.20).  It would be an extraordinary proposition that it would be unsafe ever to infer fraud on the part of a person taking credit at a time when he knew that his company would never be able to repay the creditor.

5.1.15 Lightman J. gave a clearer indication In re Leyland DAF Ltd. [1994] 4 All ER 300 where of fraudulent trading he said at p. 311:

“Under s 213 of the 1986 Act, if in the course of the winding up of a company it appears that the business of the company has been carried on with intent to defraud the creditors of the company, the court may on the application of the liquidator declare that any persons who were knowingly parties to the carrying on of the business in such manner are liable to make such contribution (if any) to the company’s assets as the court thinks proper.  The required intent to defraud is subjective, and not objective, and accordingly it is necessary to show that there was either an intent to defraud or a reckless indifference whether or not the creditors were defrauded (see R v Lockwood [1986] Crim LR 244).”

5.1.16 It is quite clear that the thread running through all the cases is one of subjectivity.  There is, in my view, no warrant for importing an objective threshold as the basis for establishing that the business of the company concerned was being carried on in fraud of creditors.  Fraudulent intent must be established subjectively after a careful examination of all the evidence.  Even in what appear to be water-tight cases, fraud may not be found - simply an unjustified albeit honest “chasing of the rainbow”.  If circumstances from which an inference of fraud might otherwise be drawn do not give rise to such a finding, it would be wrong to put a director in jeopardy as party to that “fraud”.

5.1.17 Perhaps Hoffmann J. put it most clearly In re Augustus Barnett & Son Ltd. [1986] BCLC 170.  This involved an application to strike out a claim brought under section 332(1) of the Companies Act 1948, the equivalent of section 275(1) as amended.  At p. 173, the judge said:

“It is a necessary condition of the court’s power to make an order under this section that it appears that ‘any business of the company has been carried on with intent to defraud’.  Transferring the passive to the active voice, this in my judgement involves a finding that someone has done an act which can be described as carrying on some business of the company and that in doing so he had an intent to defraud.  Equally, the words ‘any business of the company has been carried on ... for any fraudulent purpose’ must mean that someone carrying on the business had a fraudulent purpose in doing so.  Once this condition has been satisfied, the court may impose personal liability on any persons who were knowingly ‘parties to’ carrying on of the business ‘in manner aforesaid’.  The words ‘persons ... parties to’ may be wide enough to cover outsiders who could not be said to have carried on or even assisted the carrying on of the company’s business but who nevertheless in some way participated in the fraudulent acts.  For an example, see Re Gerald Cooper Chemicals Ltd [1978] 2 All ER 49, [1978] Ch 262.  But I cannot see how the requirements of the section can be satisfied if no fraudulent intent is alleged against any person who actually carries on the business.  In such a case, there are no fraudulent acts to which the outsider can have been a party and his own state of mind seems to me for present purposes irrelevant.  It may give rise to liability in deceit or some other cause of action but not under s 332 of the 1948 Act.”

5.1.18 It seems to me that authority is against ADS.  Should any doubt remain, it must, I think, be laid to rest by a passage which appears in a judgment of Jones J. given on 15th December 1989 upon an application by the defendants to strike out fraudulent trading.  At p. 8, the judge said:

“In respect of the submissions made by counsel for the defendants on the claim based upon fraudulent trading, Mr Cullen for the plaintiff agreed with the following propositions:

1.   That in order to succeed on the claim for fraudulent trading, the plaintiff must show -

(1)  that certain business of WMI was being carried on with intent to defraud creditors or for any fraudulent purpose; and

(2)  the defendants were knowingly parties to the carrying on of such business in such manner.

2.   Actual dishonesty is an essential element of fraudulent trading.

(1)  It must be shown that the persons involved in carrying on the company’s relevant business -

(a) actually intended to defraud creditors or to achieve a particular fraudulent purpose; or

(b) were reckless as to whether the carrying on of the business would result in the creditors being defrauded.”

5.1.19 In my view, there is an acknowledgment that someone must be identified as carrying on the business and shown to have the necessary intent.  Therefore, while there is a distinction to be drawn between those carrying on the business and those a party to that activity, there is no distinction between them when it comes to what must be proved.

5.1.20 Subjectively, it must be proved that they intended to defraud creditors or were knowing parties to such fraud.  In short, were they dishonest.  In R. v. Grantham [1984] 1 Q.B. 675, the Court of Appeal approved a summing up in the following terms:

“Members of the jury, my direction, as a matter of law, to you with regard to what is meant by intent to defraud is this.  A man intends to defraud a creditor either if he intends that the creditor shall never be paid or alternatively if he intends to obtain credit or carry on obtaining credit when the rights and interests of the creditor are being prejudiced in a way which the defendant himself knows is generally regarded as dishonest. . . . Some fraudulent traders intend from the outset never to pay or never to pay more than a fraction of the debt.  If that is true in your view in this case then the intent to defraud would be made out but a trader can intend to defraud if he obtains credit when there is a substantial risk of the creditor not getting his money or not getting the whole of his money and the defendant knows that that is the position and knows he is stepping beyond the bounds of what ordinary decent people engaged in business would regard as honest.

“Members of the jury, if a man honestly believes when he obtains credit that although funds are not immediately available he will be able to pay them when the debt becomes due or within a short time thereafter, no doubt you would say that is not dishonest and there is no intent to defraud but if he obtains or helps to obtain credit or further credit when he knows there is no good reason for thinking funds will become available to pay the debt when it becomes due or shortly thereafter then, though it is entirely a matter for you this question of dishonesty, you might well think that is dishonest and there is an intent to defraud.”

5.1.21 It is important, however, to distinguish an alleged fraudster’s motive from his intention.  In Welham v. D.P.P. [1961] A.C. 103 Lord Radcliffe said in relation to “defraud” at p. 123:

“Although in the nature of things it is almost invariably associated with the obtaining of an advantage for the person who commits the fraud, it is the effect upon the person who is the object of the fraud that ultimately determines its meaning.”

5.1.22 This was echoed in R. v. Allsop [1976] 64 C.A. Rep. 29 where the Court of Appeal (Criminal Division) held a person to be guilty of fraud if he intends by deceit to induce another so to act that his economic interests are imperilled even though he does not intend that the other should ultimately suffer actual loss.

5.1.23 That was approved in Wai Yu-Tsang v. R. [1992] 1 A.C. 269 where the Privy Council said at p. 280:

“It is however important in such a case, as the Court of Appeal stressed in Reg. v. Allsop, to distinguish a conspirator’s intention (or immediate purpose) dishonestly to bring about such a state of affairs from his motive (or underlying purpose).  The latter may be benign to the extent that he does not wish the victim or potential victim to suffer harm; but the mere fact that it is benign will not of itself prevent the agreement from constituting a conspiracy to defraud.”

5.1.24 It is not, I think, necessary to dwell overlong on dishonesty or to conduct a lengthy analysis of the many cases to which I was referred.  There is really no dispute about the law.  The further a person departs from objective standards of honesty, the more likely it becomes that he is dishonest.  In coming to a conclusion that a person is dishonest, a court will take into account factors such as the extent of his knowledge of the circumstances, his experience and his intelligence.

5.1.25 Finally, for reasons upon which I elaborate in Part 7, it is my judgment that Mr. Lees, Mr. Leung and Mr. Brothers, the working directors, were carrying on the business of WMI at the relevant time.  Accordingly, if none of these directors was dishonest, no other director could have been party to fraudulent trading on my view of the law.

5.2    Jurisdiction POINT

5.2.1 In view of my finding that there was no fraudulent trading, the Defendants’ jurisdiction point about s.275 becomes academic.  The Defendants’ point is that under s.275 ADS is entitled to no more than a declaration.  Any award which the court may make must be in favour of the liquidators for them to distribute pari passu amongst the general body of creditors.

5.2.2 An application under s.275 is usually made by a liquidator so that no question arises about the destination of any award made.  In In re Cyona Distributors Ltd. [1967] 1 Ch. 889, a majority of the Court of Appeal came to the conclusion that a creditor may make an application under this section and have an award made in his favour.  In that case, the Commissioners of Customs and Excise made an application under s.332 of the Companies Act 1948 which is in all respects similar to s.275.  Before the application was heard, the director at whom it was aimed made payment to the Commissioners.  The liquidator then sought a declaration that the sum received by the Commissioners was held by them on trust for the creditors generally.  After reading s.332, Lord Denning M.R. said at p. 902:

“In my judgment, that section is deliberately framed in wide terms so as to enable the court to bring fraudulent persons to book.  If a man has carried on the business of a company fraudulently, the court can make an order against him for the payment of a fixed sum:  see In re William C. Leitch Bros. Ltd.  An order can be made either at the suit of the liquidator, etc., or of a creditor.  The sum may be compensatory.  Or it may be punitive.  The court has full power to direct its destination.  The words are quite general:  “all or any of the debts or other liabilities of the company as the court shall direct.”  By virtue of these words the court can order the sum to go in discharge of the debt of any particular creditor; or that it shall go to a particular class of creditors; or to the liquidator so as to go into the general assets of the company, so long as it does not exceed the total of the debts or liabilities.  Of course, when an application is made by a liquidator, the court will usually order the sum to go into the general assets, as Eve J. did in In re William C. Leitch Bros. Ltd. (No. 2), but I do not think it is bound to do so.  Certainly when an application is made by a creditor who has been defrauded, the court has power, I think, to order the sum to be paid to that creditor.  In short, I think the words of the section are to be given their full width.  When a creditor applies, as the commissioners did here, he applies on his own account.  He does not apply as being under a trust for the other creditors or for anyone else.  He is the master of his own application.  He can discontinue his application, if he likes, without getting the sanction of the liquidator.  But no doubt the liquidator should always be made a party to the proceedings, so that the interests of the other creditors can be safeguarded.”

5.2.3 Danckwerts L.J. agreed, saying that “the creditor should be entitled to his reward” and “the court would appear to have a wide discretion under the section”.

5.2.4 Russell L.J. disagreed.  At page 906, he said:

“It is observed that section 332 does not envisage as essential to its working more than a simple declaration of personal responsibility for £x, being all or part of the debts or other liabilities of the company:  no order that the person shall pay the sum to anyone in particular is required or in terms envisaged.  This is certainly consistent with the contention that the section never envisages any outcome of its operation other than the conferring upon the liquidator as such a right to enforce the personal responsibility as an addition to the assets of the company in his hands.

In the two Leitch cases, before Maugham J. and Eve J. respectively, it is, I think, apparent that nobody concerned thought that there could be any but two constructions of this section:  one, that any declaration must swell the general assets of the company in liquidation; the other, that any declaration must benefit as a class and be apportioned among only those creditors of the company who have been defrauded:  see Leitch (No. 1), and Leitch (No. 2).  The sum of £6,000 was ordered to be paid to the liquidator, and which of those two constructions of the section was correct was left to be dealt with on an ordinary summons in the winding-up (not under the then equivalent of section 332), and was so dealt with by Eve J. in Leitch (No. 2)  It is true that Eve J. refers to an argument on the effect of the order made by Maugham J., but, as I understand it, his decision was on the question which of those two constructions of the section was correct.  Maugham J. himself in In re Patrick and Lyon Ltd. thought that Eve J. was dealing with the section.

I have no doubt that Eve J. was correct in holding that the section was not one which conferred the benefit of any declaration exclusively upon defrauded creditors of the company.  The present significance of those two cases is that it did not occur to anyone that there was a discretion in the court to decide who was to benefit from the declaration and in what proportions.  The most powerful argument in favour of the contention that such a discretion exists lies in the use of the phrase “personally responsible ... for all or any of the debts or other liabilities of the company as the court may direct,” instead of a provision empowering the court in the relevant circumstances to order the person to contribute to the assets of the company a sum equivalent to all or any of the debts, etc. etc.

But there are, it seems to me, several objections to the suggested construction.  The liquidator must get on with distribution of the assets among creditors in accordance with their admitted proofs.  A declaration in favour of a defrauded creditor might be made any time, and the enforcement by him of the declaration might bear fruit at some uncertain point of time, or in driblets, or not at all:  and all outside the purview of the liquidator.  How is such a system to be fitted into the scheme of liquidation?  Further, if declarations may be made in favour of particular creditors, perhaps on different applications, how are priorities as among them to be solved?

I have already referred to the fact that an order to pay to any particular person is not envisaged as an essential part of the scheme of the section.  And it seems to me that personal responsibility for a sum stated, measured by reference to all or any of the debts of the company, is a perfectly appropriate description of responsibility to the company which has incurred the debts without it being in any way necessary to extend it to embrace also responsibility direct to particular creditors.

I would hesitate to construe the section in a manner which never occurred to Maugham J. and Eve J. as a possibility.  But in any event I am of opinion that it is not the true construction, but that section 332 can result only in an accretion to the assets of the company for distribution in due course of winding-up.”

5.2.5 The point arose again in Re Esal (Commodities) Ltd., London and Overseas (Sugar) Co. Ltd. and another v. Punjab National Bank [1993] BCLC 872.  In that case, the liquidators made an application under s.332 of the Companies Act against the bank alleging it had carried on the business of Esal fraudulently.  A compromise in full and final settlement of all disputes was reached and approved by the committee of inspection and the liquidators.  One shareholder, however, disagreed with the compromise and commenced his own proceedings under s.332.  At first instance, Lindsay J. held that any recovery under that section had to be in favour of a liquidator and not an individual shareholder.  He carried out a close analysis of the law and, in particular, Cyona.  He agreed with the view of Russell L.J.  At page 880, he added:

“If, for any reason, the liquidator (who, as Cyona itself shows, should always be a party) cannot or chooses not to pursue a s 332 application which a creditor is willing to pursue, that liquidator is at liberty (no doubt after obtaining the sanction of the court or of the committee) to agree terms with the creditor as to some distribution other than pari passu of whatever those proceedings might yield by way of judgment in the liquidator’s favour.  Danckwerts LJ was plainly influenced by the need for a scheme under which ‘creditor should be entitled to his reward’:  see [1967] 1 All ER 281 at 285, [1967] Ch 889 at 904.  Had the possibility I have mentioned been in his mind his tentative conclusion that ‘the court would appear to have a wide discretion’ permitting payment direct to a creditor may have been otherwise.”

5.2.6 It must be noted, however, that the shareholder’s action was regarded as an abuse because it would have been wrong to allow a shareholder who had benefited from the compromise and not sought to be exempted from it to pursue such proceedings.

5.2.7 An appeal was dismissed.  Peter Gibson L.J., with whom the other two judges agreed, said:

“[S.332] can only be invoked by the liquidator and the relief obtainable is a declaration that the delinquent is liable to make such contribution to the company’s assets as the court thinks proper.”

5.2.8 Ralph Gibson L.J., who agreed with the decision, referred to the suggestion by the judge that the creditor and liquidator might agree terms for the distribution of any award won by the creditor.  In the course of argument before the Court of Appeal, it was contended that the court would have power to approve such an arrangement if it were shown to be just and appropriate.  Ralph Gibson L.J. said:

“For my part, I think that the court would have such power, although the circumstances in which it could be properly exercised would, no doubt, be unusual.  The existence of such a power has persuaded me that the construction of the statutory provisions which Lindsay J. applied ... is the right construction and one which has been shown to work as Parliament must have intended those provisions to work.”

5.2.9 For the reasons expressed by Russell L.J., as elaborated by Lindsay J. and the Court of Appeal in Esal, I am satisfied that in general an application under s.275 should be brought by the liquidator for the benefit of creditors generally.  I am equally satisfied, however, that where proper arrangements have been made between a creditor and liquidator, and those arrangements have been approved by the committee of inspection and the court, the court has jurisdiction to make an award directly in favour of the creditor.  Whether or not the court will approve an arrangement will depend upon the facts and circumstances of each case.

5.2.10 In the present case there was a meeting of the committee of inspection on 26th August 1988.  The relevant part of the minutes of that meeting reads:

“ADS’ Action Against the Former Directors of WMI and Wheelock Marden

The Joint Liquidator informed the Committee that following the review of WMI’s minutes (as approved at the last committee meeting), ADS is now in the process of drafting the formal proceedings of their action against the former directors of WMI and Wheelock Marden, under S275 of the Companies Ordinance.

According to legal advice, WMI would not benefit from any successful action brought by a creditor on his own account.  The Joint Liquidator therefore recommended that WMI does not pursue the matter further and that the liquidation should be terminated.

Copies of the draft formal Letters before Action and the legal advice obtained from Clifford Chance were circulated to the Committee members.  Mr. Robin Osborne commented that ADS intends to bring WMI in the action as a joint plaintiff, but also stated that he did not know whether this is necessary when questioned by the Joint Liquidator and the other Committee members.  He agreed, therefore to ascertain whether it is necessary to have WMI as joint plaintiff and will revert to the Joint Liquidator.

The authorised representatives of Pacnorse and HSS opined that they would prefer WMI not to join in the action with ADS so that the liquidation can be concluded.  They would, however, study the legal advice obtained and would revert to the Joint Liquidator should they subsequently think otherwise.”

5.2.11 The legal advice tendered is understandable given that Cyona was the leading authority at that time, although the advice was perhaps expressed too strongly.

5.2.12 After some further correspondence, the upshot was that the joint liquidators wrote to ADS’ solicitors on 29th December 1988 confirming that they did not wish to intervene in any application to be made by ADS under s.275 and would not contend that any of the moneys, for which the respondents to such an application might be found liable, should be paid to the liquidators rather than to ADS.  There was apparently no objection from any of the other members of the committee of inspection.  On 5th January 1989, an order was made by consent that the date of dissolution of WMI be deferred until the final hearing of ADS’ application in these proceedings or any appeal therefrom.

5.2.13 It is true that there is no tidy formal agreement between ADS and the liquidators approved by the committee of inspection.  It is quite clear, however, that there was agreement all round that ADS should be permitted to “go it alone” on what would plainly be long, difficult and very expensive proceedings.  Those proceedings apart, the winding-up of WMI was effectively over.  If ADS were prepared to finance these proceedings in which the chances of success must then have been wholly unpredictable, it seems right that ADS should reap the benefit of any success.

5.2.14 Had it been necessary, therefore, I would have given approval to the agreement or arrangement that had been made between ADS, the liquidators and the other members of the committee of inspection.

5.3    STANDARD OF PROOF

5.3.1 The final question is to what standard ADS must prove its case.  In a civil case, the standard is on the balance of probabilities.  However, the degree of probability must be commensurate with the occasion and proportionate to the subject matter: Hornal v. Neuberger Products Ltd. [1957] 1 Q.B. 247.

5.3.2 In Lai King Shing v. Medical Council of Hong Kong C.A. 95/1995 (unreported), the Court of Appeal in a decision given on 24th October 1995 was considering the standard of proof in relation to a medical practitioner against whom was made an allegation amounting to indecent assault which, if proved, would have devastating consequences.  Keith J. said:

“In my judgment, the standard of proof commensurate to the gravity of such a charge was, if not proof beyond  reasonable doubt, proof to a degree of probability which fell short of proof beyond reasonable doubt by so small a margin as made no practical difference.”

5.3.3 Nazareth V.P. agreed.  Liu J.A. also agreed, but added that in such circumstances the standard should be “that applicable to a criminal trial”.  In effect, therefore, in a serious case such as the one before the tribunal, the standard of proof was no different from beyond reasonable doubt.

5.3.4 In my view, that standard can be applicable in ordinary civil proceedings.  Here, the allegation is one of serious fraud.  If proved, it will not only have the usual financial consequences but also affect the Defendants’ standing in the business community and possibly compromise their ability to hold directorships of public companies.  In such circumstances, I am satisfied that the higher standard is appropriate.

5.4    ADS' case

5.4.1 It is ADS' case that

(1)     On or around 8th April 1983, the date of delivery of Sealock or

(2)     By 4th October 1983 following the grant of the US$4 million facility or

(3)     On or around 22nd March 1984, the date of delivery of Annalock or

(4)     At any time after 22nd March 1984 until the appointment of EW on 6th March 1985

WMI was insolvent and doomed to fail; that the Defendants knew or should have known this and should have placed WMI in liquidation; and that by failing to do so the Defendants traded fraudulently.

5.4.2 The amended Statement of Claim contains 17 pages of particulars of insolvency or of WMI’s impending doom.  In turn, these were buttressed by several hundred pages of further and better particulars.  These particulars were distilled from the events and documents which I have already recorded in some detail, although I accept that my review does not include every single item relied on by ADS.  It seems to me therefore unnecessary to rehearse ADS’ case other than in the broadest terms.  I will deal with each of the four dates or periods separately and set out the principal matters on which ADS relies:

(1)  8th April 1983

(i) The decline and depression in the shipping market from May 1981 onwards;

(ii) The acknowledgement in the general managers’ reports, at WMI meetings and in correspondence, of adverse and bleak market conditions with little prospect of improvement;

(iii) The substantial newbuilding commitments;

(iv) The absence of WMI Board meetings between 16th September 1982 and 9th February 1983;

(v) The cash flows showing serious deficits;

(vi) The need for heroic remedial measures as discussed at the November consensus and included in cash flows; and the unlikelihood of them all succeeding;

(vii) The importance of rescheduling loans which was dependent on WM support, support which it was not realistic to expect because WM was not intending to support, under no obligation to do so and had a policy not to support its subsidiaries;

(viii) The S&C report emphasised the dire financial position including the need for cash from WM and, at least in its draft form, showed an asset deficiency which, ADS claims, was the true position;

(ix) By 8th April 1983, not all the remedial action upon which the cash flows were based had been achieved, in particular the sale of Fenlock and Inverlock;

(x) As is admitted, by that date WMI was unable to pay all its debts as they fell due;

(xi) In the circumstances, no new credit should have been incurred.

(2)  4th October 1983

(i) The situation already prevailing at 8th April 1983;

(ii) The financial difficulties were more than a cash or liquidity crisis;

(iii) WMI’s chance of survival was remote, not reasonable and depended on WM’s total commitment which it was unreasonable to expect in the light of market conditions and WMI’s parlous state;

(iv) WMI also required a rescheduling of its debts which in turn depended on WM support;

(v) It was plain from the start that HKR was wary of lending money to WMI, it being only “a possible investment” and subject to shareholder approval and financial advice;

(vi) WM demonstrated its lack of commitment by its refusal to give binding letters of comfort, pursuant to its policy not to support its subsidiaries;

(vii) WM’s provision of the US$4 million facility was secured, was less than the amount recommended by S&C and in any event was only sufficient for 2 or 3 years - “a breathing space”, as Rothschilds put it;

(viii) Rothschilds’ recommendation of a US$4 million facility was based on cash flows that called for (i) retention accounts for secured lenders, yet rescheduling was in fact dropped; and (ii) other remedial action, for example the cancellation of the Dalians and no payments to Pacnorse, action which was unlikely to be achieved;

(ix) A lack of Board meetings;

(x) By 4th October 1983, the insufficiency of support and continuing poor market conditions meant WMI was doomed to fail;

(xi) WMI was balance-sheet insolvent.

(3)  22nd March 1984

(i) The ongoing financial position;

(ii) The US$4 million facility was called on earlier and to a greater extent than anticipated because of failure to refinance World Rainbow and Manila Faith, and because of the need for the Shell guarantee in relation to the ships for oil deal.  By 14th March 1984, the facility was wholly used up and therefore inadequate;

(iii) It was decided to take delivery of the Dalians;

(iv) The ships for oil deal produced US$3 million less than shown in the cash flow dated 24th January 1984;

(v) Repayment to Pacnorse began.

(4)  6th March 1985

(i) The ongoing situation;

(ii) The need in April 1984 for US$720,000.00 in addition to the US$4 million facility because of the failure to refinance World Rainbow and Manila Faith;

(iii) The WMI Board meeting on 11th April 1984 was the first since 30th September 1983;

(iv) A 3-year cash flow of 10th April 1984 (App. 2/21) showed a deficit by December 1987 of US$23 million;

(v) Increasing defaults and deferrals on loans;

(vi) In August 1984 a requirement for cash funding was blamed on failure to dispose of the investment in WWW and the less than expected proceeds from sales of vessels, with no mention of the earlier and long-running failure to refinance World Rainbow and Manila Faith;

(vii) The requirement for cash had to be met by a request to WM to waive its right to the WWW dividend;

(viii) The concern expressed both by WM and by S&C about fraudulent trading;

(ix) In September 1984, S&C said WMI’s viability depended upon:

an injection of new equity;

rescheduling;

a recovery in the market.

All WMI obtained was WM’s waiver of the WWW dividend, WM making it plain at the time that it would not provide further finance.

5.4.3 I have already set out the facts at somewhat tedious length.  They help, however, to explain 2 things.  First, why ADS chose to take on the very heavy burden of proving fraud against the Defendants.  A combination of the crippling debt, substantial deficits shown in the long-term cash flows, the continuing depressed market conditions and the apparent reluctance on the part of WM to help WMI leaves no room, according to ADS, for a genuine belief on the part of the Defendants that WM would support and thereby save WMI.

5.4.4 Second, the facts show the inherent implausibility of the Defendants being dishonest or, not to put too fine a point on it, swindlers.  If fraudsters or swindlers they were then the Defendants indulged in what must be one of the most transparent frauds ever recorded.  For fraud is not normally meticulously recorded nor carried out under the advice and scrutiny of legal and financial advisers.

5.4.5 ADS' case is pleaded thus

“Fraudulent trading

2.5 The said loans were made and the said indebtedness was incurred and/or allowed to continue at a time when, unknown to the Plaintiff, but known to all the Defendants (or which ought to have been known or in respect of which the Defendants acted with reckless disregard therefor) WMI was insolvent and unable to pay its debts as they fell due.  Further and/or alternatively the said indebtedness was incurred and/or allowed to continue at a time when the Defendants knew or ought to have known that there was no reasonable prospect that the loans would ever be repaid or that the shortfall guarantees which supported them (see below) would be honoured or at a time when they had reckless disregard as to whether such prospects were reasonable.”

5.4.6 It is not contended that the mere fact of trading while insolvent is sufficient to constitute fraudulent trading.  It is simply a fact (now admitted) upon which ADS relies to help prove its primary case that the Defendants knew that there was no reasonable prospect of the credit taken from ADS ever being repaid, whether by the shipowning companies or by WMI under its guarantees.  The key to this issue was parental support - not the provision of actual support but the Defendants’ perception of whether it would be forthcoming.  And the issue crystallised as whether each Defendant had an honest belief that WM would support WMI.

5.4.7 In relation to the period leading up to delivery of Sealock in April 1983, ADS, after setting out all the ills affecting WMI, pleaded:

“5.15 The cash flow projection referred to in Paragraph 4.1.4 above showed WMI’s prospects on two bases, one of which was that all WMI’s lenders consented to the proposed re-financing.  This was not realistic because it was known that the rescheduling of all WMI’s loans would probably be dependent on the substantial injection of additional cash from the shareholders.  It was not realistic to expect that such an injection would be achieved.

5.16 WMI was, therefore, entirely dependent on third party support for an injection of cash to avoid not just an immediate cash flow crisis but also a decline into a serious asset deficiency within the next two or three years.  It was not realistic to assume that such support would be given, either by the First Defendant or by a third party.

5.17 However, the First Defendant was not committed to or intending to support WMI through its financial difficulties and was not prepared to provide the essential financial support to ensure its survival.”

and after reviewing the S&C report,

“5.18 No further significant improvement was achieved to WMI’s position prior to 8th April 1983.  In particular, the Defendants knew by 8th April 1983 that not all the remedial action on which the cash flow projections had been based would be achieved.  In particular, agreements to sell the M.V. “Fenlock” and M.V. “Inverlock” had not been achieved, and no loans had been rescheduled.  Further, no commitment of further cash from  WMI’s shareholders had been or was likely to be forthcoming.  Therefore, in the light of the above, it was plain, or should have been, that WMI could not meet its debts as they fell due and was wholly dependent on Third Party support.

5.19 WMI was insolvent, it had a deficiency of assets over liabilities on a net realisable asset basis, and was doomed to be placed in insolvent liquidation.  In any event it was or ought to have been obvious that no new credit should have been incurred by WMI.  All the aforesaid was apparent or should have been apparent to the Defendants and the Plaintiff will contend that upon a proper analysis of WMI’s position, it should have been put into liquidation on or around this date.”

5.4.8 In relation to Annalock, ADS pleaded:

“16.2 To the extent that there was any chance at all of WMI surviving such was at best a remote and certainly not a reasonable chance but even this depended (and this was or should have been plain to the Defendants) on the First Defendant, in its capacity as the parent Company of WMI providing total commitment to WMI.  Until after Discovery and/or Interrogatories, the Plaintiff contends that such total commitment could not have been reasonably expected at this or any later stage given the state of the market and the parlous state of WMI when compared with the financial position of the First Defendant and its interests.”

5.4.9 ADS then referred to the failure by HKR to offer support and went on:

“16.11 In the circumstances, it was clear that WMI’s survival was dependent on the commitment of the First Defendant.

16.12 It was also the case, however, that the First Defendant would not make such total commitment and would not provide the support that Schroders and Chartered had advised was necessary.”

5.4.10 Again, there was a catalogue of WMI’s problems and WM’s reactions, on the basis of which ADS asserted:

“16.20 The First Defendant was not committed to or intending to support WMI through its financial difficulties and was not prepared to provide the essential financial support to ensure its survival.

16.21 By the 22nd March 1984 WMI was (irrespective of its earlier insolvency) demonstrably doomed to be put into insolvent liquidation.”

5.4.11 After delivery of Annalock, ADS recited the further lack of progress by WMI and concluded:

“25.15 No new finance was, as must have been or could and should have been expected, received from the First Defendant and that no further funds could be provided was expressly stated on 6th March 1985 (and confirmed by letter dated 28th March 1985).”

5.4.12 In their original defences, the Defendants denied that WMI was entirely dependent on third party support but asserted that, in the light of support that was given, it was reasonable to expect it to continue and that it did.  On 29th August 1995, however, the defences were amended two weeks before trial began.  In para. 58, which denied paragraphs 5.15-16 of the claim, there were introduced two new sub-paragraphs:

“(1) It had been the 1st Defendant’s policy of long standing that each of its subsidiaries should strive to be profitable out of its own resources and resolve any temporary difficulties it might encounter, but if, having taken reasonable steps to resolve them, it was unable to do so without support, the 1st Defendant would provide support.

(3) In a series of meetings held in late November 1982 between key directors of the 1st Defendant, namely the 2nd, 3rd, 5th and 6th Defendants (who were also directors of WMI), Jaime Ortiz-Patino and Peter Griffiths, it was agreed that the 1st Defendant should support WMI in the terms the first page of a memorandum by the 5th Defendant to the 3rd and 6th Defendants dated 8th December 1982 recording the consensus reached.”

5.4.13 The memorandum there referred to is the December memorandum (App. 3/1).

5.4.14 It having been accepted by the Defendants that WMI depended for survival on WM support, the plea in sub-paragraph (3) became a major, if not the most important factor, on which the Defendants relied for their confidence that support would be forthcoming.  Because of its importance, a significant amount of time was spent understandably in cross-examination of Mr. Lees, Mr. Leung, Mr. Brothers and Mr. Ortiz-Patino in trying to establish the true nature of what took place in November.  After a great deal of twisting and turning, the picture as presented by these witnesses was of a commitment by the two major shareholders of WM, Mr. Marden and Mr. Cheung, to support WMI once it had carried out the strategy set out in the December memorandum.

5.4.15 ADS’ case is that there was no more than an informal and unofficial understanding or “game plan” between four WMI and two WM directors to the effect that, if certain plans were implemented, there would be a once-and-for-all fund-raising exercise to keep WMI afloat.  Whatever the value of this understanding may have been, ADS contends that that value evaporated two months later in January 1983 when first, the Rangelock guarantee was given contrary to para. (iv) on the first page of the December memorandum; and second, the WM Board on 26th January 1983 made an unequivocal affirmation of its policy on support (see para. 3.5.11).

5.4.16 I should mention that the Defendants argued that ADS was here alleging a change of intention, a matter not pleaded.  I disagree.  ADS, in my view, was simply saying that any legitimate expectation of support was dashed in January 1983.

5.4.17 The difficulty with the second contention is that plainly the WM Board was not considering the question of its policy on support generally but its more limited policy as to the giving of indemnities and guarantees.  It was the evidence of 4 directors, Mr Lees, Mr Lee, Mr Brothers and Mr Leung, which I accept, that the debate and resolution arose out of Mr. Cheung’s anger that the Rangelock guarantee had been provided without formal Board approval.  Whatever the nature of the November consensus was, it was not, I am satisfied, in any way undermined by the Board resolution.

5.4.18 It is equally plain that the December memorandum does not set out a detailed plan from which there could be no deviation if WMI were to get support.  There would have to be flexibility, as the 4 directors said, to meet market conditions and the failure of any steps taken while WMI pursued its recovery efforts.  Further, an important component of the plan was missing.  Inherent was the need, before “once-and-for-all” support could be given, to quantify the amount of support required.  This first surfaced in the telex from Mr. Ortiz-Patino (App. 3/5) and was accepted as axiomatic by the directors.  It is inconceivable, however much Mr. Marden would have liked it, that WM would have been prepared to give WMI a blank cheque which would in effect have obviated the need for WMI to do anything at all and would certainly have provided no incentive for the banks to help by way of a moratorium or otherwise.

5.4.19 It also seems to me inconceivable, again whatever Mr. Marden may have wanted, that WM would provide the support ultimately found to be necessary if the amount required was out of proportion to WM’s resources or indicative of an incurable malaise on the part of WMI.  Put another way, WM would not support a subsidiary which could not be demonstrated to have the potential to return to profitability.  And that would be consistent with WM’s policy on support which was pleaded in new sub-paragraph (1).  To that plea, therefore, must be added the essential ingredient that support would be provided if it was thought that the subsidiary would probably return to profitability.  Such an ingredient, of course, is no more than good business sense.

5.4.20 Mr. Marden was too ill to give evidence.  His witness statement went in by way of hearsay notice and so was not tested by cross-examination.  He seems to me, however, to have set out the position in relation to WM’s policy on support as it related to WMI from 1982 onwards with admirable clarity and, I am convinced, accuracy.  After referring to the different interests of himself and Mr. Cheung, Mr. Marden said:

“10. Quite apart from the ordinary disciplines of a public company, these diverse interests meant that it was simply not possible for one arm of the Group, such as WMI, to be continually supported by Wheelock Marden & Co. Ltd., regardless of the cost (even if one had wanted to).  Accordingly, each company in the Group was responsible for raising finance for itself on its own and did not raise finance on the strength of Wheelock Marden & Co. Ltd.’s guarantee.

11. Whilst this was the general policy of the Group, it was also true that all interests in the Wheelock Group saw the need to support any particular member of the Group which might be experiencing difficulties so as to protect the value of the investment in that ailing member and to preserve the sound reputation of the Group as a whole.  This kind of support was given on an ad hoc basis and could be called the “drip feed” approach.  This kind of support was particularly important in 1982/83 when general business confidence in Hong Kong was low and well known companies, such as Carrian, Eda, Hang Lung Bank and various finance companies collapsed or were in the process of collapsing.  Rumours abounded about many of the more established Hong Kong companies.  For example, Hong Kong Land went through a very difficult phase during this period.  Shipping companies in Hong Kong went through a very difficult time and just about the only major Hong Kong shipping company to weather the storm was the World-Wide Shipping Group.  Those who were not in Hong Kong at the time tend to forget this or to under-estimate its seriousness.  Particularly in the light of the economic climate, I think everyone on the board of directors of Wheelock Marden & Co. Ltd. saw the need to avoid speculation about the stability of any member of the Group and therefore understood the need to assist an ailing member so as to ensure the survival of the Group.  Reports prepared by Schroders and Rothschilds at this time highlight this point.  Group support could nevertheless only be given so long as there was a realistic prospect of survival in the longer term.  Any such support could only be on a case-by-case basis and could not be an “open ended” commitment.  No one would have agreed to support a company which had no prospect of surviving, even at that difficult time.”

5.4.21 Whatever label may be put on the November consensus, I am satisfied and find that it was in substance an endorsement by the major shareholders of WM, i.e. by Mr. Marden in person and by Mr. Cheung through Mr. Griffiths, of the general strategy WMI had already adopted to try and retrieve its difficult position, and an affirmation that WM’s policy on support would apply to WMI.  In other words, WMI was effectively being told “carry on along the lines you are already following, taking into account our own suggestions (as set out in the December memorandum).  When you have done all you reasonably can and can tell us how much you need then, provided the figure is not outrageous and we are not throwing more money down the drain, we will help”.

5.4.22 Hence it was left to Mr. Brothers to record, which he did with no great alacrity, what were no more than guidelines.  It is unlikely that a true commitment would have been the subject of such a casual approach.

5.4.23 Once that is appreciated, various anomalies, inconsistencies and contradictions disappear.  There is an explanation for there being no further reference to what took place in November although echoes rang from time to time, for example, in the telex from Mr. Ortiz-Patino.  Mr. Lees, Mr. Leung and Mr. Brothers were taxed at length about this.  Why, they were asked, did they not mention or remind WM of the November consensus when they were in the midst of their troubles and WM was not responding as they hoped?  Their explanations taxed my credulity.  But in truth there was nothing to explain.  There was no reason to remind WM or its shareholders of a well-understood policy.  That WM were less than sympathetic was no more than a manifestation of its requirement that WMI first do all it could to survive on its own and, in particular, of Mr. Cheung’s well-known attitude of negotiating hard and giving as little as possible.

5.4.24 It can also be understood why WMI received ‘drip-feed’ support rather than a once-and-for-all injection.  WM was willing to help to a limited extent while Mr. Brothers strove to stabilise WMI and quantify the amount of injection required.  That would be consistent with a parent taking all reasonable steps not to let a subsidiary fail.

5.4.25 The criticism that the legal and financial advisers, who were said to have been told of the November “agreement” or “commitment”, made no reference to it falls away.  Mr. Shaw, Mr. Elliott and Mr. Reynolds clearly knew of the overall plan or strategy to be followed and assumed, as did ADS’ own witnesses, that WM as parent would support its subsidiary.  There was no commitment or agreement to support, unofficial or otherwise, about which they might have been informed.

5.4.26 Equally the criticism, that the advice repeatedly taken about fraudulent trading was a charade or pointless if there was an underlying commitment to support, falls away once it is appreciated that there was no such commitment.

5.4.27 All this misdirected evidence arose because, in my view, the plea in respect of the November consensus, which was introduced late, was sought to be invested with a character which was unjustified.  It is impossible to accept that it would not have formed part of the defence from the beginning if it had really had the character and importance which the Defendants attached to it.

5.4.28 Although Mr. Lees, Mr. Leung and Mr. Brothers sought comfort from the November consensus on a wholly misplaced basis, paradoxically a degree of comfort was available.  It is my judgment that, unless and until WM gave a clear signal that it had turned its back on WMI, WMI’s directors were entitled to believe they would get support if they were able to go to WM with a request for a not unreasonable sum and at the same time demonstrate that this would probably lead to a return to profitability.  WMI had to show that WM’s investment would survive because WM could not, as a public limited company, simply throw its funds down the drain.

5.4.29 In my judgment, no such signal was given until 8th October 1984 at the earliest when WM advised WMI that in addition to waiving the WWW dividend, it was prepared to sell its shareholding in WMI for a nominal sum “as part of any reconstruction or rescheduling scheme although any proposal made should not require the provision of further finance by [WM]” (see paras. 3.6.222/223).  That letter was signed by Mr. Lees.

5.4.30 ADS attempted to undermine the comfort derived by the Defendants from the November consensus in a number of ways.

5.4.31 Whatever the nature of the November consensus (which I have found to be no more than an observance of existing policy), it depended upon the continuing intention of the two major shareholders, Mr. Marden and Mr. Cheung.  There can be no doubt about Mr. Marden.  He was a shipping man, the Group carried his name and he was grooming his son, Mr. A. Marden, to take over WMI.  He was anxious for WMI to survive and, according to Mr. Ortiz-Patino whose evidence I accept, was prepared to use his own fortune to buy out WM’s investment.  During 1983 and 1984 he began moves on three or four occasions to make such an investment.

5.4.32 Mr. Cheung, however, was another matter.  He and Mr. Marden were uneasy and unlikely partners.  Their relationship suffered as a result of the Rangelock guarantee.  It was worsened in 1983 and 1984 after Mr. Marden transferred his WM shareholding into a trust but did not give, or was unable to obtain from the trustees, an undertaking to observe the shareholders’ agreement between him and Mr. Cheung to vote their shareholdings together.  But the unhappiness was not apparently all one way.  Correspondence that came to light, while Mr. Ortiz-Patino was giving evidence, indicates that Mr. Marden was concerned about Mr. Cheung’s intentions towards the Group, being suspicious that Mr. Cheung wanted to break it up and leave Hong Kong taking with him the money from the better-off subsidiaries.  (See para. 5.11.11)

5.4.33 So WM was not exactly a happy family.  It is not difficult to see why ADS maintains that Mr. Cheung’s intentions towards WMI could not be relied upon.  Inter alia, ADS pointed out that in his telex of 12th April 1983 (App. 3/20) Mr. Griffiths, who represented Mr. Cheung, quite clearly regarded the November consensus as dead and was against support.  ADS thought this not surprising given the tenor of Mr. Ortiz-Patino’s telex of 31st March 1983 (App. 3/5).

5.4.34 For my part, I readily accept the explanations by Mr. Lees, Mr. Leung, Mr. Brothers and Mr. Ortiz-Patino himself about Mr. Ortiz-Patino’s telex.  Mr. Ortiz-Patino was angry that WMI, through Mr. Brothers, had not moved faster in carrying out the survival plan and was endeavouring to stir Mr. Brothers and the two managing directors into quicker action.  I have no difficulty in interpreting the telex in that way.

5.4.35 In passing, it must be said that the idea which emerges from the December memorandum that Mr. Brothers could have effectively put the various steps in place by Christmas 1982 or soon after was quite unrealistic.  WMI could, I suppose, have cancelled all its new building contracts unilaterally but with calamitous results.  There would undoubtedly have been claims by the shipyards for substantial damages while the news of such action by WMI could only have put it under greater pressure by existing creditors and brought about its demise much earlier.  If WMI was going to make a success of its survival plan or strategy, I have no doubt that the more careful, negotiated approach adopted by Mr. Brothers and WMI was required.

5.4.36 As far as Mr. Griffiths’ telex is concerned, I reject the suggestions by, for example, Mr. Brothers that Mr. Griffiths had forgotten the November consensus and the explanation by Mr. Ortiz-Patino that Mr. Griffiths was a sick man.  For my part, I see the telex as a rebuttal of any idea Mr. Brothers might have harboured that WMI could fall back on WM if its expansion plans went wrong.  Mr. Griffiths goes on, however, to recognise that things have gone wrong and that it is more important to see what, if anything, can be done to rectify the situation rather than argue about who is to blame.

5.4.37 I accept, of course, that in his telex Mr. Griffiths gave no firm commitment of support.  I accept also that Mr. Griffiths apparently reinforced his uncompromising view in his later telex of 19th May 1983 (para. 3.5.110).  Some light, however, was shed on this in a letter written by Mr. Griffiths to Mr. Marden in November 1983 in which Mr. Griffiths said:

“I have heard little from Hongkong except that J.C. did tell me that as a result of Rothschilds opinion limited support of US$ 4 million was going to be made available for WMI.  I hope that matters in the shipping spectrum will improve and that as a result of this support WMI will be enabled to survive.

I regret that there differences of opinion between us concerning the 12 million support that was previously being considered but you are well aware that my only consideration was to protect the Directors and I still remain of the same opinion that on the ad[v]ices given it would have been a most dangerous move to have committed as then requested.  Anyhow I hope as I have said that things will improve on the shipping side.  I think you were terribly let down firstly by Robbies folie de grandeur and secondly by John and Henry not having exercised the control which it was their duty to exert.

As you know in the event of anything going wrong it is you who has to take the can and I was extremely exercised at the time that a bad decision would be made which would have made a bad situation worse.  I fully believe that this was also the motivation of JC at the time.”

5.4.38 It seems to me to be clear that Mr. Griffiths was not set against support as such but was concerned to protect the WM directors.

5.4.39 Mr. Griffiths’ telexes, of course, straddled the decision by WM on 27th April 1983 to adjourn WMI’s request for support pending a decision by HKR whether to invest US$12 million in WMI.  It is not clear how HKR’s involvement came about.  There is evidence (para. 3.5.89) that a syndicate, actually Mr. Marden, was considering acquiring a stake in WMI.  On this and on other occasions Mr. Ortiz-Patino said, and I accept, that he tried to dissuade Mr. Marden from investing his own money until WM, whose responsibility Mr. Ortiz-Patino felt it was, declined to support WMI.  Whether Mr. Cheung simply wished to put a spoke in Mr. Marden’s wheel or whether Mr. Marden discussed WMI with Mr. Cheung, what is clear is that Mr. Cheung agreed that HKR would at least consider investing in WMI.  Unless, of course, the whole exercise was no more than a piece of window-dressing, and there is no evidence to support that, it is difficult to see how it can be maintained that, at least until September 1983, Mr. Cheung and therefore WM had no intention of supporting WMI.

5.4.40 The report by EAW on the suitability of WMI as an investment is not available.  Mr. Lees and Mr. Leung, who were directors of HKR, said they did not receive copies of the report although a letter of 15th September 1983 from Mr. Tipper to HKR’s directors, in which Mr. Tipper advised them of the HKR committee’s decision, indicates copies had been sent to all directors.  It may be, however, that Mr. Tipper intended handing copies to the managing directors directly but did not get round to it.  At all events, Mr. Lees and Mr. Leung, in evidence, said they saw copies just before or at the HKR Board meeting.  Mr. Lees remembered that there were a number of conclusions of which three were:

(1) EAW were more pessimistic about the future of the shipping market than WMI;

(2) It would be some years before a return on investment could be realised;

(3) The investment was outside HKR’s normal field.

5.4.41 Mr. Leung remembered that such an investment was not HKR’s main business and that for HKR there would not appear to be a satisfactory return. 

5.4.42 ADS viewed with considerable suspicion the fact that no copy of the EAW report can be found.  The implication is that it has been buried because it contained material and conclusions that substantially condemned WMI’s position as hopeless.  I am unable to accept that.  While it is strange that no copy is available the conclusions recalled by Mr. Lees and Mr. Leung are not untenable.  Nor are they inconsistent with the evidence of Mr. Reynolds who thought EAW could very well have given HKR advice different from the financial advice given to WM because of the different positions of HKR and WMI.  The conclusions remembered by Mr. Lees and Mr. Leung, coupled with the adverse publicity and minority shareholders’ sentiment, would clearly have been sufficient grounds for HKR to decline to proceed.

5.4.43 There is then put into perspective the awkward position in which Mr. Poon thought he found himself at the WMI Board meeting on 15th September 1983 (para. 3.5.241 and 246/247) when it was understood that HKR had declined to invest US$12 million and WM was again considering what to do.  Plainly, Mr. Poon was aware that the WM directors were concerned about their position.  Equally, I am satisfied he must have been aware of a measure of goodwill on the part of WM otherwise, being the fussy and worried solicitor that he was, it is unlikely he would have been persuaded to vote to carry on.

5.4.44 In the meantime, pending a final package, support for WMI on a “drip feed” basis became necessary.  Such support, albeit on a niggardly basis, was forthcoming.  That it was parsimonious reflected Mr. Cheung’s attitude - press hard, pay little.  Thus, the US$4 million facility albeit secured; WM’s counter-guarantee in relation to the ships for oil deal, offset against the facility; the further advance of US$720,000.00 against an undertaking to repay; and the waiving of the WWW dividend.  This, as the working directors agreed, made life very hard for WMI.  They, particularly Mr. Brothers, continued their efforts to some effect.  No one from WM disillusioned them or suggested they were wasting their time and efforts.

5.4.45 The question then which, in my view, needs to be answered is whether, until 8th October 1984 at the earliest, WMI directors could justifiably be confident that they would be able to go to WM with a package that WM would find palatable.  If not, they could hardly have had an honest belief that WM would support WMI.  The answer lies in an examination of the financial position of WMI as shown in the cash flows, the steps already taken pursuant to the November consensus and the steps contemplated in order to see whether, as Mr. Brothers put it, there was any light at the end of the tunnel.  At the same time account must be taken of WM’s reactions to the developing situation.

5.5    SEALOCK POSITION

5.5.1 By the time WMI drew down the Sealock loan, it had made little progress in implementing any of the measures contemplated in November 1982.  One ship, Manila Spirit, had been sold in March.  WMI’s insurance arm, WM&S, had been sold, albeit within the Group.  The price was less than hoped for but not one, I am satisfied, that could be classified as an under-value.  One Spanish new building was to be cancelled and there was a prospect of cancellation of another.  It had not proved possible to cancel any other newbuildings, at least not without the probability of large claims for damages that would undoubtedly be terminal for WMI.  The Dalians, however, would not be delivered until January 1985.

5.5.2 The proposed sale of Fenlock and Inverlock within the Group to Beauforte had been killed off by Mr. Griffiths.  Refinancing of Rangelock, Sealock and Manila Faith had failed and failed, as I find, not because of difficulties about the proposed lessors’ year ends but because WMI was unable to obtain from WM the necessary letters of comfort as to WMI’s continued existence.

5.5.3 S&C had been appointed on 9th February.  On the basis of the then latest cash flows of 7th February, S&C advised that existing creditors would have to be approached for a moratorium and that these creditors would require WM support.  The banks did require such support.  Such support was not forthcoming so that no moratorium had been obtained by the time Sealock was delivered.

5.5.4 By 23rd February, S&C were writing that the newbuildings were of fundamental importance.  The true importance was revealed by the newbuildings’ cash flow of 18th March which, in spite of remedial measures assumed to take place, showed a deficit of US$60 million by December 1991.  It was undoubtedly this cash flow which for the first time fully revealed the enormity of WMI’s problems and helped to prompt Mr. Ortiz-Patino’s telex of 31st March.  That telex, later echoed by Mr. Griffiths on 10th April, called for cancellation of all vessels except Sealock.  Such wholesale cancellation, as Mr. Brothers indicated in his reply, was impracticable given the costs involved of between US$40-50 million.

5.5.5 I note in passing that I do not regard Mr. Ortiz-Patino’s complaint as being that Mr. Brothers or anyone had withheld information from him.  Rather, he was appalled at the scale of the problem that had emerged on the latest cash flow.

5.5.6 In the meantime, advice had been given by Mr. Shaw at the meeting on or about 17th February attended by Mr. Griffiths, Mr. Marden, Mr. Lees, Mr. Leung, Mr. Brothers and Mr. Poon.  That advice was to the effect that it was legitimate to carry on trading and take credit provided that there was a reasonable prospect that debts or credit would be repaid.  It is agreed that that is the proper test, although on this occasion only Mr. Shaw added the gloss that new credit should not be taken unless it was essential to preserve assets.  The basic test was repeated from time to time not only by Mr. Shaw but also by S&C.

5.5.7 Finally, the S&C report of 6th April sounded a caution about newbuildings; produced a 10-year cash flow for WMI as a whole which with a moratorium showed a deficit of US$56 million in January 1990 and without a moratorium a deficit of US$105 million in August 1989; and drew up a balance sheet adjusted for market values and the effect of newbuildings showing net assets of just HK$39 million  It recommended support from WM to ensure a 3-year moratorium and a stand-by facility of US$2 million in case the cash flow prediction that there would be no deficit for 3 years, given a moratorium, proved inaccurate.

5.5.8 It might be thought that WMI should have looked long and hard before drawing down US$25 million by way of loan for Sealock.  Instead of a board meeting to consider this step, however, it was handled in a relatively informal way by the working directors, leaving the Board formally to ratify later.  It must not be forgotten, however, that until the financial arrangements were revised to meet the banks’ requirements, the loan would have been completely covered by the Danish Kroner deposits.  As it was, the release of deposits to the banks resulted in the loan becoming unsecured to the extent of US$8.8 million only.

5.6    ANNALOCK POSITION

5.6.1 On 20th April, WMI made a formal request to WM for support.  Whatever the reason, that developed into consideration by HKR of a US$12 million investment in WMI.  That was a sum which would not only have kept creditors happy and produced a moratorium but also would probably have gone a very long way to keeping WMI afloat.  The disappointment when HKR decided not to proceed was tempered only by the provision by WM of the secured US$4 million facility.

5.6.2 Meanwhile, implementation of the November consensus improved substantially, motivated not least by the strictures of Mr. Ortiz-Patino and Mr. Griffiths and the fact that successive cash flows showed deficits.  Between May and December 1983, six older ships were sold, and agreement was reached for the sale of the four Spanish newbuildings, Manila Faith and one other vessel in the oil deal which, although not consummated until April 1984, represented a very big reduction in WMI’s prospective debt.

5.6.3 Discussions were also started with WWS with a view to realising surplus equity in WWW.  If successful, although not providing actual cash for WMI, it would have freed up the US$4 million facility giving WMI access to those funds once again.

5.6.4 Refinancing of World Rainbow still remained incomplete.  Failure to achieve the cash inflow from this aspect of the plan was compounded by the unexpected call for cash by Pacnorse in January 1984, all cash flows to that date having assumed payment of interest only to Pacnorse on the shareholders loan.  Yet, even without these two unexpected factors, the last cash flow (dated 24th January 1984) before delivery of Annalock showed WMI going into deficit in March 1986 with a deficit of US$13.2 million by the end of that year.

5.6.5 Contributing significantly to this state of affairs was WM which, when asked for support in April 1983, had failed to respond with the urgency WMI requested.  It did not produce even the US$2 million stand-by recommended by S&C.  When the question of support was referred back to WM by HKR, WM did not provide US$12 million recommended by Rothschilds as providing greater opportunity for recovery but rather US$4 million which meant WMI had to abandon negotiations for a moratorium.  And this, like all other significant support from WM, was given against security.

5.6.6 Rothschilds also explained that the latter amount put emphasis on an early recovery in the shipping market.  There is a tension here.  The cash flows contained, as I have mentioned, what are agreed to have been reasonable assumptions.  Unless there was a genuine belief on the part of WMI’s directors that the market would recover earlier and more sharply than assumed in the cash flows, in which case the cash flows could have been adjusted accordingly, it was improper to rely on such recovery.  To the extent of any such reliance, ADS complained, in my view rightly, that WMI was gambling and taking a risk which it was neither legitimate nor honest to take.

5.6.7 Having examined the objective positions when WMI took the two loans, it is necessary to consider the position of each remaining individual defendant.

5.7    MR. BROTHERS

5.7.1 The decision to modernise WMI’s fleet and operations was a corporate one.  That decision was largely implemented by Mr. Brothers who was known in WM circles as the shipping director, he having primary responsibility for WMI’s activities.  Assisted by Mr. Lloyd, he sought out suitable vessels or newbuildings and put together the often complex financial arrangements for their purchase.  Once WMI was caught out by the falling shipping market, it was Mr. Brothers who almost exclusively carried out the necessary salvage operations.  He worked indefatigably.  He devoted an immense amount of time and effort to WMI’s problems.  There is no dispute about that.  He would not, he said, have done that if he thought WMI was doomed or he had any doubt about WM support.  As to that, there is a major dispute.

5.7.2 Throughout his evidence, Mr. Brothers emphasised the November consensus as well as the more general principle that a parent will support its subsidiary.  Relying upon these two matters, he was never in doubt that support would be forthcoming and that WMI would be able to pay off its creditors.  He was therefore always confident, he said, that WMI would survive and was always comfortable about taking on new credit, particularly the two loans in question.  He genuinely believed all would come right.  He said he was not a fraudster.

5.7.3 Mr. Brothers’ evidence suffered from a number of drawbacks.  First, Mr. Brothers insisted that until Mr. Marden sold his shares in early 1985 he believed that what he called the November “agreement” remained in existence and that he could rely on it for the necessary support.  It is striking, however, that this “agreement” which was of such fundamental importance was of a wholly uncertain nature.  It was described in Mr. Brothers’ witness statement as a “WM view” and in para. 52.8

“It was clear that WM would provide support for WMI.  That much was agreed between the WM Directors.  The questions were the amount of the support to be provided and timing.  My own views on the subject of timing were set out in the second page of the memorandum.

So far as I can now recall, there was no formal subsequent meeting after this memorandum had been circulated.  I proceeded to implement the policy set out in the memorandum.”

5.7.4 In cross-examination, Mr. Brothers described what took place as a commitment by the shareholders whom he identified in re-examination as Mr. Marden and Mr. Cheung.  After clarifying that he had not asked for a commitment, he said in cross-examination (day 91/26):

“Q.  Did you agree that it was necessary to get a commitment?

A.  I did feel that if we were to keep WMI in its form that we planned for it, we would need to have an injection of cash, yes.

Q.  That, in effect, meant a commitment from WM?

A.  It was a commitment from WM, yes, my Lord.  May I perhaps say it was a commitment at that time more of the shareholders of WM rather than the company.

Q.  As far as that commitment is concerned, is it the position then that there was no commitment from WM?

A.  There was a commitment of the shareholders.

Q.  A commitment of the shareholders' position in November 1982?

A.  That is correct, my Lord.

Q.  Yes.  That had no binding effect on WM, did it?

A.  It had no binding effect on WM, no.

Q.  And you were aware, of course, that they could change their minds?

A.  The shareholders could change their minds, yes.

Q.  The commitment, as you call it, was no more than a statement of intention in November 1982?

A.  It was a very firm commitment by the shareholders that, subject to certain steps being taken, money would be injected into Wheelock Maritime.  I took it as being a total commitment, on my part.

Q.  It was a conditional commitment, put it that way?

A.  It was not even conditional in the way the memorandum was written, but I think those concerned wanted to see  steps that were taken and, subject to those steps being taken, money would be advanced.

Q.  We will look at it, of course, in detail, but while we are dealing with it at this stage, just to make sure I understand the position, it was a conditional commitment by the shareholders which could have been changed at any time and was not binding on the Board of WM?

A.  It was a commitment, my Lord, by the shareholders. Naturally the shareholders could come back and tell us at any time that they had changed their mind.  The fact of the matter is that they did not.  So until that came, we worked in the knowledge that that commitment remained.

Q.  Just to make sure that I have it, if you could deal with all the points, please, it was a conditional commitment by the shareholders which could be changed at any time, and was not binding on the Board of WM?

A.  I do not accept that it was really conditional.  As I said a moment ago, the shareholders certainly expected certain steps to be taken, but it was not couched in terms that it was conditional.  The shareholders could, indeed, change their minds, and it was not binding on the Board of Wheelock Marden.”

5.7.5 Because it was a commitment by shareholders and not by WM through its Board, Mr. Brothers said that this explained why it was never explicitly raised at any board meeting or indeed informally in his discussions with Mr. Lees and Mr. Leung.  It would not have been proper to do so, he said.  I have to say I find it difficult to accept that after November 1982, if there was a commitment, no one ever referred to a commitment whether by shareholders, directors or anyone else.  The answer of course is because there was no such commitment - only a plan under which support was conditional upon WMI being able to show that there was hope for it.

5.7.6 What is plain is that even if there was a commitment, as Mr. Brothers asserted there was, that commitment must have been nullified once WMI’s true financial position emerged in March 1983.  If the sympathetic Mr. Ortiz-Patino was sufficiently moved to send the telex in the terms he did, it must have been plain that thereafter there would be a harder and more critical approach to WMI’s problems.  What Mr. Brothers could legitimately rely on and, in my view, what he actually relied on was not some special agreement among shareholders or directors of WM but the more general proposition that a parent will not normally let a subsidiary fail.  That view, I feel, is borne out by the impression given by Mr. Brothers and others to ADS that they were dealing with the WM Group as a whole.  In legal terms, that meant nothing.  But it was clearly intended that ADS should take comfort from it, as indeed it did.

5.7.7 Mr. Brothers attempted to identify in the documents what he characterised as references to the November “agreement”.  He suggested there were five such references.  For example, he referred to a passage in Mr. Shaw’s instructions to counsel which read:

“Until now, the Directors have taken the view that, taking into account the discussions with bank creditors and the prospect of an additional commitment or facilities of up to US$12,000,000 becoming available, there is a reasonable prospect of achieving a situation where any amounts due over the next three years can be met from cash flow and thereafter debt can be paid off over a period.”

5.7.8 Mr. Brothers said that the words “additional commitment” were a direct reference to the shareholders’ commitment because it “was the only additional commitment we had”.  That passage was in the context of WMI’s request for support following HKR’s decision not to proceed.  The only legitimate interpretation, in my judgment, which can be put on “additional commitment” is that Mr. Shaw used it synonymously with “facilities”.  Mr. Shaw himself in cross-examination described this passage as a summary of views which had been expressed to him which he was passing on to counsel.  It is inconceivable that Mr. Shaw would not have expressly mentioned a commitment by shareholders to support if he had been told of that, it being of such crucial importance.

5.7.9 The other references specified by Mr. Brothers are no more convincing.  In my judgment, Mr. Brothers was simply indulging in a futile effort to support what was plainly unsupportable.

5.7.10 From February 1983 onward, WMI had the benefit of both legal and financial advice.  Legal advice, given principally by Mr. Shaw, dealt with both fraudulent preference and fraudulent trading.  Mr. Brothers was, however, anxious that there should be no misunderstanding of his position, namely that he was not concerned about the possibility of liquidation or fraudulent trading.  Consequently, he was at pains to emphasise that Mr. Shaw was never asked to advise about fraudulent trading as such but rather about trading while insolvent.  He said he and the other directors needed advice while WMI was unable to pay its debts as they fell due to ensure that the directors did not cross the line from what was permissible to that which was impermissible.  Mr. Leung’s recollection was that at the WMI board meeting of 20th April 1983, Mr. Shaw was asked to advise on fraudulent trading.  Whether or not that was the case, Mr. Brothers early on recognised Mr. Shaw’s advice for what it was, namely on fraudulent trading.  Hence, in his witness statement at para. 130 he referred to Mr. Shaw’s advice on “fraudulent trading” on 20th April 1983 and at para. 141.2 he said of Norton Rose’s advice on 27th May in respect of Manila Faith that “this advice on fraudulent trading was no different from David Shaw’s previous advice”.

5.7.11 So from early 1983 the whiff of fraud was in the air.  I regard Mr. Brothers’ attempts to characterise Mr. Shaw’s well-rounded advice as “gratuitous” to be the merest quibble.

5.7.12 That advice was obtained on fraudulent trading is also consistent with para. 62 of the amended defences in which the Defendants plead taking advice, including advice on fraudulent trading.  The advice given by Mr. Shaw on or about 17th February 1983 is relied on as evidence of this.  Yet, of this advice, Mr. Brothers said in cross-examination (day 93/72):

“This is Mr Shaw giving advice.  There is nothing surprising that when one has a meeting lawyers would give advice.  But I think there is a world of difference from us coming out and asking for the advice and it being gratuitously provided by Mr Shaw.”

5.7.13 What emerges from all this, of course, is that Mr. Brothers like all the other directors was seriously concerned about insolvency and fraud.  That is hardly surprising in the circumstances.  It is consistent with an appreciation that heroic efforts would be needed to improve WMI’s position if WM support was to be forthcoming.  It is not consistent with knowledge of an unconditional commitment by WM shareholders to support WMI.

5.7.14 In an attempt to deflect the apparently uncomprising tenor of some of the documents which I have reviewed, Mr. Brothers maintained that a number of them were badly worded or even incorrect.  Thus in the minutes of the WM board meeting of 7th July 1983 when Mr. Griffiths asked why Rangelock had not been refinanced Mr. Brothers apparently said that following failure to sell Fenlock and Inverlock “WMI had been faced with insolvency with the result that it had become unable to take on new credit and had therefore had to cancel the refinancing of the ‘Rangelock’, the lease of the ‘Sealock’ and also the refinancing of Hudong hull No. 1126” (para. 3.5.156).  In para. 166.5 of his witness statement which sets out this passage, Mr. Brothers said Mr. Griffiths “was quite correct that we had intended to look for a new financier for Rangelock.  Unfortunately, this had not proved possible for the reason given at the meeting”.  No doubt was thrown on the text.

5.7.15 In cross-examination, however, Mr. Brothers sought to put a different light on the passage.  At day 89/98 he said:

“Q.  Do you accept as accurate what is recorded as being in that paragraph?

A.  My Lord, I do not accept it as accurate.

Q.  You do not accept it?

A.  No.

Q.  What is wrong with it?

A.  I can only surmise, my Lord, that at that time I was rather hot under the collar and spoke inadvisably, or the minute, itself, is wrong, because clearly the problem or the lack of the sale of the two WMI vessels to Allied did not stop WMI from being unable to take on new credit, because we had taken on new credit.  It may have interrupted any plans I had to refinance the Rangelock, but it certainly had not affected my actions, as regards the lease of the Sealock, nor had it prevented me from continuing to work on the refinancing of the Hudong hull, number 1126, so it is just not a correct statement of affairs of the company at that time.

Q.  What about the phrase "WMI had been faced with insolvency"?

A.  I am not quite clear what that means, my Lord.  If we had come close to not being able to pay our debts when they were due, that is probably right.

Q.  I see.  Do you think this is a mistake?

A.  I think the reference to being unable to take on new credit, the lease of the Sealock and the refinancing of the Hudong hull 1126 is all inaccurate.

Q.  I see.  How could that have happened?

A.  As I said, it could only have been either ill-advised words from myself, if it was correct, or a badly worded minute.  I tend to think it was a badly worded minute, my Lord.  It was a complicated subject and possibly whoever drafted these minutes did not get it right, but it is certainly incorrect, as one can see from what was going on at that time.

Q.  So, presumably, you would have corrected the minutes after you had read them?

A.  I would normally have corrected the minutes, if I noticed there was a mistake of this nature.  I cannot say at this time why I did not correct them in this instance.  I do not see that I necessarily signed this particular minute, but I may well have done.”

5.7.16 At day 92/48, Mr. Brothers was brought back to this passage and said:

“My Lord, when we discussed it earlier, I said that either the minute was wrong or that I had, perhaps, used -- if it was not wrong, that I perhaps over-described the situation to Mr Griffiths because I was somewhat irritated that he should have raised the matter of refinancing the Rangelock when we had been given so much trouble as a result of the failure to go ahead with the two -- with the sale of the Inverlock and the Fenlock to the Allied Group.

I also said that I did not agree with what was stated here because patently what we had actually been doing was different to what is in the minute.  I went on to say that it was not correct that as a result of the failure to do the Inverlock and the Fenlock, WMI had been unable to take on new credit because we had taken on new credit.

It was correct that we had discontinued, or I had discontinued, any search for a refinancing of the Rangelock.  We had cancelled the lease of the Sealock; we had abandoned the lease of the Sealock, but I certainly had in mind that this would be resurrected in the future and, of course, we were continuing to arrange the refinancing, as I describe it there, of the Hudong hull number 1126.

I also had gone on to say that once matters had been satisfactorily rearranged and in that regard I had in mind the $12 million from HongKong Realty the question of the refinancing of the Rangelock would be reactivated, and certainly that is what my intention would have been.”

5.7.17 Mr. Brothers could not recall whether the minute was overstated or just wrong.  Mr. Grossman pursued the point at p. 52:

“Q.  I suggest to you that the explanation you gave to Mr Griffiths here, which was apparently heard by anyone else, and no-one demurred from it was accurate?

A.  My Lord, it plainly is not accurate.  The facts speak for themselves.

Q.  What was plainly accurate was that WMI faced insolvency as a result of the failure to sell the Inverlock and the Fenlock?

A.  I think because we did not have that inflow of money, we did have a problem in paying our debts.  To that extent, yes, it is true, we did face an insolvency.

Q.  As a result of facing that insolvency, you thought it prudent and wise and the proper course indeed not to go ahead with these other refinancing deals?

A.  I did not start anything in motion, as far as the refinancing of the Rangelock.  The lease of the Sealock we have already discussed and I think we have also discussed the refinancing of the Hudong.  Neither of those latter had any relationship, essentially, to the failure of Allied to buy the two ships from WMI.

Q.  Well, I must suggest to you that what you said there is a plain and simple truth, that is you felt yourself unable to proceed with these two deals because you knew that you were facing insolvency?

A.  My Lord, the facts are clearly otherwise.  It is clear from the documentation, it is clear from the way we conducted ourselves, it is clear that we continued to work on both the Hudong and later on, the Sealock.  So of course, prior to abandoning the Sealock lease with the Orion, we had at least a month to two months of quite hard work which came after the failure of the sale of the two ships.  

5.7.18 Then, on day 99/46, the passage was revisited

“A.  My Lord, there is no doubt that in a situation such as was faced by WMI, it would have been extremely difficult to have gone out and found a new lender for the Rangelock to take the place of LBI.  

The reason why we had many of the problems that we had, public problems, was because of the failure for WMI to sell the two ships, Inverlock and Fenlock.  If we had made that sale, we would have raised something like $8.5 million, and we would have been in a far better position at that time to go and talk to other lenders about substituting the Rangelock loan with LBI, solving the particular problem of the Aquaship guarantee.

I am reported as saying that: “...once it had been decided that it would not be feasible to sell two of WMI's vessels to the Allied Group as had originally been planned, and once that it was obvious that that proposal could not be proceeded with, WMI had been faced with insolvency with the result that it had become unable to take on new credit”.

Those are the words that I think are really applicable to this particular question.  We had been faced with insolvency.  That is undeniable.  Because of the problems that that gave rise to, we were unable to take on new credit.  Not in the sense that we could not drawdown on credit because that was something that we did feel we could do.  To find a new creditor who would be prepared to lend money on the Rangelock was very difficult as a result of the problems -- as a result of not having sold the Inverlock and Fenlock.”

5.7.19 Asked whether the passage was correct or not, Mr. Brothers said at p. 47:

“A.  It is incorrect, my Lord, insofar as we were able to take on new credit.  It is incorrect that it was a result of the cancellation -- it affected the lease of the Sealock, and it is incorrect in as far as it relates to the refinancing of the Hudong hull number 1126.  None of those particular events, I believe, were affected by the failure to sell the Inverlock and the Fenlock.

Q.  Is it correct then that because of the failure to sell the Inverlock and the Fenlock, WMI had been faced with insolvency; is that correct?

A.  I think that is correct, yes.”

5.7.20 After a break, cross-examination continued at p. 48:

“MR GROSSMAN:  Mr Brothers, just let me make sure that I understand what your position is.  As I understand it -- and correct me if I am wrong -- what you were trying to say at this meeting, or what you meant to say, was that because of the failure to sell the Fenlock and the Inverlock, WMI was faced with insolvency, but that situation that is being faced with insolvency, had nothing to do with not taking on new credit and cancelling the refinancing of the Rangelock, the lease of the Sealock and the refinancing of the Manila Faith; the two situations were unconnected?

A.  My Lord, the failure to sell the Fenlock and the Inverlock had something to do with the cancelling or the refinancing of the Rangelock, but in respect of the taking or the not taking of new credit, the lease of the Sealock and the refinancing of the Manila Faith, the two submissions were unconnected.”

5.7.21 At p. 51, Mr. Brothers was asked what he had meant in para. 166.5 of his statement

“A:  Lord, in my statement, I am referring to Mr Griffiths' comments, whereby he quite correctly had referred me back to the promise I made in January that we would try to find another financier for the Rangelock.  If we had been able to find another financier for the Rangelock, we might have been able to forego the Aquaship charter and the Wheelock Marden guarantee that was linked to that.

With the problems that were brought very much forward by the failure to sell the Inverlock and the Fenlock, it was just not practical to go out and look for another bank, a new creditor, to take the place of LBI.  That is what I meant in this particular sentence.

MR GROSSMAN:  Mr Brothers, it is quite clear what you set out here; you set out the relevant part of the minute and you set out that Mr Griffiths was querying why you had not refinanced the vessel.  Mr Griffiths inquired why the refinancing had not taken place.  You advised that it was not possible for various things to be done because WMI had been faced with, I believe, insolvency; that is the only reason you give.

When you relate in 166.5 to the reason given at the meeting, you could only have been talking about the reason with being faced with insolvency.  No other reason is given in that passage?

A.  The reason, my Lord, that I am referring to was the failure to sell the Inverlock and the Fenlock.  That is the reason that I gave at the meeting.

Q.  It is the consequence of that failure that you give as the reason.  The consequence of that failure was that WMI was faced with insolvency.  That is the reason you give for various matters not having taken place.

A.  With respect, my Lord, I say -- or I am reported as having said -- at this meeting that I advised that it had subsequently been decided that it would not be feasible to sell two of WMI's vessels to the Allied Group as had originally been planned.  That is the reason that I give Mr Griffiths that we were unable to find a new financier for the Rangelock.

Q.  Mr Brothers, if you read that through, it is perfectly clear what you are saying; that as a result of that failure, WMI was faced with insolvency with the following results that you give.  You say that that is why you explained to Mr Griffiths why you could not refinance the Rangelock and those are the reasons you give.  It is quite plain.

A.  My Lord, I am talking about the consequences of the failure to sell the two vessels to Allied.  That is partially incorrectly set down in the minute.  The reason that I am giving is quite clear, and it is in my statement, and the reason is that we did not sell the Inverlock and the Fenlock.  That is the reason.  That is what I have stated in my statement.

Q.  What is the link then, if it is not to do with insolvency, between the failure to sell the Inverlock and the Fenlock, and the failure to refinance the Rangelock?

A.  My Lord, the failure to find a buyer -- to find a new financier for the Rangelock was because we had a far more difficult situation to face immediately with the failure for us to raise coming on to $9 million.  $9 million at that time would have given us considerable breathing space to handle our creditors and to go forward with the plan.  We did not need, in fact, $9 million.  We would then have had time to have gone out and looked for another financier for the Rangelock and I felt confident, at that time, that we would have been able to find another financier.

Once that possibility was withdrawn, we had a lot of other more immediate things to tackle, but the reason why we did not find a financier for the Rangelock was because the Inverlock and the Fenlock were not sold to the Allied Group.

Q.  I am sorry, Mr Brothers, it may be my fault, but I still cannot see the link between the two, if insolvency is not meant to be the bridge?

A.  I have not stated that it is the bridge.

Q.  You have said it is not.  You did not sell the Fenlock and the Inverlock.  What that did was to put more financial pressure on you.  Why then, if insolvency was not the issue, did you not seek to get another financier?  The pressures upon you were even greater.  The need to get the refinancing even more acute.

A.  My Lord, we had a financier already for the Rangelock.  We had a package already in place.  There were other more important things to be looked at and I did not turn my mind, nor did I try to find a financier for the Rangelock, but I would have done had the sale of the two ships gone through.  Because they did not, I did not look for one and that is the reason, the direct reason, given by me to Mr Griffiths at this meeting.

Q.  Mr Brothers, the failure to sell the Fenlock and Inverlock made your financial position even more acute?

A.  I think I have accepted that, my Lord.

Q.  Which would have made the impotency (? impetus) at this stage for seeking a refinancing even stronger, not weaker.

A.  No, my Lord.  We had a perfectly viable arrangement with the Aquaship guarantee, guaranteed by Wheelock Marden and I was more concerned in getting on with rescheduling our existing credit with the secured creditors and talking to the yards.  It was a full-time job.  I did not start looking for a new financier for the Rangelock after the failure to sell the Inverlock and the Fenlock.

Q.  You mean you just did not have time?

A.  That was one of the reasons, yes.

Q.  What other reason?

A.  It would have been difficult to have found a new financier for the Rangelock.

Q.  Mr Brothers, I have to suggest to you that what is written down here is perfectly plain, and what you say in your statement is perfectly plain: the reason why you did not seek a new financier was because you were faced with insolvency and did not believe that you could do so?

A.  My Lord, I think I have explained why we could not find a new financier for the Rangelock at this time.”

5.7.22 At the conclusion of this cross-examination, it seems to me that Mr. Brothers was maintaining that failure to sell two vessels was no more than a bit of a nuisance or hiccup in relation to Rangelock but did not affect other plans.  Insolvency, although in existence, was not a factor that entered into his consideration at that time.  I accept that WMI’s financial affairs were complex, often only fully comprehended by Mr. Brothers, and that the minutes are but the briefest summary of often detailed debate.  But it is clear from the documents, as I have already found (para. 5.5.2), that refinancing of Rangelock, Sealock and Manila Faith fell through because WMI’s financial circumstances were such it could not have provided the necessary guarantees or other security.  The discrepancy between the minutes, which appear to me substantially correct, and Mr. Brothers’ explanation is such that I am unable to accept Mr. Brothers’ evidence. 

5.7.23 On 14th September 1983, Mr. Lees on behalf of WMI wrote to WM seeking support of US$12 million (App. 3/22).  Without it, he indicated in the second paragraph, WMI would have to cease trading.  Of this in cross-examination, Mr. Brothers said at day 100/39:

“A.  I think it was unlikely that we would have got the rescheduling that we were looking for now unless we had the $12 million.  As regards the final sentence in that paragraph, I do not think that was the position, but I can understand why Mr Lees put that in there.  It is necessary to make it very clear, I think, to parent company, by extension of the shareholders, that they should come up with some support at this time for Wheelock Maritime and that they should not consider the fact that Wheelock Maritime had been continuing without support as indicative that it could continue after the HongKong Realty support had been declined.

.....

MR GROSSMAN:  Mr Brothers, was it not the position at that time that you believed, as did apparently Mr Lees, that if you did not get the $12 million that would eventuate in a situation where you would have had to cease trading?

A.  No, my Lord, that was not the position at that time.

Q.  Do you find it extraordinary that Mr Lees should write to the Board of Wheelock Marden making a statement which was apparently not true?

A.  The only piece of the letter, my Lord, is the sentence -- the last sentence of the second paragraph. I think, as I said before the break, it is important that for reasons of the credibility and for the rescheduling, that Wheelock Marden should not revert back to the position we were in in April, whereby, essentially, they were not really very interested or particularly keen to provide short-term support.  This is what we were going to the parent company for, and Mr Lees put this particular sentence in to emphasize that they should now come up with the support that had been requested.

I think that was essentially the reason for this particular sentence being included.

Q.  It is a plain statement, Mr Brothers.  It could not have been read by anyone who did not have a knowledge of the situation of WMI as being other than what it meant, could it?

A.  I think somebody who did not have a knowledge of what the position was would read it literally.  Those who did have a knowledge would understand the background to that.

Q.  Mr Brothers, can you tell me this: what was the point of giving this grim foreboding of what might happen if the directors of Wheelock Marden were aware of the November agreement?  The November agreement precluded the possibility of ceasing trading?

A.  I think that is the point, my Lord, with respect.  The November agreement, the rationalisation programme, or whatever, envisaged a once-and-for-all support.  We were now going back to Wheelock Marden, essentially, for the short-term support.  We were back, if you like, to April that year, when the matter was still under consideration.  If you recall, I had asked for $5 million in April.

The company did not need cash at the time.  It could, with difficulty, continue as it was, but since April we had had the HongKong Realty announcement and, therefore, a much greater expectation on the behalf of the secured creditors than they had previously.

There was a matter generally, I think, of the credibility of WMI.  The Board felt at this time that Wheelock Marden should not, if you like, go back to the previous position where it allowed the company to sort things out, but they must come up with a clear statement now regarding -- with support.      

It was important, I think, for the Board members of Wheelock Maritime that that was the case.  I think everybody felt that quite strongly now.

Q.  What was the point of making this empty threat, that WMI may have to cease trading, when it was implicit in the November agreement that such a situation would never be reached?

A.  The concern was that the company -- that WM would not come up with the short-term support and would wait for the long-term once-and-for-all injection of cash.  That was the concern.  Mr Lees, in emphasizing it this way, was basically putting everybody on notice that support is now required.

Q.  The possibility existed that you would not get the short-term support, I think you said that yesterday?

A.  The possibility did exist that we would not get the short-term support.

Q.  Which would have meant, as a consequence, that you would not have survived long enough to put yourself in a position to ask for the long-term support?

A.  That, I think, was what we felt the parent company -- the stand the parent company would take.  The parent company might have taken the stand that we could last without short-term support.  This is what the Board were very anxious to try and deflect them away from.

Q.  If they adhered to that view, then you may well have gone into liquidation?

A.  No, I do not think we would have gone into liquidation, because we had sufficient resources to continue, but it would have made it extremely difficult to work with one's creditors, et cetera.  I do not think the Board felt that that was the right way to go forward.”

5.7.24 Apart from the obvious back-tracking once again by Mr. Brothers, that passage seems to me to put in perspective the obvious nonsense about the November consensus being some form of commitment.  Mr. Brothers was quite right about the need for short-term or drip feed support while WMI worked its way to a position when it could make a request for a final quantified sum.  It affords, however, a poor explanation for the extreme terms of Mr. Lees’ letter at a time when WMI, not to put too fine a point on it, was on its beam ends and needed support to survive.

5.7.25 At the WMI Board meeting on 28th August 1984, Mr. Brothers said if WM did not support “directors would have to give serious consideration to whether or not it would be possible for [WMI] to continue trading” (para. 3.6.171).  Asked whether he meant what he said, Mr. Brothers replied at day 105/84

“A.  No, my Lord, I did not mean it.  Again, this is a form of rather dramatic wording being used to drive the point home that now was the time for the support to be given to WMI.  I would not want there to be any misunderstanding on that.

Q.  Who were you trying to fool?  Who were you negotiating with?

A.  We were not trying to fool anyone, my Lord, nor were we negotiating.  The directors were saying clearly, we are saying clearly we had been operating the company on a shoestring, we had now taken the steps that needed to be taken and now is the time to come up with the long-term support.

Q.  Where do you see that?  That is not there anywhere.  If that was there I would understand what you are saying, but it is not?

A.  No, but that is the purpose of the emphasis in this matter.

Q.  Let us take it in stages then: 

"Mr Lees queried what could be done if WM declined the company's formal request for support. "

That, of course, was a responsibility, was it not?

A.  Yes, it was.

Q. "In reply, Mr Brothers advised that if they did decline it would be extremely unlikely the company would be able to secure alternative outside support in the limited time available".

      "By limited time available", presumably you meant by September when you had payments to make?

A.  This was the short-term support.

Q.  Was it true it was extremely unlikely that the company would be able to secure outside support?

A.  No, it was not true, but it was true in the terms of in the limited time available.  We would probably have to, under those circumstances, act arbitrarily with our bankers and, in the question of a negotiation, which is what I had in mind with one's secured creditors, there was not sufficient time to achieve that.

Q.  I am not sure that I understand that.  Does that mean that if WM did decline the company's formal request for support, could you have got alternative support?

A.  We would have gone to the bankers.  We had discussed this already with Mr Shaw.  This is how we were going -- we were considering the matter.  It was clearly minuted in the meeting we had in August with Mr Shaw as to what we would do and how we would deal with it.

Q.  No, Mr Brothers, what Mr Shaw said is: "This is what you will have to do".  You are giving your opinion here on what that is likely to achieve?

A.  Mr Shaw is saying what we had to do.  What I am talking about here, what I am referring to here, is some form of agreement with the secured creditors on alternative outside support.  I thought that it was unlikely that we could reach such agreement in the limited time available.

Q.  Which would have what consequence?

A.  The consequence we would have to act arbitrarily as was indicated in Mr Shaw's memorandum.

HIS LORDSHIP:  I am sorry, by "arbitrarily", I take it to mean that because you were going to have this cash shortfall in September in a few days time, you would simply suspend repayments to the banks at the same time spell out the difficulties, sit down with them and try and thrash out some arrangement?

A.  Yes, my Lord, that is exactly right.

MR GROSSMAN:  That is exactly what you meant, was it?

A.  That is not what I meant in this, but that is what I would have had to have done if we had not been able to -- we would have not have had time to arrange outside support in the time available.  Under those circumstances, it did not mean we would be pulling down the shutters, but it would mean that we would have to act arbitrarily in the manner described by his Lordship.

Q.  What was the point of saying that in those circumstances you would have to give serious consideration to whether or not the company could continue trading?

A.  This is the next part of this particular paragraph.

Q.  Yes, looking at the consequence.

A.  This is, if you like, the emphasis, you might call it a threat, to the -- we felt we had gone as far as we should go.  It would have to be taken by whoever read that in the way that they wished to take it.  It is the same wording as is basically used in my letter as well.  It is not saying we will not continue to trade, but there is a possibility that we may have to cease trading.”

5.7.26 Apart from once again being on the retreat from relatively clear and explicit wording, Mr. Brothers’ explanation does not sit well with the next two paragraphs of those minutes.  First, Mr. Shaw was again asked to advise about directors’ liabilities, i.e. fraudulent trading.  Then, Mr. Brothers himself mentioned Pacnorse so that “it was noted that the matter of Pacnorse would have to be resolved before any new capital issue was made”.  It does not appear to me that Mr. Brothers was correct in saying in cross-examination that “we had now taken the steps that needed to be taken and now is the time to come up with the long-term support”.

5.7.27 On the same day, Mr. Brothers wrote to WM asking for WM to indicate whether it would subscribe to a capital issue (para. 3.6.172) and stressing the possibility of being unable to continue in business in the short-term (para. 3.6.173).  The WM Board meeting on the same day was adjourned by Mr. Marden so that directors “be given adequate time to study WMI’s formal request for support and to see if there were any other ways of saving WMI”.  That was in the context of a rights or capital issue.  “Saving WMI” certainly suggests its survival was at least of concern.  Yet, in cross-examination on day 105/89, Mr. Brothers said:

“However, if you like, I had raised the stake somewhat in the wording of the letter to WM.  It may well have been regarded by some of the directors of Wheelock Marden as a matter of life and death, I am not sure.  I am not sure those are words I would have used under the circumstances.”

5.7.28 Mr. Brothers went on to distinguish between short-term support, which was the concern at that moment, and the long-term support which WM would ultimately supply and which assisted WMI’s directors in deciding if they could continue trading.

5.7.29 Mr. Brothers also got into difficulties over refinancing of Manila Faith which, by February 1983, had been agreed with Orient Leasing subject to a letter of comfort from WM to the effect that it would maintain the corporate existence of WMI (para. 3.5.39).  On 24th March, Mr. Tipper asked Mr. Shaw for advice (para. 3.5.61).  In cross-examination, Mr. Brothers said he disagreed with and could not understand Mr. Tipper’s statement that the refinancing could not be completed until rescheduling had been agreed by WMI’s bankers.  He could see no reason why the sale and lease-back could not be completed anyway and thought Mr. Tipper must have been confused.

5.7.30 As to Mr. Tipper’s request for advice about taking new credit, Mr. Brothers said at day 92/18:

“A.  Again, I did not ask Mr Tipper to do this letter.  I do not know why he did it.  He may have done it off his own bat, but I find that also really an unnecessary statement from Mr Tipper to Mr Shaw.

Q.  Can you conceive of him doing it without the instructions of Mr Lees and Mr Leung, or at least without the knowledge of them?

A.  I think it would be very likely that they would have known, and, as you say, probably with their instructions, and it may well be that they had asked him to write to Mr Shaw to check up before we made this temporary arrangement with World-Wide Wheelock that we covered all contingencies, Mr Tipper just got on with it.  It is difficult for me to understand because, again, like the first page, I do not think it really relates to the circumstances at the time.”

5.7.31 Plainly, Mr. Brothers had forgotten his own memorandum of 18th March to Mr. Tipper which deals with both passages (para. 3.5.56).  However, when it was drawn to his attention at day 107/86 he could only say:  “Unfortunately, it does not make it any clearer to me now as to why this was the case”.  He made reference, however, to the WMI Board meeting of 20th April at which Mr. Lees said the sale and lease-back could not proceed because Orient Leasing required a letter of comfort from WM.  Mr. Brothers said the letter of comfort was not given and Orient Leasing went off because of the introduction of HKR.  When it was pointed out that that had only occurred about two days before the meeting, Mr. Brothers said there was also Mr. Marden’s earlier interest in buying WMI about which Mr. Lees but not Mr. Brothers had been aware.  All this, however, occurred in April whereas Mr. Brothers’ memo to Mr. Tipper was on 18th March.

5.7.32 Mr. Tipper, it appears, was prone to mistakes because in the minutes of the shipping committee meeting of 2nd March 1983, he recorded Mr. Brothers as saying that the Sealock sale and lease-back to Orion/RBC had to be abandoned because the necessary assurance of WMI’s existence could not be given until the banks had responded to the moratorium proposals (para. 3.5.41).  In cross-examination at day 92/33, there occurred

“Q.  There you see an echo here of what Mr Tipper said on 24th March?

A.  Thank you, my Lord.  I can only refer back to the earlier correspondence in February -- at the end of February where it is quite clear why we called off the negotiations.  As I said, it was to do with the provision of a parent company guarantee.  It was nothing -- it was not as is stated here, that we were concerned about the assurances regarding the refinancing.

Q.  Mr Brothers, this is not someone else speaking and making a mistake, this is you.  These are minutes which presumably you would have seen and corrected if they were wrong.  Furthermore, they are almost identical in terms to what Mr Tipper said on 24th March, in a different context?

A.  It is probably why Mr Tipper, or possibly why Mr Tipper made this mistake, he was the draughtsman of these minutes.  As I can say, my Lord -- I can only refer you to the actual events.  That is very clear from the correspondence that went on at the end of February, that a guarantee was proposed or required in order to give the satisfaction to the lessors.  I do not think there were any circumstances at this time where Wheelock Marden would have been prepared to give that guarantee.                  That is why the discussions were halted.

Q.  Well, nobody appears to have corrected these minutes; they were signed by you; you have signed them?

A.  Yes.

Q.  So did Mr Lees and Mr Leung?

A.  I think the main fact of this minute is that the discussions had been discontinued.  I do not think it was really very important what went after that.  But, as I said, the reason -- and the only reason -- was this requirement for the guarantee.

Q.  It says here not that the lease arrangements were discontinued, but "abandoned", that is the word used?

A.  It is true, they were abandoned.  The lessors went off and made separate arrangements.  It was not, say, we were abandoning the concept of a sale and leaseback.

Q.  Mr Brothers, the simple fact of the matter is that you were having to approach the banks about refinancing and if that approach was unsuccessful then the future of the company was in doubt?

A.  No, my Lord.  I think it is clear from the advice we got from our advisors that the future of the company would not be in doubt, even if we had not been successful in our rescheduling arrangements with the banks.  As it was said repeatedly, the reason why we discontinued these discussions with Orion and their lessors was because of the year-end and the difficulty and the impossibility of giving a guarantee at the time.

It had nothing to do with bankers, rescheduling, or otherwise.  As I mentioned before, there was a lot of confusion going on at that time.  No doubt, Mr Tipper was confused.”

5.7.33 If Mr.Tipper was confused, so no doubt was WM.  It is perhaps not surprising that WM was slow to come up with any commitment or support.  There followed a torturous examination of documents in cross-examination.  In his witness statement at para. 78.2, Mr. Brothers said:

“The falling through of the proposed sale and leaseback occurred because WMI was unable to meet all the requirements of the proposed lessors before their year end.  One of these requirements was a categorical assurance WMI would remain in the business of shipping for the foreseeable future and be able to meet its commitments and indemnities.  I did not believe that the proposed arrangements fell through simply because of this requirement.  Had this been the only requirement, I believe that it could have been satisfied.  I telexed Orion on 25th February 1983 to inform them of our decision.”

5.7.34 The relevant part of that telex is at para. 3.5.38.

5.7.35 Mr. Brothers received on 24th February a telex dated 23rd February from RBC which drew attention to the lessors’ March year ends and to the need to give a categorical assurance that WMI would remain in the business of shipping for the foreseeable future and be able to meet its commitments.  RBC suggested a WM guarantee of WMI’s obligations.  Mr. Brothers knew a WM guarantee was impossible so he abandoned this proposed sale and lease-back.  The reason given in his telex to RBC was of course mere colour.

5.7.36 Asked about his telex of 25th February to RBC and whether the first sentence was true, Mr. Brothers said at day 92/37:

“A.  It is perfectly true, my Lord.  There is nothing that is not true in that.  We did not -- I did not feel that we should continue negotiations with the lessors.  I had discussed it at length with the Orion Merchant Bank, and I felt that although we may well have been able to put everything together prior to the end of March, it would not have been fair on the lessors to continue those discussions on that basis, and the alternative suggestion made by Orion of a parent company guarantee was also not an option.

Therefore, we did abandon the lease, so --

Q.  The abandonment was to do with your inability to get parental support?

A.  Our inability to get parental support, as far as an unconditional guarantee, yes.

Q.  That was the reason for it?

A.  That was the reason, yes.”

5.7.37 Mr. Brothers was then referred to his statement and asked why the sale and lease-back fell through.  He said at day 92/40:

“A.  It fell through because I did not feel, in consciousness, that we could have continued our negotiations with the proposed lessors any longer, because I was concerned in case anything happened that would have prevented us going through with the lease.  As I said, there was a certain amount of confusion.  Nobody knew quite what the clear position was at that time.  I was -- I felt it would be unfair to the lessors to continue.”

and at day 92/43

“ ... I was taking into account a whole lot of various factors that existed at that time.  One such factor was the November agreement another such factor was the very categorical statement that Mr Griffiths had made.  There were discussions going on with the banks at that time.  It was not something that we easily called off because it was, certainly beneficial, the arrangements were beneficial.  It did cause us a lot of subsequent problems because we had to move very fast with DSKF to come up with the alternative arrangements.  But, nevertheless, those were the circumstances and that is why the deal was called off at that time.”

5.7.38 Finally, at day 92/44

“Q.  ... The reason why you discontinued it, the reason why you abandoned the discussions is because you could not get the parental support which was required for it?

A.  No.  That was not the reason.  The reason was because, as I have said already, we would not have been able to put in place the guarantee which was an unlimited guarantee from Wheelock Marden that the lessors would have needed -- or to provide them with the comfort to continue until the end of March.

Q.  Mr Brothers, you said unequivocally that the reason why you abandoned it was because there was a year-end problem as far as the lessors were concerned, the fact of the matter was that you were not going to get the agreement of the parent to provide the comfort letter that was required, and you knew that?

A.  No, I did not, my Lord.  The parent --

MR JOHNSON:  Was not going to get the guarantee, my Lord, he did not say was not going to get the comfort letter.

MR GROSSMAN:  You said a guarantee --

HIS LORDSHIP:  The explanation, as I understand it, is that there was a time constraint, the March year-end, and there were going to be problems about completing all the documentation, in particular, letter of comfort by that time.

Orion, according to Mr Brothers, came up with the suggestion: "we can solve this if Wheelock Marden, your parent, will give us a complete guarantee".

Mr Brothers then put his thinking cap on and said to himself: "I am not going to get a guarantee for the reasons we know about, there are other factors involved", which Mr Brothers mentioned, the banks and so on.  He then took a directorial decision to abandon the negotiations at that stage.

MR GROSSMAN:  Is that correct?

A.  That is exactly so, my Lord, yes.

HIS LORDSHIP:  He has said on at least two occasions, that is to say Mr Brothers has said this morning on two occasions:  "I believed that if the negotiations had continued, if there had been no time constraint, ultimately we would have got a letter of comfort from WM."

Whether that belief is justified is another matter and you will, no doubt, be addressing me on it at length later.  That is the story, as I understand it this morning; am I correct, Mr Brothers?

A.  You are, my Lord, thank you.”

5.7.39 In my judgment, it is clear that the sale and lease-back of Sealock fell through because WMI could not get support from WM.  A guarantee was a non-starter.  An appropriate letter of comfort depended upon WM taking a view on WMI’s future which in turn depended on the attitude of the banks to a moratorium.  These factors were all inter-connected.  It was disingenuous, to say the least, of Mr. Brothers to try and suggest that some other factor or factors influenced his decision to call off the negotiations.  In any event, he is wholly unable to explain his explicit memorandum of 18th March to Mr. Tipper.

5.7.40 There are other places which appear in my review of the facts and documents where there are plain statements of why these sales and lease-backs fell through.  At the meeting of the shipping committee on 16th May 1983 (para. 3.5.107) it was noted that it could not be finalised until loan rescheduling was complete.  And at the shipping committee meeting on 24th August 1983, Mr. Brothers reported on various possibilities for refinancing Manila Faith including

“(b)  Sale and lease-back with Orient Leasing - Orient Leasing had confirmed they would provide US$11.5 million to WMI but on the basis of no drawdown being made until WMI’s re-scheduling proposals with its bankers and WM Group support of US$12 million were finalised.”

5.7.41 In their letter dated 5th July 1983 with which they submitted their discussion paper, Rothschilds said that if any HKR proposal was unacceptable then WM “will have to consider whether to support WMI at least in the shorter term” (para. 3.5.141).  The discussion paper itself at para. 6.3 reads:  “In deciding whether to extend support to WMI ... ” (para. 3.5.147).  It would appear Rothschilds regarded support as being an open question.  Mr. Brothers would not accept that.  In cross-examination at day 99/13

“A.  I am sure it was not open, my Lord.

Q.  Why do you think they said that?

A.  It is difficult to see in the context of that one sentence why they should have imposed the words "whether to support", especially in the context of what they say in the next few sentences, my Lord.  I am sure they had no thought at all that there would not be support, either in the shorter or the longer term.

Q.  What do you say, they mis-stated the position?

A.  It is clear, I think, my Lord, that in the subsequent sentences they have absolutely no thought whatever that Wheelock Marden would not support Wheelock Maritime.”

5.7.42 I find it difficult to understand what Mr. Brothers had in mind.  The passages from Rothschilds’ letter and paper to which I have referred reek of justification for support which would hardly have been necessary if it was not an issue.

5.7.43 Similarly, in their report of 21st September 1983, which was after HKR’s decision, Rothschilds state that that decision “placed the onus on [WM] to consider whether to provide support for its subsidiary company and, if so, what form that support will take”.  They went on to spell out the rationale for support (para. 3.5.253).  Mr. Brothers again would not accept that the question of support was still open.  In cross-examination at day 101/3

“Q.  Do you think that the position in September then was, or perhaps as early as Rothschilds were first appointed, that the decision whether to give support was still an open one?

A.  When Rothschilds were first appointed, my Lord, I think they were briefed at that time.  They had to give their report in the context of their terms of reference and advice to Wheelock Marden.

Q.  Was the question of whether there should be support an open one; something that still had to be determined or not?

A.  I do not believe Rothschilds felt that, no.

Q.  In fact, was it an open situation?

A.  I think it was not, no.

Q.  If it was not open, what was the point of getting that advice?

A.  The point was that Wheelock Marden as a public company in providing support to a subsidiary would need advice from financial advisors, such as Rothschilds.

Q.  That part of the advice which dealt with whether there was to be support was just a charade, was it?

A.  I do not think it was a charade, but they were asked to look at the position.  They would have been briefed, perhaps, on the background -- I think they were briefed on the background, but I do not know that for sure.  They would still look at it as independent advisors to Wheelock Marden.  I am sure that they would have looked at all sides of the matter, even they had not been briefed -- I should say despite their briefing.”

5.7.44 The last answer is also at odds with Mr. Brothers’ witness statement para. 160.10 in which he recalled meeting Rothschilds soon after their appointment and providing them with information about WMI’s difficulties “and the policy decision made in November 1982”.  In cross-examination about that paragraph at day 99/24 he said:

“A.  ...  That meeting may well have served to provide them with that information, but it was not a specific reference by me to them of what had been agreed in November 1982.  I do not recall discussing that with Rothschilds.  I do recall giving them information on Wheelock Maritime.

Q.  Are we to read this as excluding the statement by you that you provided them with information on the policy decision in November 1982?

A.  The meeting itself might have served to provide them with information, but not specifically on the policy decision made in 1982.”

5.7.45 It is right to acknowledge that Rothschilds’ original terms of appointment were termed “low key” and were designed to obtain an independent view of what might be done if HKR decided not to invest.  That does not detract, however, from Mr. Brothers again adjusting his evidence to meet problems as they arose.

5.7.46 Having examined some, by no means all, of the examples of Mr. Brothers evidence, it is not difficult, I think, to see why I am of the view on the totality of the evidence that Mr. Brothers’ credibility was considerably damaged.  Set against the background of WMI’s fragile finances and hand-to-mouth existence for over 2 years, it establishes a powerful case against him.  But not powerful enough for me to be persuaded that he had no honest belief in WM eventually supporting WMI.  In coming to that conclusion, I have taken into account 7 factors:

(1) Until WM’s letter of 8th October 1984 no clear and unequivocal signal was given by WM that there would be no more support.  I do not accept, as Mr. Brothers suggested, that that letter (paras. 3.6.222/223) left scope for WMI to renew its request for support if it could not succeed in surviving in accordance with WM’s suggestions. 

(2) The provision of drip feed from time to time, with the approval of Mr. Cheung’s nominees on the WM Board, rather indicated that WM remained committed to the principle of support.

(3) From February 1983 onwards, WMI and its directors were receiving financial and legal advice.  It is inherently unlikely that Mr. Brothers or any other director would have embarked on a course of fraud with the advisers looking over their shoulders.  The situation was very different from the more common “cooking the books” and hoping not to be found out later on.

(4) While there were obviously low moments in WMI’s board-room, the minutes and documents I have reviewed generally indicate an expectation that there would be a future.

(5) It is axiomatic that a parent should support a subsidiary.  Rothschilds emphasised this.  Mr. Brothers and the other directors were entitled to derive comfort from this, particularly in the light of Mr. Marden’s interest in shipping and WM’s position as a hong and as general managers of WMI.

(6) Notwithstanding his evidence about the legal advice relating to fraudulent trading, Mr Brothers was plainly under no illusions about the very fine line he and his fellow directors were treading.  He stood to gain no material benefit from keeping WMI going, other than the satisfaction of a job well done.  The loss of face involved in being connected with a collapsed company might well be a powerful inducement for many people to hold on as long as possible in the hope that something might turn up.  I do not, however, find that such a consideration motivated Mr Brothers.  The inference therefore is that it was genuine belief in WMI’s future, a future assisted by WM, that fuelled Mr Brothers’ unstinting efforts to keep WMI afloat.

(7) Last, but by no means least significant, I had the opportunity to observe Mr. Brothers in the witness box for over four weeks.  Despite the obvious difficulties he encountered, he never became flustered or embarrassed.  My very carefully considered appraisal is that he was for the most part a sincere and honest witness.  I reach that conclusion notwithstanding my finding in relation to fraudulent misrepresentation.

5.7.47 After 8th October 1984, neither Mr. Brothers nor anyone else in WMI’s boardroom can have been under any illusions about WM’s feelings towards WMI.  Something more was required to sustain Mr. Brothers’ faith that WMI would survive.  In my judgment, that something was provided by the plans centred on the scheme to extract the tax benefits dormant in Rangelock, Sealock and Annalock.  It is true that the consummation of that scheme was not a foregone conclusion, as the continuing saga of Marilock demonstrated.  The idea had, however, been examined and given the green light by accountants; had found someone who was prepared to try and find purchasers for the vessels; and had passed the first stage with the help of the banks and ADS (see Part 4.5).

5.7.48 That scheme and a restructuring of WMI eventually came to nothing, but only after the Wharf take-over and the appointment of EW on 5th March 1985.  ADS do not complain of the Defendants’ conduct after that date.  Until that date, I am satisfied that sufficient interest and support was shown by creditors to justify Mr. Brothers continuing his efforts.  After all, as late as 8th August 1984, Mr. Shaw was saying that “the Board should do what is reasonable and responsible in the circumstances it would be incorrect ... for the Directors just to throw in the towel.”  (para. 3.6.150).

5.7.49 In Hardie v. Hanson Kitto J. said at p.463:

“But the onus lay on the respondent to prove affirmatively that the carrying on of the company’s business during the relevant fifteen months was characterized by an intent - which in the circumstances means an intent on the part of the appellant - to defraud creditors of the company.  An actual purpose, consciously pursued, of swindling creditors out of their money had to be established against the appellant before a declaration under the section could be made.  It was not enough for the respondent to prove that the appellant acted with blameworthy irresponsibility, knowing that he was gambling (in effect) with his creditors’ money as well as his own, and with much more of their money than of his.  ...

The circumstance that he did draw out more than he paid in demonstrates the unfairness, not to say the utter wrongness, of the course he pursued; but with what intent he pursued it is the question; and in my opinion the only answer which can be given on the material adduced is that although he was clearly unjustified in his chasing of the rainbow, he is not shown to have had any more sinister intent than an intent to try, however despairingly, to carry the business through its difficulties to a success which, if it had been reached, would have benefited the creditors as well as himself.  In whatever terms his conduct may be condemned, his intent is not, I think, to be described as an intent to defraud the creditors.

5.7.50 In my view, that passage is apt to sum up Mr. Brothers.  I find therefore that, although Mr. Brothers was carrying on the business of WMI, he did not do so dishonestly with intent to defraud creditors.  The main case on fraudulent trading against Mr. Brothers must be dismissed.

5.8    MR. LEES

5.8.1 Mr. Lees was one of the two managing directors of WM and principally responsible for WMI and the activities of Mr. Brothers.  His was a supervisory as opposed to an active role.  It was for him, or in his absence Mr. Leung, to approve or authorise what Mr. Brothers was doing.  He too was carrying on WMI’s business.

5.8.2 Mr. Lees accepted, and like the other individual defendants he really had no alternative in view of the documents and auditors’ reports, that from September 1982 WMI depended on WM support for survival.  Like the other defendants, his confidence that WM would support derived principally from the November consensus.  Mr. Lees was not, however, entirely consistent about its nature nor was he consistent about its duration.  Ultimately, he was effectively espousing the formulation I set out earlier (para. 5.4.21).  The two elements, a probable return to profitability and the amount of support required would be taken into account.

5.8.3 In his witness statement at para. 28.2, Mr. Lees said that following informal meetings of WM directors in November 1982 “Peter Griffiths and Jaime Ortiz-Patino outlined the strategy which had been agreed between the major shareholders and which was based on the proposals put forward by Henry Leung and myself”.   That seems to indicate first, that the agreement was one between Mr. Marden and Mr. Cheung and second, was an endorsement of steps already devised by WMI to meet its problems.  Further, the word “strategy” suggests a broad approach, leaving the tactics to WMI.  Successful implementation of the strategy would then produce the support required.  In other words, support was not unconditional.

5.8.4 That the agreement was one involving shareholders rather than directors is emphasised by the next paragraph in his statement where Mr. Lees deals with “the major shareholders’ attitude to WMI” and why he felt they would support.

5.8.5 Later, in para. 166.6 where Mr. Lees was dealing with the S&C report dated 21st September 1984, he said:  “In the November 1982 policy decisions, the senior directors of WMI had decided once WMI’s cash flow problems were resolved WM would provide long-term funding”.  Apart from attributing the “decisions” to directors, that passage seems to me to contain a clear indication that support depended on solving WMI’s cash problems, i.e. that there was no commitment to support regardless of the circumstances.

5.8.6 In cross-examination, Mr. Lees was asked why the November consensus was not recorded in any minutes and replied at day 65/38:

“A.  Well, it was not a matter of me wanting it in there; it was a question that the major shareholders would require steps to be taken with Wheelock Maritime before they quantified the amount of support they would give.  In my mind there was never any doubt that they would give the support, but that is a different thing from having it recorded at the meeting.”

5.8.7 But a few minutes later, he said at p. 40:

“What I have said all along is that this was a meeting of directors of Wheelock Marden about what should happen with Wheelock Maritime, and that was a strategy to be followed and it was a step-by-step strategy, to arrive at the parent company support.  It was something which we could not quantify and get into the minutes.”

5.8.8 Then, on day 67/40 when referred to the November consensus Mr. Lees said:

“A.  That was a strategy of the directors.

Q.  It was an agreement, you have said, to support?

A.  Yes, all right, it was an agreement amongst the directors.

Q.  To support?

A.  To support.”

5.8.9 Plainly, if you are unclear in your own mind about who precisely agreed or committed to provide support, it is difficult to sustain a case for such an agreement or commitment.  I have already found the case to be unsustainable.

5.8.10 In any event, whatever had or had not been agreed in November1982, it had by September 1983 become something of a movable feast.  It was put to Mr. Lees that once WM had provided drip feed in the form of the US$4 million facility, the November consensus had gone.  After some disagreement over the question and Mr. Lees’ answer, I sought to clarify at day 68/90:

“HIS LORDSHIP:  I will put this matter to rest, because it is something I had marked to raise with Mr Lees, anyway.

Q.  From your last answer, Mr Lees, I understood you to say that the November agreement was no longer in existence in the sense that it had been varied because some of the steps which were anticipated had not been taken, or were going to be impossible, or as the case may be?

A.  That is correct, my Lord.

Q.  I did not understand you to say that the essence of the agreement -- namely, that support would be forthcoming -- had vanished?

A.  No, my Lord, I did not mean -- if I implied that, I am sorry -- I withdraw that.

MR GROSSMAN:   Well, Mr Lees, if we could just follow that.

The reason I put it to you, and let me put it to you unequivocally -- that the November agreement was now dead, the whole of the agreement was dead; it no longer existed?

A.  Not in those precise terms.

Q.  The reason I put it to you is this:  because it was the essence of the November agreement that certain steps be taken and then, once quantification took place, there would then be a once-and-for-all support?

A.  In that case, yes, my Lord, you are correct, but it does not mean to say the whole agreement as such had varied.  The principle, the policy of supporting it remained in place, but not in those precise terms of the November agreement.

Q.  What we are looking at now, of course, is, as you have said, using my words, a drip feed approach giving money as and when required until a long-term solution could be come up with after quantification?

A.  That is correct, yes, I accept that.

Q.  That is the opposite to what was contemplated in the November agreement?

A.  Yes, my Lord, it had been taken over by events, but the principles behind it were still that parent company support in some form would be made available in the future.

Q.  Yes, some time in the future on a one-off basis?

A.  No -- in that respect, my Lord, it was dead because we could not quantify the one-off amount as such.  It would have to come in the form of staged payments, if I may put it that way.

Q.  By September 1983, almost none of the steps had been completed?

A.  Yes -- you may be right.  I mean, offhand, I cannot be sure.  Some steps had been taken.

Q.  Some steps?

A.  Yes.

Q.  The once-and-for-all approach had to be abandoned?

A.  Yes, I accept that.

Q.  So, whatever agreement there was in November 1983 had been overtaken by events?

A.  Yes, except the principle of parent company support, that had not gone out of the window, as you said.”

and at p. 93:

“MR GROSSMAN:  Q.   I must put it to you so that there is no misunderstanding that, by the beginning of 1983, the November agreement was dead; it had disappeared from people's minds?

A.  No, my Lord, I do not accept that -- by the beginning of 1983, no.

Q.  Well, then, by at least, at the latest, September 1983, was dead and buried?

A.  In those precise terms, yes, my Lord.”

5.8.11 Ultimately, as I said, it boiled down to an application of WM’s general policy on support.  In cross-examination about paragraphs 10 and 11 of Mr. Marden’s witness statement (para. 5.4.20) Mr. Lees was asked if he agreed and said at day 65/50:

“A.  In general, yes.

Q.  You notice that there is no mention here of the November strategy?

A.  He does not refer to it specifically, but he mentioned a lot of it that is in there.

Q.  Sorry?

A.  He has mentioned most of the steps indicated, the steps in this statement.

Q.  But what he indicates --

A.  The policy of actually trying to get the subsidiary to sort out its own problems, on its own, without keep referring back -- that was a policy arrangement in November/December 1982 -- and then drip feeding, which we had to do subsequently, and then you had to study the long-term viability of the company, and I think we always did that.

Q.  Insofar as WMI was concerned, and that is what he is talking about here, he seems to indicate that you first had to decide if it had a long-term future?

A.  Correct.

Q.  The question did not arise, therefore, of:  "It will never go into liquidation because we will support it".  The point that he seems to be making here is that there is not a question of WMI inevitably being supported, but what we would look at first is to see if it would survive in the long-term?

A.  Yes, that is true -- you had to look at the long-term, but on the other hand you would not allow a company to go into liquidation in the shorter term pending solving the longer term problems, and as in my view this was only a matter of time, because the charter markets were in such a poor state, we thought that the charter market would improve -- shipping values would recover, therefore, it was not a finite calculation, because there were so many variables, but at the end of it, you would see how much you needed and whether you could achieve it.

Q.  But, as far as WMI was concerned, the question of its long-term survival, you tell us, was never in doubt?

A.  It was not, in my mind, ever in doubt.

Q.  That is because you intended to support it?

A.  Sorry?

Q.  That is because you intended to support it?

A.  Yes, indeed.

Q.  So, this was not a question of whether it would survive in the long-term first; this was a case where you did not have to worry about the long-term because you knew it would survive?

A.  No, that is not what I said.  What I meant to say:  You had to look at the steps you would have to take towards the long-term to see whether you could survive the long-term.  Then you would come back to the quantum, the amount of support you require.”

5.8.12 Mr. Lees was then questioned about his answer that Mr. Marden had “mentioned most of the steps indicated” in the November consensus as set out in the December memorandum.  He said at day 65/54:

“A.  He does not specifically point out step 1, step 2, step 3, I agree, but he is pointing out the general policy.

Q.  That is exactly what I said to you: general policy, not alluding to the November agreement.

A.  Alluding to WMI.

Q.  Well, he is talking here about general policy.  It does not mention "WMI" once in this paragraph, so when you  said before, as I was reminded, that he refers to the "steps" mentioned in the November policy, that is probably not right, is it?

A.  No, I meant in general terms.”

5.8.13 Then Mr. Lees was cross-examined about his supplementary witness statement dealing with support, at day 66/1:

“MR GROSSMAN:  Q.   Mr Lees, in paragraph 2.3 of your statement, if you would care to turn to that, you set out the general philosophy, if I can call it that, of the Group when it came to providing support.  Read it through to yourself and just remind yourself what you say.  Towards the bottom of the page you say, having indicated that a subsidiary must look after itself, if it could:

"However, it was recognised that there would be occasions when the subsidiary might encounter financial difficulties which it could not resolve by itself, and in those cases WM would provide the necessary support, provided of course it was thought that the subsidiary would probably return to profitability."

Which I think is what Mr Marden said, in effect -- in different words, of course? Is that right -- yes.

Q.  There is not much difference between you on that point, is there, as a matter of wording?

A.  That is correct.

Q.  Of course, it was a pre-condition for providing support that the WM board was satisfied that there was a probability that the subsidiary would return to profitability?

A.  A probability, yes.

Q.  In the case of WMI, clearly, before you decided to give support at any time, you would have to be satisfied that there was a probability of return to profitability?

A.  That is also true.

Q.  So, the commitment, the agreement to support, had that condition at least?

A.  It was taken into consideration.

Q.  But at given times along the route you would always have in mind that you may not support if the Board was satisfied that there was no probability of a return to profitability?

A.  It refers to "probability"; it does not specify when.

Q.  That is correct, but that would always be something taken into account?

A.  It would be taken into consideration, yes.

Q.  Into consideration?

A.  Yes.

Q.  So, at any time after 20th November, if the majority of the Board, those who could vote on it, did not consider that it was probable that there would be a return to profitability, then there would not have been any promise of support?

A.  I cannot answer that.

Q.  That would have been the position, would it not?

A.  It would be their position to take into consideration.  I cannot really answer for them.  I cannot really answer for them.

Q.  I am talking about in terms of the policy that you have articulated here.  If, at any time after 20th November, whatever agreement had been reached there, a majority of the Board was of the view that it was improbable that WMI would return to profitability, then the agreement of 20th November would have been at an end?  (A.)  No, I do not accept that.

Q.  Did the agreement of 20th November go contrary to the policy you have set out in paragraph 2 of your supplemental statement?

A.  In what way contrary?

Q.  Well, what you have said in paragraph 2 is that it was a pre-condition for support that there was a probability of return to profitability?

A.  I did not say it was a pre-condition; I said it would be taken into consideration.

Q.  No, you do not say that.  You say:     

"Provided of course it was thought that the subsidiary would probably return to profitability."

A.  Provided it was thought that it would.

Q.  So that was a pre-condition; it had to be thought that it would return to profitability?

A.  I will accept that.

Q.  Was that a pre-condition for support for WMI?

A.  I would not have thought so.

Q.  Why was WMI in a different situation on this general policy?

A.  It was not.

Q.  Well, we seem to be going around in circles.  Perhaps I can put it one more time.

A.  Maybe I can explain this.  This is what I set out as being the policy.

Q.  Yes.

A.  No more than that.

Q.  Did that --

A.  We are talking here about the probability of returning it to profitability.

Q.  Did that policy apply to WMI?

A.  WMI was always known to be returning to profitability.

Q.  It could never be known -- it was always hoped?

A.  I am sorry, it was known it would return -- if you recall, it is the market that we have to take into consideration and the time.  We never thought it would not return to profitability.

Q.  That was your view?

A.  That certainly was my view.

Q.  But, if the majority of the Board, those who could vote, had taken a different view, then there would have been no support?

A.  I do not accept that, either, because of my knowledge of the major shareholders' attitude towards this company.”

5.8.14 After clarifying who were the WM directors able to vote on WMI support, at p. 7:

“Q.  If, rightly or wrongly -- let us leave it at that at the moment -- before July 1983 or after July 1983, the Cheung faction took a view that WMI would probably not return to profitability, then, of course, there would be no support, would there?

A.  That is also not necessarily true.  Support depended very much on the major shareholders, not on the individuals that were representing the major shareholders.

Q.  But they were the ones who would vote for it?

A.  They would vote in accordance with their instructions.

Q.  Really, then, what we are talking about is the competing views, if there were competing views, between Mr John Marden and Mr Cheung?

A.  There were competing views, if we are going through this point, as to how the problem would be dealt with.

Q.  That is correct, that is what you have told us.  However, the point that I am putting to you is that it is quite conceivable there could have been competing views as to profitability in the long run?

A.  That would be taken into consideration.  It was not necessarily the final conclusion.

Q.  I am not going to carry on with it.  I ask you simply this:  You adhere to what you said in paragraph 2 of your statement?

A.  "Provided it was thought ..."

Q.  Yes, that is what you have said in paragraph 2; you adhere to that, do you?

A.  Yes.

Q.  And you are satisfied, are you, that WMI was treated in accordance with the policy set out in paragraph 2?

A.  Yes.”

5.8.15 What emerged, apart from some monumental obfuscation by Mr. Lees, was that at the very least future profitability would be taken into account as also would be the amount of support required.  On day 67/106, Mr. Lees was asked:

“Q.  Mr Lees, in 1983, in the middle of 1983, indeed throughout that year, you were seeking a quantification so that you could know how much support was required on the bases you have said.  Did you not have in mind that, if the quantification was above a certain figure, then you would not support it and WMI would have to go to the wall?

A.  That must be a possibility I have to accept, my Lord.

Q.  Was that ever discussed?

A.  No, it was not, my Lord.

Q.  But it was an assumption that a businessman would make?

A.  As you put it to me, yes, my Lord.”

5.8.16 Then after some sparring between Mr. Lees and Mr. Grossman about a ceiling figure, I intervened at p. 110:

“HIS LORDSHIP:   Mr Grossman is just seeking to see if you agree that, in principle, if all possible steps having been taken and a figure being quantified, it might possibly be a figure which you could not agree to support because of its magnitude, relating it always to the --

A.  That is a possibility, yes.

Q.  -- point you are making, the increase in equity in the vessels as time passes?

A.  That is correct.

Q.  Even after all steps had been taken, there might come a time when, a figure having been quantified, you and all the other directors would have to throw your hands in the air and say "Too much"?

A.  Well, that, my Lord, is not necessarily true, either, because at that point, as you go through, you could take ships and separate it out.

Q.  Taking all this into account, I understand your point perfectly that the money that is being paid out by WMI over the next three or four years is substantially going on paying back banks and other lenders so that you are beginning to revive the equity in your vessels, which will give you the opportunity, three or four years down the line, to raise fresh funds on the security of the equity in those vessels.  I have that point on board, and what Mr Grossman is seeking to get you to agree with -- whether or not you agree, of course, is entirely a matter for you -- that taking all this into account, a figure might be quantified which, possibly, you and the other directors would say: It is still too much; we are not prepared to do it?

A.  That is correct, but I think I said earlier that I thought $US20 to $US30 million would be a figure I certainly would have considered reasonable, and any more than that would have required much greater study to see what could be done.”

5.8.17 It follows therefore that whatever the nature of the November agreement, support could not be taken for granted.

5.8.18 To give him credit, however, Mr. Lees was more realistic than Mr. Brothers.  He readily accepted that the way in which WM dealt with WMI was not only unhelpful but had the effect of making matters worse, for example, the failure to provide a letter of comfort for the sale and lease-back of Manila Faith, the provision of a disappointing US$4 million facility and the setting off of the Shell counter-guarantee against that facility.

5.8.19 Mr. Lees also acknowledged that Mr. Cheung was lukewarm about support for WMI.  He began to have misgivings when the management committee was set up in July 1983.  He felt Mr. Cheung was using the question of support for his own objectives - to gain greater control of the WM Group.  That was why Mr. Cheung made the uncommercial decision to refer to HKR the request for support in April 1983.  Mr. Lees would have preferred WM to give support of US$12 million at that stage which would have prevented WMI’s position from deteriorating.

5.8.20 When HKR declined to invest, Mr. Lees wrote to WM on 14th September 1983 seeking support (App. 3/22).  He said WMI needed US$12 million to obtain a moratorium and without a moratorium WMI would have to cease trading.  Mr. Lees said this was not correct but was intended to emphasise to WM that it could not keep delaying.  Cross-examination proceeded at day 68/119:

“Q.  Mr Lees, are you telling His Lordship that you were seeking support from the parent company on a false basis?

A.  Not -- I have been expressing it probably too strongly.

Q.  Who is expressing it too strongly?

A.  In this letter.

Q.  It is not a question of how you are expressing it; it is a question of the content of what you are saying -- in other words:  If we do not get the money, we will have to cease trading?

A.  Yes, that is how it was put, I agree -- I accept that.  That is how it was put.

Q.  This is another example, is it not, of unfortunate wording all leading to an indication that there would be no parental support?

A.  No, I do not accept that.

HIS LORDSHIP:   Sorry, can you put that question again?

MR GROSSMAN:  Q.   Time and time again, when we have come to look at documents which deal with parental support, or its absence, you have indicated, where it has been unequivocal where there would not be parental support, that either the person did not mean what he said, or it is poorly phrased, or words to that effect?

A.  Yes, I accept that, and I accept the wording of this was the same.  When you write a letter like this, it was written to create an emphasis point.  I mean, it was not true they would have to cease trading.

Q.  Why did you need to emphasise it?  Surely John Cheung knew what was going on.

A.  He knew what was going on, but he had to make a decision.

Q.  I thought the decision had been made?

A.  It had been made in November, but he was reluctant, if you recall, only to give a once-and-for-all payment, and now we were basically drip feeding it.  What this meant was that we needed more of a drip feed.

Q.  Can I put it this way then --  do I understand your evidence to be this:  Mr Cheung was committed to a final once-and-for-all payment, but --

A.  That was --

Q.  But he had to be persuaded to give the bandaid, as it was needed, in the short-term?

A.  That is correct, my Lord.

Q.  Would it be right to say that there was no certainty that he was going to agree to the interim measures?

A.  In my own mind I thought there was certainty, but it is true there was an uncertainty -- yes, I accept that.

Q.  If the short-term measures were not forthcoming, then the question of the long-term fell away, because the company would not survive?

A.  No, we go back again to restructure.

Q.  Let us look at it from your point of view on 14th September 1983.  At that particular point in time, you were not certain that Mr Cheung would support the interim measure?

A.  In my own mind I was, but there is uncertainty, I accept that.

Q.  Yes, there was uncertainty, but that uncertainty did exist?

A.  Yes, I accept that, yes.

Q.  The possibility existed, at least, that he would not give that interim support?

A.  Yes, I will accept that, yes.

Q.  In other words, he is saying:  Look, if you can come to me with a once-and-for-all solution, I will agree, but if it does not come to that, if we have to have a step-by-step, then I am afraid WMI does not get the support?

A.  No, I would want to be convinced.

Q.  You would want to be convinced?

A.  Yes.

Q.  So the uncertainty existed at that stage?

A.  Yes, my Lord, I will accept there was uncertainty.

Q.  And it was quite possible that Mr Cheung would say:  I am not giving this support -- and that was the reason why you felt it necessary to write in these strong terms?

A.  I felt it was essential to write it in strong terms, yes.  There was a possibility, but I did not think it was a probability.

Q.  You were trying to persuade him?

A.  I will accept that.

Q.  There was no need to try and write in this, as you said, exaggerated terms unless you felt there was a need to do that?

A.  Yes, I will accept that.

Q.  In fact, is not the reason why you put it in such strong terms that you felt support was unlikely at this stage?

A.  No, no, I do not accept that.

Q.  But anyway, the position we have reached then is that in September there was a possibility that Mr Cheung might not give his blessing to support and that WMI would be forced to close down?

A.  No, I do not accept that.  There was a possibility he might not give that support, but then other alternatives would have to be looked at -- in that eventuality, we would have to look at other measures.

MR GROSSMAN:   But that possibility certainty existed?

A.  I believe it did, but I must say, not in my own mind.  I always believed we would get the support.

Q.  I can only put it to you that you wrote in these exaggerated terms because you knew that support was unlikely?

A.  I wanted to make sure we would get it.”

5.8.21 Mr. Grossman rounded off at p. 125:

“Q.  Can I assume that there is no mention of the November agreement in this letter, because there was no point in it any more?

A.  Yes, I think I accept that.”

5.8.22 Mr. Lees’ letter was considered by the WM Board next day when Mr. Poon and Mr. Lees indicated support was not a foregone conclusion (para. 3.5.239).  In cross-examination at p. 126:

“Q.  You would probably accept that Mr Poon was talking authoritatively from Mr Cheung's point of view?

A.  I accept that.

Q.  So, here we have the situation then, post the HKR rejection, that there is no certainty of extending support to WMI, that Mr Poon is specifically raising a caveat or a query?

A.  He is raising a query, yes, I accept that.

Q.  So, whatever you may have thought in your own mind, the expressed indications here are that it is not a fait accompli, by any means?

A.  I will accept that, yes.

Q.  And, presumably, you accepted what Mr Poon said in good faith?

A.  He was following instructions, yes, I accept that.

Q.  That is right, yes.  And, speaking then, if I can put it this way, as Mr Cheung's mouthpiece, Mr Cheung was saying:  I have not decided that I am going to support?

A.  That is what he told Mr Poon to state the position.

Q.  Do you have any reason to suppose --

A.  No -- sorry?

Q.  Do you have any reason to suppose that Mr Poon was not reflecting accurately what Mr Cheung said?

A.  He was correctly reflecting his instructions at this point, yes.

Q.  You are not suggesting that Mr Cheung was giving instructions to do something that was contrary to his, Mr Cheung's, views, are you?

A.  No, my Lord; he was under instructions to take this stand.

Q.  Because that reflected, obviously, Mr Cheung's views?

A.  That reflected what Mr Cheung wanted Mr Poon to state.

I cannot -- I am not prepared to state that that was entirely Mr Cheung's own attitude.  My knowledge of him was that he would provide support, and he put nominees on the Board and they were under instruction to say what he told them to say.  That did not necessarily mean that is what he intended, if you follow me, my Lord -- I do not know whether you can.

HIS LORDSHIP:   Yes.

A.  It is difficult.

Q.  No, I follow.

A.  Thank you, my Lord.

MR GROSSMAN:  Q.   What purpose --

HIS LORDSHIP:   Mr Cheung has instructed Mr Poon to enter this caveat, but not departing from the agreement which he had reached in November 1982, that at the end of the day he would provide support?

A.  That is what I believe, my Lord, yes.

MR GROSSMAN:  Q.   What basis was there for thinking that Mr Poon was not reflecting Mr Cheung's thinking?

A.  Because he was making a statement which was contrary to what I believed Mr Cheung's position was.

Q.  You will recall that it was identical, in effect, to previous statements that he had made after the Schroders & Chartered report and to statements Mr Griffiths had made?

A.  Yes, I accept that.”

5.8.23 While I acknowledge Mr. Lees’ honesty about the uncertainty of the position, I have to say that it militates against a genuine belief that WM would support.

5.8.24 When WMI considered its position on the same day, Mr. Shaw gave advice about carrying on trading (para. 3.5.241 and following).  Mr. Lees was asked at p. 131:

“Q.   ...  So, pausing here, clearly, what was in mind here was that, if the parent company does support in an acceptable way, then you will not be fraudulently trading?

A.  That is correct, yes.

Q.  So, the question which we have asked in the past and dealt with in the past still remained; that is, it was a live issue whether or not the company would go into liquidation?

A.  There was certainly uncertainty -- more uncertainty at this meeting, yes.

Q.  So, therefore, the people at the meeting were specifically anxious to get advice as to whether or not there was fraudulent trading; this was no longer hypothetical advice?

A.  It was proper to take that advice, my Lord, yes.

Q.  That is right, because there was now a real concern, as distinct from what you have said before was a hypothetical concern?

A.  Yes, I accept that, my Lord.”

5.8.25 Later, Mr. Lees agreed that at that meeting Mr. Poon was saying in effect that he was unlikely to be directed to vote for support (para. 3.5.247).  He also agreed that he appeared not to have been too sanguine, at day 69/57:

“MR GROSSMAN:  Q.   Mr Lees, before the break, His Lordship summarised to you the thrust of your evidence in this way, that what you were saying was this:  Yes, the documents which we have been looking at do raise concerns, do raise doubts about the question of support in this case.  However, it is an article of faith with you, notwithstanding what the documents say, that from the beginning you believed support would be forthcoming?

A.  I agree with that, my Lord.

Q.  The only thing I would add to that is that it is also apparent, is it not, that your very own statements and observations at the meeting of 15th September also did not indicate that you believed that help would be forthcoming?

A.  I agree with that.

Q.  In fact, your statements at that meeting, as they were recorded, are consistent with the documents that indicate that help would not be forthcoming?

A.  Yes, I agree with that, my Lord.”

5.8.26 Like Mr. Brothers, Mr. Lees also had difficulty in accepting apparently unequivocal statements in contemporary documents and did his best to deflect them.  At the meeting of the management committee on 4th September 1984, he is recorded as answering Mr. Ying by saying if WMI did not get the WWW dividend “it appeared WMI could not survive long enough to seek an injection of funds by way of a new issue to shareholders in March 1985” (para. 3.6.177).  This gave rise to a strange passage in cross-examination, on day 72/79:

“Q.   ...  Mr Lees, you are clearly stating here to Mr Ying:  if we, that is, WMI, do not get the dividend, then we cannot survive long enough to seek an injection of funds in March 1985.  That was clear, was it not?

A.  That was clear -- that is the point that I wanted to make to Mr Ying.

Q.  But that was the true position, was it not?

A.  No, that is the point that I wished to make to Mr Ying.

Q.  Sorry, are you saying that was not the true position?

A.  No, that was not the true position.  That was the point I wanted to get across to Mr Ying as a representative of Mr Cheung.

Q.  Did Mr Ying not know the position?

A.  I wished to make that point to him.

Q.  Why was it necessary to emphasise it in that way if it was not true?

A.  I have been through this before.

Q.  Yes.

A.  It was not necessary -- it was not necessary for WMI to survive; WMI could have survived, my Lord, without it.  This is the point I am trying to make to Mr Ying, and he would, of course, report to Mr Cheung.

Q.  I may not have followed that.  I am sure it is my fault, but what is specifically stated here: if the request for the dividend is turned down, is rejected, then it appears that WMI cannot survive long enough to seek an injection of funds in March 1985.

Forgive me if you have answered it, but I am not sure that I have followed it.  Was this true or not?

A.  There are two points.  Maybe I have not made it clear.  If we did not get the dividend, then WMI would not have a long enough period in order to prepare a document for a capital injection in March, as was forecast.  That is what that said.  But it did not say that WMI could not survive without the dividend.

Q.  But the point you were trying to make to Mr Ying is that it would not survive -- it probably would not survive?

A.  It could not survive long enough to get the dividend; in other words, to retain the structure as it was, therefore, you would have to approach it from a different angle altogether.  You would then have to go to the creditors, you would have to get a rescheduling and you would probably have to have a restructuring.  The point is, I emphasise, to survive in its present form.

Q.  It does not say that.  It says the complete opposite?

A.  No, it says:  "It would not survive long enough to seek an injection of funds by way of a new issue from shareholders".  That made it quite clear, my Lord.

Q.  It is clear, Mr Lees, and what is clear is that you are saying:  unless we get the dividend, we are not going to survive long enough to get the injection by March 1985?

A.  The company, as I said before, could survive.

Q.  I wonder why you said that to Mr Ying?

A.  No, my Lord, I made the point to emphasise it to Mr Ying.  He had asked the question and that was my response, so that, quite firmly, he would take it back to Mr Cheung.

Q.  Maybe I have not understood it.  Let me ask you this:  are you satisfied that the statement is true and it is properly expressed, the statement as is recorded on page 7?

A.  Let me put it again.  Sorry.  What I said was, he asked the question, I do not really know what the question was -- I cannot recall what the question was -- but what I gave in response was that, if we did not get the dividend, we would not have sufficient time to put together a new issue proposal.  That did not mean that the company could not survive, my Lord.

HIS LORDSHIP:   What you did not say was:  we will have to look for an alternative form of support; we will have to go to the creditors if they will agree to a restructuring?

A.  Yes.

Q.  Or any other step that you could possibly think of?

A.  No, I did not say that at this time, because, as I said earlier, this was to emphasise the point to Mr Ying, who would relay it to Mr Cheung.

Q.  Your purpose being to get Mr Cheung to make up his mind?

A.  That is correct, my Lord.

Q.  And to take some action, sooner rather than later?

A.  That is correct, my Lord.

MR GROSSMAN:  Q.   I do not understand if what you are saying is that the paragraph on page 7 does not fully or properly reflect what you said, or that it does properly reflect what you said, but you did not mention at all the question of alternative funding?

A.  No, these minutes, as often, are not always as precise as they should be, but the point -- I think I have explored it with you.  The question, I do not know -- I do not recall how he put the question.

HIS LORDSHIP:   If it helps, I understand your answer.

A.  Sorry?

Q.  If it helps, I understand your answer, which, as I said a few minutes ago, is to the effect that you made this statement, which is true, to emphasise the position to Mr Ying, who would in turn carry the message to Mr Cheung.  You did not state, or it remains unspoken, that the alternative would be to seek support from the creditors in one form or another?

A.  That is correct, my Lord.

MR GROSSMAN:   Thank you, my Lord.

Q.  I now understand.  The minutes correctly reflect what you said?

A.  Yes, I think that is correct.  If you have my explanation with it --

Q.  I understand the explanation.  What I now understand you to say is that the minutes reflect what you said?

A.  Yes.

Q.  The alternative of obtaining some other form of parent support was not mentioned?

A.  That is correct, my Lord.”

5.8.27 The possibility that WMI could be restructured and survive in a different form was mentioned by Mr. Lees and Mr. Brothers from time to time.  It appears from my review of the documents.  It was not something actively pursued until the end of September 1984 when the possibility of UK tax benefits began to crystallise.  Until then, it would have required among other things the co-operation of all creditors including ADS.  Doubtless, Mr. Lees and Mr. Brothers were realistic enough to appreciate that, given WMI’s circumstances and their own failure to obtain significant support from WM, they would get short shrift from creditors.

5.8.28 In my judgment, the idea of restructuring is not a factor which until then had or could have had influence on the directors’ perception of whether WMI could survive.  It is not something which has any bearing on the crucial issue, namely whether they honestly believed WM would support WMI.  Indeed, it is a factor which would have militated against such a belief because it would arise only if WM was not going to support.  And, of course, on 8th October 1984 WM gave its first unequivocal indication that there would be no further support (para. 3.6.223).

5.8.29 Mr. Lees also had to deal with Mr. Shaw’s letter of 4th August 1983 (para. 3.5.197) about the proposed sale of Asia Heron to Allied in which Mr. Shaw gave advice on fraudulent preference, and with para. 90.2 of his witness statement.  At day 67/90:

“Q.   ...  in 90.2 you say this:       

"I was still on holiday at this time.  I was, however, aware of this proposed sale, as this had been discussed before I left.  The WMI directors considered the price offered to be a fair price, but decided at the shipping committee meeting on 3rd August to refer the matter to David Shaw.  The concern, which I shared, was that the transaction could be seen as preferring a WM Group creditor to other creditors and we wanted to ensure that we could not be criticised if we proceeded with the proposal.  Norton Rose was asked, probably by Robbie Brothers, to advise whether the transaction could be open to attack as a fraudulent preference."

This was a concern that you shared?

A.  Fraudulent preference?

Q.  Yes.

A.  Yes.

Q.  Which could only exist on liquidation?

A.  Well, yes, that is true.

Q.  That was a concern you had?

A.  No, I had no belief that it would go into liquidation.

Q.  Then which concern did you share?  What is the concern to which you refer in paragraph 90.2?

A.  My main concern was because this was a transaction, my Lord, between two companies in the group.  I mean, it is very important to try and establish something like this at arm's length; therefore, every point had to be considered.

Q.  The concern to which you refer is that the transaction could be seen as preferring a WM Group creditor to other creditors?

A.  I had in mind the fact that we were, shall we say, securing or getting $1 million of the debt from Allied paid back.  That, it seemed to me, might be a fraudulent preference, because it is taking security out of the hands of the general body of Wheelock Maritime.

Q.  Mr Lees, this transaction and the concern about it could only be relevant in the context of liquidation, is that not right?

A.  No, my concern was not that at all.  My concern was that we were going to be taking $1 million of Wheelock Maritime's assets, which were secured, into Allied, who were not secured.  That was my main concern.

Q.  Well, your statement here is that your concern was that the transaction could be seen as preferring a WM Group creditor to other creditors?

A.  No, what I meant was, and I still mean, was that I thought we were taking secured assets of Wheelock Maritime into Allied.  Allied's debt was not secured.

Q.  Mr Lees, are you withdrawing from your statement in paragraph 90?

A.  No, I am not withdrawing from it, no, but I am explaining to you what I meant and what I understood.

Q.  I put it to you that paragraph 90 can only be read in one way and that is the directors, including yourself, were concerned about fraudulent preference and you knew perfectly well that that only related to the possibility of liquidation?

A.  I am afraid I cannot accept that as regards liquidation.  I have explained what I meant by "fraudulent preference" in this particular case.  That is what I meant.”

5.8.30 Mr. Lees had been a fellow of the Institute of Chartered Accountants since 1965.  He was an experienced businessman and managing director of a large public company.  I have difficulty in accepting his somewhat facile explanation of his “concern”.

5.8.31 Mr. Lees therefore suffered from the same disadvantages as Mr. Brothers.  His credibility was damaged by his adherence to a wholly unsustainable interpretation of the November consensus and by his repeated refusal to accept contemporary documents at face value.  On the other hand, he was prepared to acknowledge uncertainty from time to time about support and the need to persuade Mr. Cheung.

5.8.32 The problem in effect was that WM could not make up its mind what to do.  Put another way, Mr. Marden and Mr. Cheung could not agree about WMI.  Mr. Lees , however, said he remained confident throughout that the support would come.  It is plain that that confidence had a somewhat shaky basis.  For reasons similar to those I have mentioned in relation to Mr. Brothers, however, I am unable to say that Mr. Lees has been proved to have been dishonest.  The primary case of fraudulent trading against Mr. Lees must also be dismissed.

5.9    MR. LEUNG

5.9.1 As the other managing director of WM, Mr. Leung’s concerns were finance, property and administration.  Mr. Leung saw his function and duty to be to implement WM board policy.  He had risen through the WM ranks from the position of accounts clerk in 1948.  At the time of these events, he had been well over 30 years with WM.  When he gave evidence in February 1996, he was almost 70, a diabetic and in 1995 had had cataracts removed from both eyes and a tumour from his tongue.  In spite of these physical difficulties, he gave a good account of himself.  I formed a generally favourable view of him.

5.9.2 Mr. Leung, however, was not without his blemishes.  He too struggled to extract from the November consensus more certainty than it really contained.  Yet, even his witness statement gave an indication of its true nature.  In para. 34.01, he referred to “a number of informal meetings between certain WM directors”.  In para. 34.02, he continued:

“The discussions centred upon what should be done with WMI given the prevailing market conditions which were beginning to look worse than had been anticipated and in particular the support which WM should give its subsidiary.  All those participating in these meetings were aware of WMI’s problems.  Peter Griffiths, in particular, was pressing for a solution to WMI’s financial problems.  He wanted a solution to be worked out sooner rather than later, as indeed did the rest of us.  At the meeting on 29th November, Peter Griffiths and then Mr. Ortiz-Patino set out for Robbie Brothers what we had all agreed upon as the strategy for dealing with the WMI Group cashflow problems and the support WM would give to WMI.  There was no suggestion from any of those present that WMI should be liquidated or otherwise disposed of.  The concern was simply as to the state of WMI and the shipping market and what steps WM and WMI should take to improve the position.”

5.9.3 After setting out the steps contained in Mr. Brothers’ memo, Mr. Leung continued in para. 34.04:

“I believed that this agreed approach offered a sensible solution to WMI’s financial problems.  It was not a formal Board policy: more a basic management policy.  It is important to note that WM had agreed to provide long term support for WMI.  So far as I can now recall, there was no further formal discussion with Robbie Brothers regarding this plan.  So far as I was aware, he commenced implementing the agreed policy immediately.

I recall that some time after the penthouse meeting in November 1982 I was called to John Cheung’s office with John Lees.  I understood his view to be that WMI must rely on its own efforts to solve its problems but WM would assist so long as this was within its financial capabilities.”

and then added:

“I believed John Cheung would always have gone along with parent company support at the end of the day because it was in the best interests of the WM Group as a whole.”

5.9.4 In cross-examination at 77/14:

“Q.   ...  Looking, first of all, at the memorandum of 8th December, Mr Brothers makes the point that the meetings were informal; do you see that in the first line?

A.  Yes, I do, my Lord.

Q.  It is clear that these decisions that were reached did not have the force of board policy, did they; they were not board policy?

A.  My Lord, I think it had informally the force of a board policy.

Q.  I am sorry, I should have asked you to look at your own statement before you answered the question, because you actually deal with that and I was not trying to trap you into making a conflicting statement.  Have a look on page    of your statement, paragraph 34.04, and read that, please.  Is that the position -- "not a board policy, more a basic management policy" -- "not a formal board policy, more a basic management policy"?

A.  I think it was still partially or to some extent a board policy -- excuse me, a board policy.

Q.  It was never anything that was discussed at board level, was it -- not on a formal basis?

A.  Not on a formal basis, my Lord.

Q.  So, to that extent, it was not formal board policy?

A.  I agree, I cannot say that.

Q.  This was just something you were going to try to achieve and that had been discussed informally amongst the directors, or some of them?

A.  I do not accept, my Lord.

Q.  What do you not accept?

A.  I did not accept that we were trying to achieve something or that represented our ideas of trying to achieve something.  It was a directive.

Q.  It was a directive in what sense?

A.  A directive -- a policy directive, my Lord, I would call it.

Q.  A policy directive that was never ever mentioned again at WM or WMI meetings?

A.  I believe, my Lord, it had been mentioned not formally but informally in discussions and in some correspondence.

Q.  No doubt you will show us the correspondence in due course, but I can assure you that we have not seen it and Mr Lees could not point out anything to me.

A.  I cannot remember at this moment.

Q.  But, Mr Leung, having sat through the evidence of Mr Lees, I think you will agree with me that there is no mention whatsoever in any board minutes of this policy directive?

A.  Not in the minutes, my Lord, I accept.

Q.  In fact, nowhere -- nowhere at all?

A.  I believe that was the case.

Q.  So, this was not anything informal or even anything semi-formal; this was a group of directors getting around, having a chat, a prayer meeting, if you like, to try and work out a general attitude towards assisting WMI -- that is all it was, was it not?

A.  Yes, I agree, my Lord.”

5.9.5 In re-examination at day 85/29:

“A.  My Lord, I always considered that the memorandum of the 8th December 1982 reflected substantially, the discussions at the meeting in November.  The meeting between the Managing Directors and Mr Brothers with the members of the Policy Committee.  There had not been any formal records or resolution by the WM Board, that was correct.

Q.  So was there a commitment by WM, at that stage, as you understood it, or was that something for the future?

A.  I took it as being the commitment by the members of the Policy Committee on behalf of the Board.

Q.  But you refer in your answer -- this is Mr Cheung -- you said in your answer yesterday: no formal Directors Meeting to approve or disapprove the commitment?

HIS LORDSHIP:  He said that yesterday and again today.

A.  That is correct.

MR JOHNSON:  Yes.

HIS LORDSHIP:  His summary, if you like, is that the major shareholders, Mr Marden and Mr Cheung, in their capacity as the now informal Policy Committee, had made a decision on behalf of the Board.

MR JOHNSON:  Yes.

Mr Leung, my Lord has summarised your evidence, and the only query which I have to put to you arising out of it is whether the decision of the informal Policy Committee was, on your understanding at the time, something which could be either approved or disapproved of by the Board?

A.  My understanding at the time, my Lord, was that that was something that could be approved by the Board.

HIS LORDSHIP:  The reality of the situation, Mr Leung, was that if Mr Marden and Mr Cheung agreed something should be done, they would be able to carry the Board with them?

A.  That is correct, my Lord.”

5.9.6 In any event, Mr. Leung seemed to accept that any commitment had disappeared once HKR declined to invest.  Of the WM board meeting on 15th September 1983 at which Mr. Poon indicated support was not to be assumed (para. 3.5.239), he said in cross-examination at day 81/66:

“Q.  Mr Leung, what had happened to this commitment or agreement by WM to support WMI?  It was just a possibility, that is all, was it not?

A.  No, that was a belief.

Q.  No, no.  Mr Poon and Mr Lees make it quite clear that the question is still open and to be decided still?

A.  I believe what he actually meant --

Q.  No, no, this is what he said.  I can ask Mr Lees himself what he meant -- I have done -- but this is what he said and what Mr Poon --

A.  Yes, if that is what he said, that is what he said.

Q.  What Mr Poon said, that is perfectly clear at this stage that there was no commitment, there was no agreement to support?

A.  There was no commitment, correct.

Q.  If there ever had been a commitment, that had now disappeared?

A.  No, I do not agree.

Q.  Well, there was no commitment, so it had disappeared -- it is simple?

A.  I believe the words "no commitment" refer to the request for help after the turndown of HKR for the investment.

Q.  That is absolutely right, HKR had turned it down, and there was no commitment by WM to ensure that WMI survived?

A.  The commitment was subject to the fulfilment of certain conditions, yes.

Q.  No --

A.  But --

Q.  That is not what it says?

A.  My Lord, I agree there was no commitment at this stage of WM.”

5.9.7 Subsequently, when cross-examined about the WMI board meeting on the same day, Mr. Leung clarified what he meant about commitment.  Mr. Grossman pointed out that Mr. Shaw had made no reference to any commitment, and continued at day 81/69:

“Q.  There was no need for it, because there was no commitment any more, was there?

A.  No, there was no commitment at that point, or, shall we say, we did not know if and how much at that point.

Q.  The big question was:  you did not know if Wheelock Marden would support?

A.  I would not think so.  I still believed that WM would give support.

Q.  Mr Leung, we have just been through the previous minutes where you agreed with me that there was no commitment?

A.  No commitment at that point did not mean there was not going to be any support.  All I understand about the word "commitment" is they did not definitely answer at that stage how much, or if at all, support would be coming, but it does not mean there was completely no support.

Q.  No, no, I understand you are not saying it had been definitely decided that there was no support -- you are not saying that?

HIS LORDSHIP:   Mr Leung is saying, as he must, in view of the documents and what he said a moment ago that support was not a foregone conclusion, but he, nonetheless, still had the belief, at the end of the day, that Wheelock Marden would provide the necessary support.”

5.9.8 Unfortunately, Mr. Leung immediately resiled from that position at p. 70:

“Q.  Mr Leung, the reason why I am asking you this is because the position seems to be different now.  You had always been under the impression, or believed, that ultimate support from WM was a foregone conclusion.  Now, that position no longer existed, that is, because there had been an agreement with Mr Cheung, but that position no longer existed; is that not correct?  Do I understand your position to be that?

A.  That was not correct.

Q.  Can you explain then what you are saying the position was, now, in September after Warburgs had given a negative recommendation?

A.  My recommendation, my Lord, was that HKR had turned down the recommendation.

Q.  Yes?

A.  WMI had approached originally WM, or had wanted to approach WM.  The approach was interrupted by this idea of HKR to invest, so the thing was held in suspense -- the approach by WMI to WM.

HKR said "No" and WMI was told or had to reapproach WM.  WM said, "Let me think about it." It did not say "Yes" or "No", because it was not sure that it would itself give the support.  It might well be that Mr Cheung, or the major shareholders, or even the board of WM, might think of other companies in the Group that might have the idea, or interest, in investing in WMI.

So, you talk about commitment at that moment.  As I said, I agree there was no commitment, because the whole thing was still under consideration and that is why I said at that moment there was no commitment.

Q.  At that moment, there was also the possibility that there may not be any support at all?

A.  Anything can happen, my Lord.  There was no uncertainty as such, I think, in everything.  You can only say you believe, or you can perhaps say, "I am fairly certain," but there is no such thing as a sure certainty, I would say, if I can put it that way now.  I believe things can change, however certain we believe the position was.

Q.  Yes, the position had always been like that, had it not?  There was a hope that Mr Cheung might agree to support, but it was always uncertain?

A.  It was not a "hope", my Lord, it was a belief.  The belief could be upset by events that took place -- sorry, by events that take place without his expecting it, or, in fact, arising from a complete unexpectation such as act of God, war, anything -- earthquakes, so nobody, if I may say so, can -- at least I am sure I can say it for myself, I cannot say it for everybody -- can say that this was a certainty and it must happen.  There is no such thing, my Lord.

Q.  We are not talking about a certainty in that sense.  What we have been discussing in this case is an agreement, or a commitment, by Mr Cheung to ensure that WMI survived.  What I am saying to you is that agreement, or commitment, or undertaking never existed?

A.  No, my Lord, not only had it always existed, the question I was asked or that was just put to me is "no commitment by Mr Cheung to ensure" -- is that right?

Q.  Yes.

A.  My answer to this, my Lord, was that there was no adverse decision relayed either to myself directly by Mr Cheung, or through his representative, like this, because this was reflected by Mr Poon's remarks at that meeting.  He did not say that there was no commitment.  He probably only said -- as a lawyer, he had to be careful and, therefore, he wanted to be sure of the wording that one does not make it too definite.  Such is the case also when HongKong Realty, or HKR, made that announcement.

Q.  Mr Leung, all I am pointing out to you is that every indication during 1983 was to the effect that, at most, Mr Cheung would be prepared to think about the matter.  There was never any indication at all that he was committed to saving WMI, and, indeed, Mr Griffiths' telegram or fax that we saw yesterday for the first time indicates very strongly that there was not any commitment?

A.  As I said earlier on, or a few days ago, there was such an arrangement.  It was from Mr Griffiths in November 1982.  As far as I was aware, there was nothing that had been either written or told to me by Mr Griffiths that the agreement that we had arrived at in November is now no longer valid.  There was no such information or message passed to me.

Q.  Mr Leung, the reason why no message was passed to you was because of the November agreement was out of everybody's mind by early January.  It had been overtaken by events?

A.  It was not.  It might be affected to a certain extent by things happening every now and again, such as the HKR proposal or idea, but the fact -- the ultimate decision, as far as I can see, is WM would come to the rescue.  It was only a matter of perhaps whoever thought about this, say, Mr Cheung -- was that we, as executives, have to try our best to solve this, not just go back too easily to your parent and ask for money.”

5.9.9 So the essence of the November consensus, according to Mr. Leung, was a decision by major shareholders, one of whom at least recognised there would be financial constraints, which at some stage would be expected to be translated into approved policy by the WM Board.  Yet, it never was, and indeed, as Mr. Leung accepted, it was never mentioned although he suggested there were “echoes”.

5.9.10 Apart from the November agreement, Mr. Leung had other difficulties in cross-examination.  Thus dealing with the advice Mr. Shaw gave at the meeting on about 17th February 1983 (para. 3.5.28), he said he regarded the test as there being a reasonable prospect of debts being met.  That, I think, was not unreasonable given that it seems to be accepted that the advice about preservation of assets was something of a gloss.  However, at day 78/21 he said:

“A.  Mr Shaw said this in February before we took delivery of the Sealock and there was no doubt that the position of WMI at the time of this meeting in February -- 17th February -- was doubtlessly serious, but this, I recall, had been taken over by events after 17th February, perhaps before the date of the delivery of the Sealock.

Q.  Well, Mr Leung, we will go through it together and perhaps you will be able to show us how the position had improved, but I am going to suggest to you that the position had got much worse, in fact, by April?

A.  We will have to see, my Lord.”

5.9.11 Cross-examination proceeded to examine the events occurring between that meeting and delivery of Sealock.  Then at day 79/37:

“Q.  So, let me summarise then, briefly, the position at the end of March.  The cash position of WMI was critical; you had been told not to incur new credit unless it was absolutely essential; you needed a moratorium; you were not going to get a moratorium, you had been told, without parental support; you had not asked for parental support and you did not know what would happen if you did ask for parental support.  These things were all open, were they not?

A.  I do not agree with the last bit of it.

Q.  What do you not agree with?

A.  It was true that we did not -- "we" meaning WMI -- am I right in saying that, my Lord?

Q.  I am sorry, I do not follow that.  I will put the question to you again.  In summary, therefore, what you knew at the end of March was that the cash position of WMI was critical?

A.  Correct.

Q.  You had been told not to incur new credit unless it was absolutely essential to preserve assets?

A.  Yes.

Q.  You needed a moratorium on repayments to the bankers?

A.  I do not agree with the word "needed", because we would like a moratorium, but there would be other approaches.

Q.  This is the advice you had got from Schroders & Chartered, and this is what Mr Brothers was saying?

A.  Yes, that was the suggestion.

Q.  You were not going to get such a moratorium without parental support -- that is the advice given to you by Schroders & Chartered?

A.  That was the advice given by Schroders & Chartered, yes.

Q.  You had not asked for parental support?

A.  We had not asked for that.

Q.  And, if you did ask for it, you did not know what response you would get?

A.  I believe if it asked for that, we would get support.

Q.  I thought you just agreed with me that you did not know?

A.  I did not know the outcome, naturally, but that was my belief then, that it would be, but we had not approached; so what I meant to say was at that very moment I did not know, but that was my belief -- that, had we approached, we would get it.

Q.  And, Mr Leung, every indication in 1983 thus far had been against support for WMI?

A.  I think the idea was or the policy was that WMI should use its own efforts and resources to sort out its problems, so that was what we were doing, but if everything that we had done had performed and we did not get the -- and we were not able to solve the problem, then I believe the parent company will or would give its support.

Q.  But, Mr Leung, every indication had been -- not only from the Cheung camp, but also from Mr Ortiz-Patino at that stage -- that support would not be forthcoming?

A.  I do not agree.

Q.  Do you agree with me that the position was very uncertain?

A.  It was critical.  I would not want to use the word "uncertain", because I had the belief that eventually WM would give its support.

Q.  Mr Leung, I have set out the background extensively and I think you have agreed with me about it this morning.  Do you not accept that it was quite wrong to take credit from my client at the beginning of April, given the background of events in early 1983?

A.  I do not agree, my Lord.

Q.  I must put it to you -- and you know perfectly well, Mr Leung, that I am correct -- that there was no reasonable prospect of getting support for WMI and there was no reasonable prospect, therefore, of my client being repaid?

A.  I deny this allegation.

Q.  Mr Leung, all you had was a belief that there should be support and a hope that there would be support -- that is all you had?

A.  It was not a hope, my Lord; it was a belief -- a firm belief on reasonable grounds.

Q.  Well, Mr Leung, I must put it to you that you have not given us a single reasonable ground for this belief.

A.  The ground I had was the basis that I mentioned earlier on.

Q.  I must put it to you that that is simply not true.

A.  I do not accept that.

Q.  Let me ask you this.  Mr Shaw had advised on 17th February that you should only take new credit if it was absolutely essential to preserve the assets.  You said to me, when I asked you about this, that the position had improved after February and that is why you could ignore that advice at the beginning of April.  Tell me, Mr Leung, having gone through the various events of February and March, how the position had improved.

A.  I can not, at this stage, give any details.”

5.9.12 After an interruption to clarify whether it was appropriate to use the word “improve” or “change”, cross-examination continued at p. 43

“Q.  Mr Leung, what events had happened after 17th February which enabled you to ignore that part of Mr Shaw's advice?

A.  Do you mean, my Lord, the question is what event had happened at any time after 17th February 1983?

Q.  Well, we know, Mr Leung, that you did ignore or you did not follow Mr Shaw's advice that you should not take credit unless absolutely essential to preserve the assets.  We know that, because you took credit from my client.  What I am saying to you is:  why did you ignore that advice?

A.  Because I believed parent company support would come.

Q.  What event had happened between 17th February and the end of March to lead you to that conclusion or that belief?

A.  I believed that if the need did become very necessary for WM to seek help or assistance from the parent -- for WMI to seek from the parent company support or help, then we would get -- WMI would get it.

Q.  Mr Leung, when I first asked you about this matter, you said that you had not needed or had not followed Mr Shaw's advice, because it had been overtaken by events?

A.  That was what I am stating now -- it had been overtaken, but at that moment, naturally, I would not have known what took place, but I had this belief that we would get it, in one form or another.

Q.  Mr Leung, I am only going to ask you this once more, simply because we have to move on, but I will repeat the question and I will repeat it as clearly as I can.  If you do not follow it, please ask me and I will try and re-explain it.  On 17th February, Mr Shaw had given you certain advice.  One piece of advice was that you should not obtain new credit unless it was absolutely essential to preserve the assets.  You had said to us that that advice was not followed because it had been overtaken by events.

Now, we have examined in detail all the events between 17th February and Easter just before the delivery of the Sealock.  What I want to know from you is what events transpired, what happened between 17th February and the end of March which enabled you to believe that you could ignore this advice?

A.  I cannot remember.

Q.  I must put it to you that nothing happened and you deliberately ignored the advice.

A.  I deny that.”

5.9.13 It is clear that any events which occurred during the relevant period were far from encouraging.  Mr. Leung’s earlier answer plainly carried the implication that things had improved or changed for the better or become brighter.  That was wholly unjustified.  In the later passage, Mr. Leung indicated that he was relying simply on his belief that support would be forthcoming.

5.9.14 Mr. Leung quite understandably had difficulty in recalling events of over 10 years ago.  Like Mr. Lees he was a little coy about the missing EAW report.  In his witness statement, he said at para. 105.02:

“I do not recall that I ever read the EAW report.  I understand that I acknowledged receipt of a copy of the report with a letter dated 13th September 1983 from EAW.  I cannot be certain when I received this letter.  It may be that it was shown to me just before the HKR Board meeting on 15th September.  In any event, if I did read the report, it certainly did not make a great impression on me and, therefore, I assume it was uncontroversial.”

5.9.15 In cross-examination, Mr. Leung said about the report at day 81/57

“Q.  Of course, we have not seen the Warburg report.  Do you know what happened to it?

A.  I do not know, my Lord.

Q.  What happened to your copy?

A.  I had no copy, my Lord.

Q.  Mr Tipper wrote -- I will show you the letter in a moment -- but we have seen, question questioning Mr Lees, that Mr Tipper wrote and said that he had given a copy of the report to each of the directors.  Have a look on page 51.

A.  Yes.

Q.  You will see that --

A.  Yes.

Q.  If you read it very quickly, you will see that a copy had been sent to each director?

A.  This was a letter that was addressed, my Lord, to the directors of HongKong Realty.  It was not addressed to me or any particular person, and at this stage I cannot confirm that I had got this report.

Q.  Were you a director of HongKong Realty?

A.  Yes, I was.

Q.  I do not follow your answer.

A.  My answer is that this letter does not reflect the fact that I had been given a copy, or sent a copy.

Q.  It says so specifically?

A.  It does not, my Lord.

Q.  It says "a copy of which has been sent to each director" and you were a director?

A.  That is what this letter said.

Q.  Yes.  You would have received a copy of this letter, would you not?

A.  It was not a letter that was mailed to me -- it was perhaps a circular letter, or a letter addressed in common to all the directors of HongKong Realty that were supposed to be present at the board meeting.

Q.  Yes.  What point do you make?  You were one of those persons?

A.  Yes.  What I meant to say was that I did not have a copy given to me as this letter said.

Q.  I must suggest to you that you did, because that is exactly what is recorded here -- you did have a copy of it?

A.  I did not, my Lord.

Q.  What has happened to these copies of the Warburg report?

A.  If I remember correctly, my Lord, the reports were tabled at the HongKong Realty meeting, and it was there when I left the meeting.  What happened to that, I did not know.

Q.  Let us talk about what happened when you saw the report.  Up to the stage when you saw the report, you had no firm idea, or no concluded idea what it would recommend; is that right?

A.  That is correct.

Q.  It must have come as a great shock to you then?

A.  A great shock and a great disappointment.

Q.  Have a look at page 117 of your statement at paragraph 105.02.  I am afraid I do not understand this paragraph, and perhaps you can explain it.  Perhaps you would like to read it through?

A.  Yes.

Q.  You say it did not make a great impression on you?

A.  I do not know what "a great impression" -- whether that is different to my answer just now as being "shocked" and "disappointed".

Q.  You say: "It did not make a great impression on me, and therefore I assume it was uncontroversial," but it caused you great shock and disappointment?

A.  I was shocked and disappointed at the result.  The last sentence of my paragraph 105.02 was the reference to the content of the report itself.”

5.9.16 After an interruption, I took up the matter at p. 60

“HIS LORDSHIP:   Before Mr Grossman takes you on to another point, I am not quite clear what you are saying about this report, Mr Leung.  You saw it in the sense that you saw a document like that?

A.  Yes, that is correct.

HIS LORDSHIP:  Did you see it in the sense of reading it, looking at it to see what was in there?

A.  I had no opportunity to read that.  I recollect, my Lord, that the report was tabled at the meeting.  The meeting -- it was recorded in the minutes -- was to discuss or to report -- it was not actually to discuss -- it was to report the findings or the decisions of the committee -- the special committee formed for that purpose to consider this proposal.

The meeting started by Mr Tipper, who was the chairman of the committee, saying that he had received the report, and it was tabled at the meeting.

He then went on to say that the committee had given the report its deliberation and had come to a conclusion that they would not recommend that HongKong Realty make this investment.

There was no reason explained, but the terms of the reference, or the authority given to the committee, was that they had full authority to make a decision, and probably impliedly, not having any documents with me, that they had full authority delegated by the board and, therefore, the decision that they made was, in a sense, binding on the board of HKR.

We were not given too much time to read it.  The meeting probably lasted a very short time and was called off by the committee, and we left -- and I left.  That was what, at this moment, my Lord, I can recollect.  All I can recollect was this.

HIS LORDSHIP:   So this report which you had been waiting with such anxiety for, you saw, briefly on the table, were told it is no go and you left?

A.  No, it was not that, my Lord.  I managed to read pages -- the necessity or the decision to read the report was what was the reason.  I simply remember -- I can not have it now and I can only use the best of my recollection -- that the report considered that HKR was not -- in its business was not an appropriate -- in other words, an investment in WMI was not their business, or main business.  Their main business was that of property owning and property development.

If I recall, also, secondly, they do not believe that the return as suggested or as mentioned -- can I try again -- that the return, according to information supplied to them, did not indicate a satisfactory one for HKR -- probably in comparison with the property development business -- and it was these two main things that I was able to remember.

MR GROSSMAN:  Q.   Mr Leung, I must suggest to you that this is a remarkable feat of memory.

A.  As I said, that was 15 years ago.  I try very hard to remember if that is what went on, and all I can say is that what I have just said is to the best of my recollection.  It may be wrong; it may be right, and you talk about recollection or memory -- I could only say that some items I can remember -- general items, but not detailed items.  I already said that perhaps at the beginning of my statement.

Q.  Yes, you did, and everybody, I am sure, accepts that.  We have seen, quite understandably, how you have had a great deal of difficulty remembering things that are recorded in documents, but I wonder at this sudden recollection that comes about, and is not referred to in any document or your statement -- I wonder how it is that, really, of all the matters we have looked at, this is the one matter that you manage to recollect independently of any documents.

A.  That is what I have done, my Lord, I hope.”

5.9.17 I am prepared to accept what Mr. Leung said in that passage.  The manner in which he dealt with the report in his witness statement did not however do him any credit.

5.9.18 Finally, at the adjourned WM board meeting on 1st October 1984, Mr. Lees said that without the WWW dividend WMI would be close to consideration of appointing a receiver (para. 3.6.221).  Questioned about this, Mr. Leung said at day 84/30:

“Q.   ...  Mr Leung, you understand what a receiver is, and you did understand at the time, did you not?

A.  I did understand at that time.

Q.  Yes.  Can you think of any reason why Mr Lees should have made such a remark, given the belief you had anyway that WM would ensure that WMI did not go into liquidation?

A.  I believe, my Lord, that Mr Lees was trying to make the transaction look more arm's length.

Q.  Trying to look more arm's length to whom?

A.  To the Board, to say that WMI, unless it got the 2.8 million, its position would be very critical, that is what he apparently was trying to emphasize and to be recorded -- for that to be recorded in the minutes, to make it more arm's length.”

5.9.19 I can understand perhaps why Mr. Lees should want to emphasise WMI’s parlous position - although it seems unlikely that anyone on the WM Board was unaware of the position - but I see no justification for characterising Mr. Lees’ wording as an attempt to make “the transaction look more arm’s length”.

5.9.20 I hope I have given an indication of why Mr. Leung’s evidence must be looked at with some reservation.  I have, however, come to the conclusion, for much the same reasons as I advanced for Mr. Brothers, that Mr. Leung was ultimately honest in his belief that WM would support and save WMI notwithstanding the somewhat threadbare basis for that belief.  I am not persuaded that he was dishonest or fraudulent.  The fraudulent trading case against him must be dismissed.

5.10    MR. LEE

5.10.1 In view of my findings in relation to Mr. Lees, Mr. Leung and Mr. Brothers, there was no fraudulent trading to put Mr. Lee in jeopardy.  It is right, however, that I should deal with Mr. Lee as though he was at risk.

5.10.2 Mr. Lee was 75 at the time he gave evidence in April 1996.  He joined WWS in 1955 where he became a director and ultimately vice-chairman.  He was therefore in Sir Y.K. Pao’s camp.  He became a non-executive director of WMI in 1974 and of WM in 1976.  He replaced Sir Y.K. Pao on the WM Board where he was to monitor to some extent the WWW joint venture.  He was also indirectly connected with the Dalians.  CSSC’s subsidiary CSTC was since 1980 in a joint venture with WWS.  He was a director and president of this joint venture for 5 years.

5.10.3 As far as the affairs of WM and WMI were concerned, although he said he exercised independent judgment, he relied on Mr. Marden, Mr. Lees, Mr. Leung and Mr. Brothers for their conduct.  He himself was similarly engaged as director of WWS.

5.10.4 In cross-examination, he accepted that from March 1983 WMI required parental support to survive.  He was not aware of the November consensus although he knew meetings had taken place.  He realised a plan had been formulated involving the reduction of debt, sales and the cancellation of newbuildings which was similar to the policy which had been adopted by WWS.  He was not worried about WMI because, as he said in his witness statement at para. 32.03:

“Throughout the time I was a WMI Director, I believed support would be forthcoming for WMI to trade out of its difficulties until the market improved.  In relation to the “tests” raised by David Shaw, I had no special knowledge that support would not be forthcoming and I certainly believed there was a reasonable prospect of sorting something out.  Rothschilds and Schroders had both recommended that WMI be supported and for compelling commercial reasons.  My belief was confirmed by Rothschilds’ and Schroders’ views.  I could not envisage WM ignoring such professional advice and not providing support.  I appreciated of course that John Cheung and his associates would have to agree to any decision to assist WMI, but I believed that at the end of the day support would be forthcoming.  My reasons were principally as follows and they remained the same at all times until WM’s takeover by the Hong Kong and Kowloon Wharf and Godown Company Limited (“Wharf”) in March 1985, referred to later in this Statement:

(a) Although the shipping market was severely depressed when delivery was taken of the “Sealock” in April 1983 and the “Annalock” in March 1984, I was aware from my experience with WWS that the market can be extremely volatile and, on occasions, can improve very quickly.  I had no doubt whatsoever it was only a matter of time before the market improved substantially and WMI would again be profitable.

(b) WMI was part of WM which was a long-established and leading Hong Kong company.  WMI had the “Wheelock” name and was a major WM subsidiary and investment.  In my view, WMI was WM’s “baby” and would be supported.

(c) I was aware that John Marden as WM’s Chairman, for historical and other reasons, was staunch in his support of shipping.  I had no doubt he and other WM Directors, if not necessarily always for the same reasons, would support WMI where necessary.  I considered it was in the WM Group’s interests to support WMI, although the amount of such support should be limited to what was necessary before the market improved.  I was confident John Marden would act in the best interests of WM and WMI.

It was also well known within the WM Group that Anton Marden, as John Marden’s only son, was being “groomed” for a role within WMI and WM, in particular in attending WM and WMI Board and Committee meetings, although not a Director.

(d) So far as John Cheung and his associates was concerned, I had no reason to believe they would disregard the Chinese belief that a parent company does not “cut off” a member of its family, or allow a subsidiary to go into liquidation.

Further, although John Cheung’s associates were not enthusiastic about shipping, it was clear to me and I believe the other WM Directors, that in the interests of the Group as a whole, John Cheung’s associates considered WMI should be supported until the market improved and not put into liquidation.  They wished to limit such support to what was necessary in the circumstances.

(e) No one within the WM Group wanted WMI to go into liquidation or believed liquidation was necessary.  So far as I am aware, all WMI’s Directors including myself, believed that a solution in one form or another, should and would be found for WMI’s financial difficulties.

(f) My views on parent company support were reinforced by the independent financial and legal advice received from time to time by WMI and WM, particularly from Schroders and Norton Rose in the case of WMI and Rothschilds and Slaughter & May in the case of WM.

(g) Liquidation would be extremely damaging both to the reputation and creditworthiness of WM and the WM Group as a whole and to WM’s share price.  I was firmly of the belief that John Marden and John Cheung as WM’s two major shareholders would be keen to avoid this.

(h) The numerous instances when WM proposed or provided support directly or indirectly.”

5.10.5 There was, of course, a flaw in Mr. Lee’s reasoning.  The WMI cash flows, as is now agreed, contained reasonable assumptions of improvement in the shipping market.  There was no room to rely on some other substantial increase.  Mr. Lee’s expertise was in finance so, while he relied on Mr. Brothers for these projections, he cannot have been under any illusions that market improvements were going to save the day.  The cash flows unrelievedly showed deficits.  Support was required in addition to the predicted market increases.

5.10.6 Further, Mr. Lee’s attitude to Sealock was hardly to be commended.  In cross-examination on day 113/26

“Q.  At that time, the time the Sealock was taken delivery of, you were aware, I take it, that the WMI was taking a large amount of credit from the Danish organisation?

A.  Yes, that is the usual way which you do with new ships.  You must have some.

Q.  How did you think WMI was going to be able to repay this debt to the Danes, given its financial situation?

A.  Usually I do not involve in the details, how to pay.  It was the responsibility of the somebody else, they must show their own judgment.

Q.  You did not concern yourself with that?

A.  I do not.

HIS LORDSHIP:  It was the concern of the executive directors; is that what you are saying?

A.  No.  I am not concerned with one single case, one single ship how to repay.  Usually I do not concern.

HIS LORDSHIP:  No, but you said it was somebody else's concern, I think.

A.  Yes.

HIS LORDSHIP:  Whose concern?

A.  The Managing Directors, the General Managers.

MR GROSSMAN:  Mr Lee, you were a party, because you had to sign the resolutions, to WMI taking this huge amount of credit at a time when it was in deep financial trouble.  Did you not think that you had a duty, or a responsibility, to enquire as to whether WMI would ever be able to repay this debt?

A.  I left that to the Managing Directors.

Q.  You left that to the Managing Directors?

A.  Yes.”

5.10.7 Mr. Lee recognised that apart from a running account between WM and WMI, no support which was not fully secured had been given by WM.  When he was being asked for examples of support, he mentioned the WWW dividend.  Then in cross-examination on day 113/24

“Q.  Of course you knew that that did not affect security.  They were not actually losing any money from that?

A.  They cannot give a free gift.  It is a public company; they support them in a different way.

Q.  Support was in the form of security; secured loans?

A.  Secured loans --

Q.  Or security facilities?

A.  A public company, they cannot give you free gift, just give you without security.

Q.  There would be a cash injection, would there?

A.  I consider this kind of way of dividend, or give a standby guarantee, even secured, as still some kind of support.

Q.  But not an unsecured support?

A.  Yes, I personally believe, or consider, that support, even secured, is still support.

Q.  I understand that, Mr Lee.  What I am saying is that because, for the very reasons you say, because this was a public company, WM would not give unsecured support?

A.  That is right.

Q.  Do you agree with me?

A.  That is right, agree.

Q.  If WMI had no more security, it would not get any more support from WM?

A.  That is probably true.”

5.10.8 So, again it boiled down to whether WM was going to support once security was no longer available.  Asked about Mr. Ortiz-Patino’s telex, Mr. Lee said on day 112/114:

“A.  I have a certain little bit different thinking.

Q.  Certain different thinking?

A.  Yes.  It was old type of Chinese reasoning that actually the parent company always give its subsidiaries support.  If it is possible, if it is within our ability.  Not so easy to cover the major subsidiary company, just simply do not give support.  I believe at the end of the day, support will come from one way or another.”

5.10.9 A little bit later at p. 116

“Q.  I suppose it is right to say there were always two views: one is you look at things commercially, what is in the interest of the shareholders generally.  The other view is that you must always support, because that is the Chinese way of doing things?

A.  That is correct.

Q.  Of course, you had no idea what Mr John Cheung's attitude would be?

A.  No.”

5.10.10 Then when it was pointed out that Mr. Ortiz-Patino seemed concerned about liquidation, Mr. Lee said at day 112/121:

“A.  I do not think I ever -- I do not think I was worried at that time.  I never worried about liquidation.

Q.  You never worried about liquidation?

A.  I never worried that the company would be forced into liquidation.

Q.  Mr Ortiz-Patino seems to be worried that that might happen?

A.  In my mind, Wheelock Marden is a big company.  All the rest --

Q.  Of course, Wheelock Marden might not support.  You did not know what attitude John Cheung would take?

A.  John Cheung -- they will always have some kind of agreement between John Cheung and John Marden.

Q.  You did not know what that was?

A.  I believe so, that -- sooner or later it will be coming.

Q.  That is what you hoped?

A.  Yes.  I am not sure because nobody can guarantee.

Q.  Pardon?

A.  Nobody can guarantee.

Q.  Of course.

HIS LORDSHIP:  Sorry, Mr Lee.  You are saying that, all along, you expected Mr Marden and Mr Cheung to reach an agreement about supporting WMI?

A.  That is correct.

HIS LORDSHIP:  Although, it could not be guaranteed; is that right?

A.  No guarantee from me, or anybody, that they can reach agreement.

HIS LORDSHIP:  You expected them to reach agreement?

A.  That is right.”

5.10.11 Like all other defendants, Mr. Lee was on somewhat shaky ground when professing his belief that WM would support wmi.  In my view, Mr. Lee can legitimately be accused of over reliance on the working directors and paying too little attention to what was really at issue in taking delivery of the newbuildings and drawing down the loans.  I am doubtful whether he properly discharged the functions of a director of a public limited company.  I am not persuaded, however, that he was dishonest and party to a fraud on ADS.  For this and reasons already given, the primary case in relation to fraudulent trading must be dismissed against Mr. Lee.

5.11    MR. MARDEN

5.11.1 The eponymous Mr. Marden’s position in the WM Group is tolerably clear by now.  He was the shipping man.  He had other shipping interests outside the WM Group.  After his father, he had been installed on the WM throne but, by the time these events took place, he had had to make space for Mr. Cheung and was in danger of being pushed off.  The struggle with Mr. Cheung plainly undermined Mr. Marden’s ability to approach WMI’s problems in the direct manner he would no doubt have preferred.

5.11.2 The absence through ill health of Mr. Marden from the witness box raised considerable difficulties.  Mr. Marden’s witness statement is a masterpiece of commercial reason and common sense.  It contains, however, two substantial contradictions of other evidence: not only is there no reference to the November consensus but there is no reference to any such meetings (para. 5.4.20).  Second, there is no suggestion that Mr. Marden was prepared to help WMI out of his private resources.

5.11.3 Somewhat surprisingly Mr. Marden also said of the S&C report of April 1983 that

“I think it highly unlikely that I would have discussed the report with John Cheung as I had little direct contact with him about any of the Group’s business.”

5.11.4 In para. 22 of his witness statement, Mr. Marden dealt with HKR

“The records show that, on 30th April 1983, WMI’s directors resolved to approach Hong Kong Realty for assistance.  I was not present at the meeting.  I do not recall discussing this with John Cheung but John Cheung must have agreed in principle to provide this support as he ran Hong Kong realty.  Otherwise, the letter dated 6th May 1983 from WMI to Hong Kong Realty would not have been written in the terms that it was.”

5.11.5 That too is in sharp contrast to the clear indication from all the evidence that Mr. Marden had been putting together a syndicate to deal with if not take over WMI.  It is inconceivable that Mr. Cheung and HKR would have stepped in without discussion between the two principals even if it was conducted through intermediaries.

5.11.6 Mr. Marden also made clear that from January 1983 onwards WMI obtained continuous legal advice about fraudulent preference and fraudulent trading, “matters which were in the directors’ minds from this time onward”.  Mr. Marden, as he believed did all the other WMI directors, relied heavily on this advice, would not have acted against it and would have expected Norton Rose to react to any proposals which caused them disquiet.

5.11.7 As far as support was concerned, at para. 24 of his witness statement, Mr. Marden said:

“24. In mid July 1983, I received a letter from Schroders stating that the secured banks were unwilling to proceed with a moratorium unless parental support was forthcoming.  This was something N.M. Rothschild & Sons Hong Kong Ltd. were instructed to advise upon.  My position remained that every effort should be made to find support for WMI and I had every confidence that it would be forthcoming, which it ultimately was.”

5.11.8 That paragraph seems to have accepted, as is now acknowledged to be the case, that WMI was dependent on support for survival.  In para. 30, Mr. Marden also seems to have acknowledged that support would have to come from WM

“30. I did not and do not think that WMI’s expectation that Wheelock Marden & Co. Ltd. would come to its assistance was misplaced.  Indeed, if it had been misplaced, one would have expected Wheelock Marden & Co. Ltd. to have sent a clear signal to WMI to have resigned as general manager and to have ceased consulting professional advisers about supporting WMI.”

5.11.9 So, once again could Mr. Marden have genuinely expected that support from WM?  The fact that Mr. Marden did not in the end make a private investment in WMI is not to the point.  What is important is that his intention to do so was an indication of his determination to see WMI through its problems.  Although, as I have said, Mr. Marden himself makes no mention of a private investment, there is no doubt on the evidence that on at least two occasions he was seriously contemplating such a course.  Initially, there was the syndicate to acquire an interest in WMI in April 1983.  That project was no doubt abandoned once HKR became involved.  Next, Mr. Marden commissioned Wardleys to report after the disappointment of HKR and the US$4 million facility.  That report was hardly encouraging and Mr. Marden did not invest.  But by then, December 1983, an air of optimism had crept into WM and WMI.  Hence, at the WM board meeting on 20th December 1983, Mr. Lees reported progress and Mr. Marden “congratulated all those who had been concerned with resolving WMI’s difficulties”.  I can perhaps comment here, and it is a comment which applies to all the minutes and other documents, that this minute was not prepared with litigation in mind or, at least, not litigation of the nature and magnitude of the current proceedings in which the question of an honest belief is crucial.

5.11.10 By August 1984 when WMI was again beset by problems, Mr. Marden was considering an acquisition of an interest in WMI, a course which had the support of Mr. Cheung.  This turned into a search for an outside investor to acquire WM which would allow Mr. Marden to keep the Group together and support WMI.  Had it not been for the intervention of Wharf, the last plan may have succeeded.

5.11.11 Mr. Marden’s championship of WMI was spoken of in the strongest terms by Mr. Ortiz-Patino, whom I deal with in the next section.  Mr. Ortiz-Patino identified part of a letter written by Mr. Marden to, as I understood it, Mr. Ortiz-Patino himself in August 1984 (App. 3/25).  This letter seems to me to throw contemporary light on Mr. Marden’s attitude to WM and WMI.  It shows Mr. Marden at least had doubts about Mr. Cheung’s good faith and his commitment to WMI.  It shows that Mr. Marden was fully behind WMI and one way or another was determined to support it through WM.  According to Mr. Ortiz-Patino, Mr. Marden had the personal means to achieve this.

5.11.12 Despite the lack of any mention by Mr. Marden in his witness statement of his personal allegiance to WMI, on the totality of the evidence there is no doubt that he intended to ensure support by WM for WMI with or without Mr. Cheung’s assistance.  It is difficult, in the circumstances, to see how dishonesty can with the necessary degree of probability be ascribed to him.  But for the unexpected take-over by Wharf, Mr. Marden’s plans and intentions should have proved well-founded.  If Mr. Marden was confident in WMI’s future, his fellow directors and defendants were entitled to derive some comfort from that confidence, a confidence at the highest level.  It is important to recognise, as ADS pointed out, that it is not part of the pleaded case that survival of WMI was assured on the basis that Mr. Marden would have stepped in to save WMI.  That does not, however, affect my finding that the other defendants could legitimately derive confidence from Mr. Marden.  The source of Mr. Marden’s confidence was irrelevant.  In any event, it seems clear at least to me that it was Mr. Marden’s intention to solve WMI’s problems not so much by a private take-over as by placing WM in a position to be able to maintain WMI as a going concern.

5.11.13 Accordingly, I dismiss the primary fraudulent trading claim against Mr. Marden.

5.12    MR. ORTIZ-PATINO

5.12.1 Mr. Ortiz-Patino was and is an experienced businessman with international interests and connections.  His commitments are such that only with many months’ notice could he make himself available to give evidence.  He gave the unfortunate impression that he was somewhat exasperated at being troubled with what he regarded as a rather trivial episode which he had long consigned to limbo.

5.12.2 Mr. Ortiz-Patino was involved in the November 1982 meetings of which he said:  “The upshot was that a broad strategy was agreed as recorded in [the December memorandum]”.  In para. 8.02 of his witness statement, after noting the presence of Mr. Griffiths, he said:

“My understanding was that John Cheung’s position was that WM would provide financial assistance to WMI provided WMI had taken all reasonable steps to increase its liquidity, in particular by reducing or rescheduling its debts and selling assets, so that WMI’s actual cash needs could be quantified.  He was against simply pouring money into WMI.  So was I, and in fact John Cheung’s views on this matter were similar to my own.  To my mind, the agreed strategy recorded in Robbie Brothers’ memorandum of 8th December 1982 reflected this approach.  Parent company assistance was to come last, in the form of a “once-for-all fund-raising exercise”, and not in the form of guarantees.”

5.12.3 That evidence is rather more consistent with a plan than a commitment.  When giving oral evidence in chief, Mr. Ortiz-Patino added the element of quantification, a step which would be necessary before a rights issue or other form of support.  In cross-examination, however, he too characterised the November consensus as a commitment by the two major shareholders.  He was pressed about the amount which might have been quantified.  After saying he had a figure of US$20-30 million in mind, cross-examination proceeded on day 118/102

“Q.  There was no agreement on a figure?

A.  No.

Q.  Of course, if it turned out to be considerably higher, what would you have done?

A.  As I mentioned before, we wanted to be quantified.  That was the whole purpose of this whole exercise: we wanted it quantified.  I am not going to make suppositions of what is going to happen.  All I can say is that Wheelock Marden is a very wealthy company, a rich company and can cope with a figure of $20 or $30 million; it is nothing for them.  You have their annual report here, you can confirm it to yourself. .

Q.  It is easy enough to see what they were worth, it is a question of how much they were prepared to --

A.  I am sorry, I could not hear.  I do not know how much they were prepared, my Lord, to put up.  We would only have decided that when we knew what the figure was.

Q.  Once you had the figure, then depending on its enormity, the Board may or may not agree to give that support?

A.  I do not know, we never got to that stage, my Lord.”

5.12.4 It seems to me that there Mr. Ortiz-Patino was accepting that WM would not have put up any sum otherwise he would have stated categorically that the amount would not have mattered.  So I do not accept, as I have already indicated, that until November 1984 that there was an unfettered ongoing commitment to save WMI.  And as with other witnesses who tried to cloak the November consensus with an ill-fitting garment, Mr. Ortiz-Patino’s credibility necessarily suffered.

5.12.5 Mr. Ortiz-Patino met and became friendly with the Marden family in about 1962.  He was appointed a director of WM in 1966 out of friendship with Mr. Marden after Mr. Marden’s father died.  He became a very close friend of Mr. Marden and stayed with him when in Hong Kong.  He was uniquely placed to speak about Mr. Marden’s interest in and deep commitment to shipping and to WMI which represented the majority of the WM Group’s shipping activities.  In para. 14.01 of his witness statement, Mr. Ortiz-Patino said:

“I always believed that, if necessary, John Marden would use his own personal fortune to secure the future of WMI despite the adverse market conditions.  In my mind such a proposal would be used as a last resort.  However, John Marden did not discuss this proposal with me.  He already knew that my concern at this time and later was that he would allow his enthusiasm for the shipping business and his desire to support WMI to lead him to provide the necessary support personally before it had been clearly demonstrated that there was no alternative to securing WMI’s future.  I recall I had voiced this concern to John Marden during one of my recent visits to Hong Kong.  As stated in paragraph 3.03 above, I used to stay with the Marden family in Shek-O on my visits to Hong Kong and travel with John Marden by car to the office.  I am sure that I took the opportunity on one such drive to try to dissuade him from investing in WMI unless and until it was clear that this was the only way of saving WMI.  I also advised him that he should ascertain the extent of the investment which would be needed to secure WMI’s future and obtain independent financial advice on the viability of the investment.  I should add, however, that even if John Marden had obtained independent financial advice which was not in favour of him investing in WMI, I was well aware that he would have proceeded with the investment in any event.  This was because of his love of the shipping business and desire to hand it over to his son in due course.  I just wanted him to be made aware of the risks he would be taking in making such an investment.”

5.12.6 I accept that Mr. Marden himself has provided no evidence of his great commitment to WMI.  Indeed, his witness statement is consistent with the evidence of Mr. Brothers.  For example, Mr. Brothers said Mr. Marden had a “hard nosed approach to what was in the interests of WM and his family” and “would have behaved rationally as would any vendor” - although ultimately Mr. Brothers felt that Mr. Marden would invest.  Again, Mr. Brothers said that in November 1984, he discussed with Mr. Marden the possibility of Mr. Marden taking over shares of WMI:  “The result of that was basically inconclusive but certainly not in any way positive”.

5.12.7 In his witness statement, however, before this point might have been perceived as relevant, Mr. Ortiz-Patino described Mr. Marden as “an intensely private man who did not communicate well”.

5.12.8 I accept, therefore, Mr. Ortiz-Patino’s analysis of Mr. Marden’s attitude to WMI.  Despite the point about the November consensus, I am satisfied that, whatever his personal feelings, Mr. Ortiz-Patino came to help the court and to recount events and personalities as honestly and accurately as he could.  He certainly pulled no punches about Mr. Cheung.  He said he was concerned about him all along particularly because of the enormous number of votes he had obtained through acquiring cheap B shares and said:  “I would not have trusted him implicitly”.  Mr. Ortiz-Patino added that Mr. Cheung had always been polite and that in the course of discussions he had had with Mr. Cheung during this period (day 118/77)

“A.   ... he never said he was going to support the shipping.  He never said that.  He always said: "John wants me to support the shipping, I want to know what it is going to cost."  That is all he said.

Q.  You got this from John Cheung?

A.  John Cheung, yes.  I went to see him quite often in his office down below.  He would always say to me -- there never was at any stage, anywhere, where he said he was not going to support the shipping any more.

Q.  Did you discuss with him the question of whether or not he would support.

A.  No, but he knew -- I probably did.  I discussed many things with him.  I discussed splitting the company, I discussed him selling his shares, I discussed the shipping.  He was annoyed at the shipping and annoyed that John had given the guarantee without his knowledge.  He was annoyed that these reports were going around.  He was not pleased, but he did want to -- he even went as far, at one stage, as having HongKong Realty say they will take it up.  He discussed shipping with John Marden and he discussed shipping with me.”

5.12.9 I conclude, therefore, that Mr. Ortiz-Patino was supportive not only of the view that Mr. Marden was committed to WMI but that there were real grounds for believing that Mr. Cheung, once every drop of blood had been wrung from creditors, would also stand by WMI.  Mr. Ortiz-Patino at least remained confident WM would support.

5.13    ADVICE

5.13.1 The legal and financial advisers gave evidence.  They were David Shaw of JSM/Norton Rose; and John Reynolds and Giles Elliott, both of S&C.  Mr. Shaw, of course, provided WMI with legal advice from February 1983 onwards.  Mr. Reynolds was involved with WMI from February 1983 to March 1984 and Mr. Elliott from September 1984.

5.13.2 The thrust of the advice they gave and of their views is apparent from the documents and reports I have reviewed.  There were not, as far as I am aware, any material deviations from that advice or those views in their evidence.  The effect of their evidence may, I think, be summarised in three parts:

(1)  November Consensus

5.13.3 None of them were aware of any formal November plan.  Mr. Shaw and Mr. Reynolds, who were involved at the beginning, realised WMI had evolved a plan or strategy to combat their difficulties.  It was a plan which was sensible in the circumstances.  All of them assumed WM would support and were not aware of any commitment.  As Mr. Reynolds put it “to the extent the problems were beyond [WMI, it] would then have to negotiate some form of support with its parent”. 

(2)  Propriety of Advice

5.13.4 The advisers agreed that, given WMI’s difficulties, it was right for the directors to have sought advice particularly as a public company was involved.  Taking advice, however, did not necessarily mean the directors viewed liquidation as inevitable although clearly it was on their minds.

5.13.5 The evidence was not, however, an unrelieved paean of unconcern about WMI and its directors’ position.  Thus, in cross-examination of Mr. Shaw on day 123/24:

“Q.  Did you find that there was a worry from time to time when you were called in, that WMI was facing liquidation?

A.  Certainly in that week of 15th to 23rd September, the uncertainty appeared to have grown at that point.

Q.  So we can get it in our minds, it is 1983, and this is the time when HongKong Realty had turned down the investment, was it?

A.  Yes, that is correct.

Q.  They were waiting for Wheelock Marden to decide what it was going to do?

A.  I think as far as I was concerned anyway, there was some uncertainty in that week.  Perhaps that is the main time we were looking at the possibility of WM not supporting at that point.

Q.  Was it your recollection that WM not supporting was equated with WMI going into liquidation?

A.  I think it rather depends on the point of time, but in the earlier stages, I think Schroders & Chartered were reasonably firmly of the view that unless WM gave some support, then it would be difficult to persuade the banks to agree to any moratorium or rescheduling, and certainly in that phase, it was an important element of getting something together which would put the company on a long-term footing.

Q.  The consequence of the banks adopting such an attitude would have been liquidation; is that how you understood it?

A.  Yes.”

5.13.6 Mr. Reynolds was asked about Mr. Lees’ letter of 14th September 1983 seeking support (App. 3/22) in which Mr. Lees said WMI might have to cease trading (day 148/27):

“Q.   ...  You agreed with that, I take it, at the time?

A.  Yes.

Q.  The urgency is stressed in the next few paragraphs, and it is a degree of urgency that presumably you would have agreed with?

A.  Yes.

Q.  It was not overstated?

A.  No.”

5.13.7 Mr. Elliott perhaps described the position best when asked at day 131/41:

“Q.   ... if it was the position that the directors of WMI were concerned and properly concerned at all times, from 1 August 1984 onwards, with the possibility of liquidation and their own positions in that event --

A.  I think they were so concerned, but as I have said before, I think they were also -- I think effectively they wanted their advisors to help them solve the problems.  They wanted their advisors expressly to identify the questions that they should be asking themselves to enable them to satisfy themselves that they were continuing to trade properly.  That is one of the roles I saw myself doing.

When we set forward our advice and said how we thought they should address the question, and these are the questions they should ask themselves, they were consistently able to answer them positively and satisfy themselves they were not facing liquidation.”

(3)  Character

5.13.8 Mr. Reynolds and Mr. Elliott both spoke of the honesty and integrity which they perceived on the part of Mr. Brothers, and of his hard work and commitment to getting WMI on a sound footing.  Mr. Reynolds also spoke of Mr. Lees’ honesty and competence.

5.13.9 Mr. Shaw had the impression that Mr. Lees, Mr. Leung and Mr. Brothers all honestly believed support would be forthcoming.  His partner, Donald Freeland of the firm’s London office, who was responsible for putting WMI’s financial deals into legal shape, also gave evidence and spoke highly of Mr. Brothers’ competence and honesty.

5.13.10 All these witnesses regarded Mr. Marden as something of a father figure or statesman who did not concern himself with details.

5.14    THE EXPERTS

5.14.1 Both ADS and the defendants called experts in relation to the financial situation of WMI.  David Mace of Messrs. Ernst & Young was retained by ADS, and Roderick Chalmers of Messrs. Coopers & Lybrand by the defendants.  Both Mr. Mace and Mr. Chalmers prepared lengthy reports and replies to each other’s reports.  Each covered the ground in considerable detail.  They were initially divided on a number of issues.  As the trial developed, however, the only issue of any significance which survived between them was, in my view, what was called the Danish Kroner funding adjustment.

5.14.2 ADS also called Mrs. Jean Richards, an expert in the shipping market and ship valuation.  She too provided a lengthy report which to her chagrin was reduced very considerably on the grounds of admissibility (I repeat, however, that I found the unexpurgated report, which I had read earlier, of immense interest and a tribute to a very considerable expert).  In the event, the defendants largely accepted Mrs. Richards’ evidence and did not find it necessary to call their own experts in this field.  As a result of this evidence, it became possible to agree that the assumptions in relation to the shipping market contained in the WMI cash flows were reasonable.

Equity build up

5.14.3 It also became possible for Mr. Chalmers to recalculate the equity build-up in WMI’s fleet based on what became known as “Mrs. Richards’ formula”.  In essence, the formula consisted of the estimated value of existing vessels based on predictions of what the shipping market would do; in general the value of existing vessels not exceeding the cost of newbuildings; and the value of a vessel having to be kept at scrap value in the last 2 years of its working life of 20 years.

5.14.4 This calculation transformed the WMI cash flows by showing the effect of refinancing 80% of the increasing equity available to WMI in vessels on which debt had been paid down.  The S&C cash flow of April 1983 with a moratorium had shown a maximum deficit of US$53 in 1989.  Mr. Mace in his report had based his assessment of WMI’s position upon the then market values prevailing.  Mr. Chalmers had used net book-value.  After making an adjustment for equity build-up on the basis of 1983 market values, the maximum deficit would be US$22 million in 1987; using book-values there would be a deficit of US$15 million in 1988.  Mrs. Richards’ formula, however, produced a deficit of only US$6.8 million in 1987 and by 1992 there would be a surplus of US$86 million.

5.14.5 The position became even more marked if an injection of US$12 million was introduced.  Mr. Mace’s deficit of US$22 million in 1987 is reduced to approximately US$2 million.

5.14.6 Without a moratorium, the S&C cash flow showed a maximum deficit of US$101 million in 1989.  Applying Mrs. Richards’ formula, the deficit is reduced to US$26 million in 1985.

5.14.7 The Rothschilds’ cash flow of September 1983, which showed a deficit of US$69 million in 1991, was treated to a similar calculation based on 1983 market value and book value.  The former produced a maximum deficit of US$16 million in 1988; the latter one of US$10.7 million in 1990.

5.14.8 It was Mr. Mace’s view that WMI was wholly dependent on WMI support for survival.  That was the linchpin of ADS’ case.  Mr. Chalmers was of the same view.  Where they differed was on timing.  Mr. Mace said it should have been in place before the loans were drawn down and that the failure to have it in place undermined any reasonable belief that support would be forthcoming.  Mr. Chalmers did not insist on support at that stage.  Of course, it would have been desirable for WM to have provided support in 1983.  Had it done so, in all probability it would not have been necessary for me to write this judgment.  That support of US$12 million was not then provided has raised the question which I have to answer - whether there was an honest belief support would be forthcoming.

5.14.9 Mr. Mace agreed, however, that an injection of US$12 million in 1983, if not eliminating a future deficit entirely, would have reduced it to an amount over which it would have been reasonable to expect WM to help out.  The calculations I have outlined lend considerable credence to that position.

5.14.10 These calculations were, however, academic.  They would no doubt have provided great comfort to WMI and WM in 1983 and 1984.  Effectively, they were the quantification that WM was seeking.  The picture would have been encouraging.  The calculations were unfortunately not carried out.  Further, although equity build-up was mentioned by Mr. Lees and Mr. Brothers, it was not a factor they relied upon.

5.14.11 There is also something of a catch 22 situation.  The equity build-up assumes debt being paid down in the intervening period, or bridging the gap as Mr. Chalmers put it.  To pay down that debt, WMI had to acquire funds from somewhere - which could only have been from WM.  Without those funds, the debt would remain and the only equity available would be that arising from any increase in vessel values.

5.14.12 Mr. Mace was criticised for not taking equity build-up into account in his report.  He explained that his approach was to take a snapshot view of WMI at the relevant times, a view based amongst other things on market values.  That view led him to conclude support was necessary but which, as time went by, became less and less likely on an objective basis.  That was the real issue.  On his approach the question of equity build-up did not arise.

Danish kroner adjustment

5.14.13 Also academic, in my view, was the issue of the Danish Kroner adjustment.  The argument for the defendants was that the liability (the loans) and the corresponding assets (the Danish Kroner deposits) were in imbalance because the smaller deposits would pay off the larger loans.  Net assets were thus reduced.  Although that was correct accounting treatment, WMI’s balance sheet should be adjusted to reflect the beneficial effect of the arrangement and thus improve WMI’s asset position.  Indeed, S&C carried out the adjustment in their balance sheet of April 1983. 

5.14.14 Mr. Mace was prepared to accept this in relation to Marilock and Rangelock.  He would not, however, accept any adjustment for the three later vessels because the revised arrangements meant that the deposits no longer liquidated the loans and interest.  Mr. Chalmers was of the opinion that an adjustment should still be made for that part of the loans still covered by the remaining deposits.

5.14.15 Even accepting Mr. Chalmers’ contention, however, it seems to me the effects are cosmetic rather than real.  Mr. Chalmers disagreed with Mr. Mace’s valuation of WMI on a market rather than book value basis.  He said that this was not in accordance with a going concern basis.  He pointed out that WMI’s accounts had not been qualified by its auditors.  He said, and Mr. Mace agreed, that there was as yet no permanent diminution in the value of WMI’s assets which required them to be written down.

5.14.16 Mr. Chalmers had,however, been to considerable trouble to explain to me his approach to a company which finds cash flow problems and which may be commercially insolvent.  He said it is then necessary to look to the company’s balance sheet to see what assets are or will be available at the relevant time and which can be refinanced or disposed of in order to provide any funds which may be required.  He acknowledged, however, that a banker or other person being asked to provide such finance is likely to give any asset a realistic appraisal rather than simply accept its book-value..(Although not an accounting expert, that is effectively what Mr Shaw told Mr Brothers and others on 9th August 1984 - para. 3.6.148).

5.14.17 In practice therefore Mr. Chalmers would adopt the same approach as Mr. Mace in deciding on the health or otherwise of a company.  Applying that approach to wmi and the Danish Kroner, the deposits themselves were not going to provide any relief.  They were already accounted for.  Mr Chalmers accepted that no finance could be borrowed against them.  WMI’s other principal assets were its vessels or the owning subsidiaries.  The amount of debt and available equity, if any, was readily ascertainable in respect of each individual vessel.  This would be reflected in the equity build-up calculation.  The only other sources of finance were any residue of the WWW shares and the excess over 80% of any available equity, 80% being the likely maximum up to which a bank would lend.  The excess might have provided, according to Mr. Chalmers, security sufficient for WM to lend further support. 

5.14.18 I accept that there were substantial differences between the ADS loans and the funds earmarked for discharge of those loans.  According to Mr. Chalmers’ calculations, the adjustment in April 1983 should have been HK$238 million, in September 1983 HK$234 million and in March 1984, after hull 912 had been sold, HK$156 million  For the reasons given, I do not believe the adjustment had any practical effect on WMI’s overall financial position. 

Conclusion

5.14.19 In spite of the immense amount of information provided, I am unable to derive any further assistance from the evidence of Mr. Mace and Mr. Chalmers.  Both are experts in the insolvency field.  They helped me patiently with various financial documents and problems associated with them.  I am indebted to them for that help.  But as I have already indicated, apart from the Danish Kroner adjustment there was very little between them.  WMI’s financial precariousness spoke for itself.  Any businessman would have been rightly alarmed at the situation.  So, in my view, it came simply to a question of whether, in spite of that cause for alarm, the defendants could legitimately allow WMI to continue trading on the basis of an honest belief in support being forthcoming from WM.  It was not a question which turned upon difficult financial analysis or the resolution of divergent views upon accounting principles.

5.15    FRAUDULENT TRADING - THE ALTERNATIVE CASE

5.15.1 Should its primary case on fraudulent trading fail, ADS pleaded an alternative in paragraphs 29 and 30 ASOC

“29. Further and/or alternatively, at all material times, albeit that the Defendants knew or ought to have known or were acting recklessly as aforesaid, the Defendants failed to inform the Plaintiff of the true position which, if known would have caused and/or enabled the Plaintiff to cover its position.  Further and/or alternatively the Defendants failed to put WMI into liquidation thereby allowing its assets to be dissipated.

PARTICULARS

(1) The Plaintiff repeats Paragraph 2.5 above and the particulars thereunder;

(2) At no time did the Defendants state the true position to the Plaintiff:  the Plaintiff will refer to and rely on all the facts and matters pleaded in paragraphs 3 to 11 and 13 to 22 above;

(3) Further particulars of dissipation are a matter of expert accountancy evidence.

30. Further and/or alternatively, to the extent that it was the case or can be inferred from all the aforesaid that the Defendants were acting contrary to the interests of the Plaintiff and/or the Creditors generally and/or were acting in their own interests an not those of WMI (whether to try and protect their position on a charge of fraudulent trading, or to protect their position financially or otherwise) such were improper purposes within the Companies Ordinance (1975 and 1984).”

5.15.2 Accordingly to ADS, this claim is necessary in case I should find the defendants had no honest belief in support but I followed the apparent ratio in Hardie v. Hanson, or in case I hold (as I have) that there was anyway no intent to defraud.  Paragraph 29 itself falls into two parts.  First, breach of duty to keep ADS as a creditor informed of WMI’s true position is an evidential factor in the primary claim as well as the alternative claim.

5.15.3 To establish the necessary duty in directors towards creditors, Mr. Cullen referred to West Mercia Safetywear Ltd. (in liquidation) v. Dodd and Another [1988] BCLC 250.  In considering the duties of directors, Dillon L.J. said at p. 252:

“For my part I find helpful, and would approve, the statement of Street CJ in Kinsela v. Russell Kinsela Pty Ltd (in liq) (1986) 4 NSWLR 722 at 730, where he said:

‘In a solvent company the proprietary interests of the shareholders entitle them as a general body to be regarded as the company when questions of the duty of directors arise.  If, as a general body, they authorise or ratify a particular action of the directors, there can be no challenge to the validity of what the directors have done.  But where a company is insolvent the interests of the creditors intrude.  They become prospectively entitled, through the mechanism of liquidation, to displace the power of the shareholders and directors to deal with the company’s assets.  It is in a practical sense their assets and not the shareholders’ assets that, through the medium of the company, are under the management of the directors pending either liquidation, return to solvency, or the imposition of some alternative administration.’”

5.15.4 The other members of the court agreed.

5.15.5 Thus, in Winkworth v. Edward Baron Development Co. Ltd. and Others [1987] BCLC 193, Lord Templeman with whom all the other members agreed said at p. 197:

“But a company owes a duty to its creditors, present and future.  The company is not bound to pay off every debt as soon as it is incurred and the company is not obliged to avoid all ventures which involve an element of risk, but the company owes a duty to its creditors to keep its property inviolate and available for the repayment of its debts.  The conscience of the company, as well as its management, is confided to its directors.  A duty is owed by the directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors.”

5.15.6 Towards shareholders, directors have a duty to be honest and not to mislead : per Brightman J. in Gething and Others v. Kilner and Others [1972] 1 WLR 337 at p. 341, although the point was not argued.  Hoffmann J. came to a similar conclusion in Re a company [1986] BCLC 382 where he was considering a petition under section 459 of the Companies Act 1985 brought on the basis that the directors had acted in a manner unfairly prejudicial to the interests of the petitioners.  The complaint was that the directors had given unbalanced advice in relation to rival take-over bids.  It is plain that the judge’s decision rested upon the concept of “unfairness”.  At p. 388 he said:

“Whether or not the board of a company faced with competing bids is under a positive duty to advise the shareholders to accept the higher offer, I think that if the board choose to give advice on the matter, fairness requires that such advice should be factually accurate and given with a view to enabling the shareholders (who, ex hypothesi, are being advised to sell) to sell, if they so wish, at the best price.”

5.15.7 And at p. 389, the judge said:

“I cannot accept the proposition that the board must inevitably be under a positive duty to recommend and take all steps within their power to facilitate whichever is the highest offer.  In a case such as the present, where the directors propose to exercise their undoubted right as shareholders to accept the lower offer in respect of their own shares and, for understandable and fully disclosed reasons, hope in their personal capacities that a majority of other shareholders will accept it as well, it seems to me that it would be artificial to say that they were under a positive duty to advise shareholders to accept the higher offer.  The fact that they would get more money by taking the higher offer is hardly something which needs to be pointed out.  I do not think that fairness can require more of the directors than to give the shareholders sufficient information and advice to enable them to reach a properly informed decision and to refrain from giving misleading advice or exercising their fiduciary powers in a way which would prevent or inhibit shareholders from choosing to take the better price.”

5.15.8 It is to be noted as Mr. Johnson pointed out that in West Mercia, the reference was “the interests of the creditors intrude”.  While Lord Templeman’s remarks in Winkworth were obiter and unsupported by authority in a case where he was plainly anxious to give short shrift to a “bald and astonishing proposition”.

5.15.9 In Kuwait Asia Bank E.C. v. National Mutual Life Nominees Ltd. [1991] 1 AC 187, Lord Lowry, who delivered the judgement of the Privy Council, said at p. 217:

“Their Lordships now proceed to consider the causes of action pleaded by the plaintiff against the bank.  Two general principles may first be stated.  (1) A director does not by reason only of his position as director owe any duty to creditors or to trustees for creditors of the company.”

5.15.10 In support, his Lordship cited Ferguson v. Wilson [1866] 2 Ch. A. 77; In re Wincham Shipbuilding, Boiler and Salt Co. [1878] 9 Ch. Division 322 and Wilson v. Lord Bury [1880] 5 QBD 518.

5.15.11 Gore-Browne on Companies 44th ed. at p. 27.007 states:

“When a company is insolvent or on the verge of insolvency, but not otherwise, it is the creditors’ interests that are paramount.  Although it has been said that a duty is owed by the directors to the company and to the creditors of the company to ensure that the affairs of the company are properly administered and that its property is not dissipated or exploited for the benefit of the directors themselves to the prejudice of the creditors, it is submitted that this is not a duty owed directly to creditors, but rather a duty to the company which in the event of liquidation can be enforced by the liquidator for the benefit of the creditors.  In practice, the common law requirement to take account of creditors’ interests is likely to be superseded by statutory liability for wrongful trading.”

5.15.12 Palmer’s Company Law at para. 8.506 is to like effect:

“The interests of the creditors

There is now a growing body of dicta in the English courts to the effect that, when the company becomes insolvent or is nearly so, then the interests to which the directors must have regard when acting in the interests of the company include the interests of the creditors as well as, perhaps in some cases instead of, those of the shareholders.  This view is supported by a number of Commonwealth authorities.”

5.15.13 In a footnote, Palmer comments on Winkworth : “This seems to envisage a duty owed to the creditors separate from that owed to the company”.

5.15.14 On the authorities, I am satisfied that directors owe no duty to creditors, only to the company.  Upon insolvency, however, that duty expands so as to require the directors at least to take into consideration the interests of creditors.

5.15.15 The second part of para. 29, failure to put WMI into liquidation but rather to continue trading contrary to ADS’ interests or in the defendants’ own interests, constituted carrying on business for “any fraudulent purpose” under section 275.

5.15.16 The alternative claim was not pursued against Mr. Lee.

5.15.17 In view of my finding on honest belief and intent to defraud, this claim as ADS accepted in its submissions also fails.  Nonetheless, I must consider it although it is a somewhat unlikely scenario.  If support was crucial to WMI’s survival, yet with no honest belief in that support being forthcoming the directors were not fraudulent in taking credit from ADS, it is difficult to see how intent might be inferred from them failing to put WMI into liquidation.

5.15.18 As to the first limb, the defendants pleaded that ADS was kept fully informed of WMI’s position.  In particular, they supplied certain cash flows including those of 18th March 1983 (App. 2/14) and 5th September 1983 (App. 2/17-18).  As I have found elsewhere, the cash flow of 18th March was not supplied.  It is admitted the other cash flow was not supplied.  These two cash flows were, in my view, important, indeed crucial documents.  They were the 10-year cash flows showing very substantial deficits even with remedial measures.  Assuming there was a duty to inform, the defendants were clearly in breach of that duty.

5.15.19 Turning to the substance of the alternative claim, I have no difficulty in accepting and would find, if necessary, that WMI should have been put into liquidation if the individual directors had no honest belief in support from WM.  In the case of WM, it was put by ADS as there being no intention to support.  I deal with the correct approach at section 7.4.

5.15.20 The events and documents I have reviewed showed WMI’s parlous condition, living a hand-to-mouth existence from November 1982 until the end, and unable to pay debts as they fell due.  If WMI was to survive in its existing form and pay its creditors, support from WM was the only hope.  Absent either an improvement in the market over that provided for in the cash flows or the arrival of a “white knight”, WMI could not survive without that support.  To have relied on either of these two factors would have been an impermissible gamble on the part of the directors of a public company.

5.15.21 The evidence of the accounting experts effectively coincided on this point, as does the thrust of the Rothschilds’ report of 21st September 1983. 

5.15.22 To continue trading at a loss so that WMI’s already diminished value would be diminished further was plainly not in the interest of creditors.  ADS argued that liquidation would, however, damage WM’s interest by effectively writing off its investment and damaging its reputation, particularly in China, if the Dalians were not delivered.  It is the latter consideration, claimed ADS, which motivated WMI in leaving the Dalian position to drift in the hope that something, for example, an uncovenanted recovery in the market, would turn up.  In spite of Mr. Brothers’ efforts, no viable or cash neutral plan for the Dalians had yet been achieved.  Cancellation, however, would have injured WM.

5.15.23 It was ADS’ case that WM’s interests took precedence over those of WMI and its creditors and that the directors pursued those interests to the detriment of creditors.

5.15.24 For the purpose of the primary case of fraudulent trading, it is not necessary to establish a motive or purpose.  The motive will often, however, be self-evident - personal enrichment - which may well assist in establishing a fraudulent intent.  In this case, insofar as any motive for taking credit from ADS is discernible, it would probably have been to avoid liquidation and the stigma associated with it.

5.15.25 The alternative claim requires a purpose to be established and to be shown to be fraudulent.  Two difficulties emerge.  First, neither directly nor, in my view, inferentially, is there any evidence to show that the directors were serving WM’s interests per se as opposed to interests which were by convention identical (para. 7.2.8).  Second, I see very little difference between the reasons, purpose or motive in taking credit from ADS and those for keeping WMI going when it was otherwise headed for liquidation.  If no intent to defraud can be inferred in relation to the former, it is difficult to see how fraud is to be attributed to the latter.  Further, I do not see how, if it was not fraudulent to take credit from ADS when there was no honest belief WM would support, it might be said to be fraudulent to have carried on trading in the same circumstances.  The mischief appears to me to be indistinguishable.

5.15.26 I would therefore have dismissed the alternative claim against the defendants.

5.15.27 In addition, ADS alleged that Mr. Brothers was also protecting his status and position.  In his review dated 30th March 1983 (App. 3/3), Mr. Brothers mentioned his credibility and “personal need to retain some standing in the business community”.  Asked about it in cross-examination, he said he should not have been concerned about this but was trying to bring matters to a head.  Asked if that part of his review was true, he said at day 107/82:

“A.  No, I think it was not true.

Q.  It was not true?

A.  No.  I said at the time we went through this in giving my evidence that this was not a sensible thing for me to have said.  It was the last time that I did say it and I no longer had any regard to my own standing or credibility in the community.  At the time I said it, I made a mistake and I never raised the matter again because I thought it was, on reflection, the wrong thing to have said and raised.

Q.  Were you not concerned with your credibility in the community?

A.  The survival or the working out for Wheelock Maritime was a far more important thing than my own personal credibility.

Q.  If you had managed to ensure the survival of WMI, given all of the vicissitudes and problems, et cetera, it would have been an enormous feather in your cap?

A.  No, I do not think so, my Lord.  I was only doing my job.  The job was a very heavy and difficult one which was not a pleasant job and one which I would thankfully have laid down, had I had the opportunity.  Had we succeeded, I do not think anybody would have turned round and patted me on the back at all.

Q.  You would have been known in the community as the man who saved WMI in the face of a very awkward and obstructionist parent company?

A.  No, my Lord, I do not think so.  I was already involved and certainly my name was connected with the company, but I never gave that issue a thought at all.  My whole direction really was that I probably was the only person in Wheelock Marden that could handle the situation and that it was my responsibility to do that.

Q.  Certainly Mr Brothers if you had managed to ensure WMI's survival and if you had snatched them from the jaws of liquidation, as it were, you would have been a name remarked upon in the shipping community, somebody who succeeded where others failed?

A.  My Lord, I have never made -- I never put myself forward or promoted myself either then or after then in a manner that would give me some glory or whatever.  That is not my way of working and was never in my mind when I was working for Wheelock Marden on this particular matter.”

5.15.28 Mr. Reynolds was asked what part Mr. Brothers played in trying to trade WMI out of its difficulties.  He said on day 147/37:

“A.  He was full-time engaged on this.  He was very keen for it to succeed.  I mean, he was the guy in the Wheelock Marden Group who was responsible for this, and he was under pressure because his part of the empire was not as healthy as other parts.  So I think for his own personal satisfaction, and his own, you know, career ambitions and all those normal things that motivate people, he was very motivated and single-minded to achieve a satisfactory solution to this.”

5.15.29 That, I think, admirably sums up the position.  People are often motivated by pride or professionalism to try and see things through against overwhelming obstacles.  The reverse of that motivation, however, is not necessarily an intent to defraud or some fraudulent purpose.

5.15.30 Mr. Brothers had been with WM since 1959.  He was a director of WM.  He was involved in several other aspects of WM’s business activities including the Cross-Harbour Tunnel.  His future was not apparently at risk.  He would hardly have wished to be associated with running a business which for 2 years was doomed to failure.

5.15.31 I am unable to attribute any sinister personal motive to Mr. Brothers or to draw any inference of fraud against him on this ground.

6.    MISREPRESENTATION

6.1 It is ADS' case that, in relation to both vessels, WM and Mr. Brothers made, allowed, authorized or ratified representations about the true financial position of WMI, knowing them to be false or being reckless as to their truth.  Further and/or alternatively, the representations were misrepresentations within the meaning of the Misrepresentation Ordinance Cap. 284 which effectively makes actionable negligent misrepresentation.

6.2    Fraudulent Misrepresentation

6.2.1 The elements of the tort of deceit were helpfully brought together by Viscount Maugham in Bradford Third Equitable Building Society v. Borders [1941] 2 All ER 205 (HL) at p. 211:

“My Lords, we are dealing here with a common law action of deceit, which requires four things to be established.  First, there must be a representation of fact made by words, or, it may be, by conduct.  The phrase will include a case where the defendant has manifestly approved and adopted a representation made by some third person.  On the other hand, mere silence, however morally wrong, will not support an action of deceit :  Peek v. Gurney, at p. 390  per Lord Chelmsford, and at p. 403, per Lord Cairns, and Arkwright v. Newbold, at p. 318.  Secondly, the representation must be made with a knowledge that it is false.  It must be wilfully false, or at least made in the absence of any genuine belief that it is true :  Derry v. Peek and Nocton v. Ashburton (Lord).  Thirdly, it must be made with the intention that it should be acted upon by the plaintiff, or by a class of persons which will include the plaintiff, in the manner which resulted in damage to him : Peek v. Gurney and Smith v. Chadwick, at p. 201.  If, however, fraud be established, it is immaterial that there was no intention to cheat or injure the person to whom the false statement was made :  Derry v. Peek, at p. 374, and Peek v. Gurney, at p. 409.  Fourthly, it must be proved that the plaintiff has acted upon the false statement and has sustained damage by so doing : Clarke v. Dickson.  I am not, of course, attempting to make a complete statement of the law of deceit, but only to state the main facts which a plaintiff must establish.”

6.2.2 No difficulty arises about any of these elements save as to the absence of any genuine belief in the truth of the representation.

6.2.3 In Derry v. Peek [1889] 14 AC 337 (HL), Lord Herschell said at p. 360:

“In the Court below Cotton L.J. said : “What in my opinion is a correct statement of the law is this, that where a man makes a statement to be acted upon by others which is false, and which is known by him to be false, or is made by him recklessly, or without care whether it is true or false, that is, without any reasonable ground for believing it to be true, he is liable in an action of deceit at the suit of anyone to whom it was addressed or anyone of the class to whom it was addressed and who was materially induced by the misstatement to do an act to his prejudice.”  About much that is here stated there cannot, I think, be two opinions.  But when the learned Lord Justice speaks of a statement made recklessly or without care whether it is true or false, that is without any reasonable ground for believing it to be true, I find myself, with all respect, unable to agree that these are convertible expressions.  To make a statement careless whether it be true or false, and therefore without any real belief in its truth, appears to me to be an essentially different thing from making, through want of care, a false statement, which is nevertheless honestly believed to be true.  And it is surely conceivable that a man may believe that what he states is the fact, though he has been so wanting in care that the Court may think that there were no sufficient grounds to warrant his belief.”

6.2.4 And at p. 374, after stating the elements of deceit Lord Herschell said:

“I think these propositions embrace all that can be supported by decided cases from the time of Pasley v. Freeman down to Western Bank of Scotland v. Addie in 1867, when the first suggestion is to be found that belief in the truth of what he has stated will not suffice to absolve the defendant if his belief be based on no reasonable grounds.  I have shewn that this view was at once dissented from by Lord Cranworth, so that there was at the outset as much authority against it as for it.  And I have met with no further assertion of Lord Chelmsford’s view until the case of Weir v. Bell, where it seems to be involved in Lord Justice Cotton’s enunciation of the law of deceit.  But no reason is there given in support of the view, it is treated as established law.  The dictum of the late Master of the Rolls, that a false statement made through carelessness, which the person making it ought to have known to be untrue, would sustain an action of deceit, carried the matter still further.  But that such an action could be maintained notwithstanding an honest belief that the statement made was true, if there were no reasonable grounds for the belief, was, I think, for the first time decided in the case now under appeal.

In my opinion making a false statement through want of care falls far short of, and is a very different thing from, fraud, and the same may be said of a false representation honestly believed though on insufficient grounds.  Indeed Cotton L.J. himself indicated, in the words I have already quoted, that he should not call it fraud.  But the whole current of authorities, with which I have so long detained your Lordships, shews to my mind conclusively that fraud is essential to found an action of deceit, and that it cannot be maintained where the acts proved cannot properly be so termed. ...

At the same time I desire to say distinctly that when a false statement has been made the questions whether there were reasonable grounds for believing it, and what were the means of knowledge in the possession of the person making it, are most weighty matters for consideration.  The ground upon which an alleged belief was founded is a most important test of its reality.  I can conceive many cases where the fact that an alleged belief was destitute of all reasonable foundation would suffice of itself to convince the Court that it was not really entertained, and that the representation was a fraudulent one.  So, too, although means of knowledge are, as was pointed out by Lord Blackburn in Brownlie v. Campbell, a very different thing from knowledge, if I thought that a person making a false statement had shut his eyes to the facts, or purposely abstained from inquiring into them, I should hold that honest belief was absent, and that he was just as fraudulent as if he had knowingly stated that which was false.”

6.2.5 More recently, in Akerhielm [1959] AC 789, Lord Jenkins, delivering the judgment of the Privy Council, said at p. 805:

“The question is not whether the defendant in any given case honestly believed the representation to be true in the sense assigned to it by the court on an objective consideration of its truth or falsity, but whether he honestly believed the representation to be true in the sense in which he understood it albeit erroneously when it was made.”

6.2.6 The test therefore is plainly a subjective one.  If a person recklessly fails to make enquiries an honest and reasonable man would make, that would be powerful evidence that the person was not honest or genuine in his belief as to the truth of his statement.  But the failure would not necessarily lead to such a finding.

6.3    negligent misrespresentation

6.3.1 The Misrepresentation Ordinance which came into effect in 1969 provides:

“MISREPRESENTATION

2. Removal of certain bars to rescission for innocent misrepresentation

Where a person has entered into a contract after a misrepresentation has been made to him, and

(a) the misrepresentation has become a term of the contract; or

(b) the contract has been performed,

or both, then, if otherwise he would be entitled to rescind the contract without alleging fraud, he shall be so entitled, subject to the provisions of this Ordinance, notwithstanding the matters mentioned in paragraphs (a) and (b).

3. Damages for misrepresentation

(1) Where a person has entered into a contract after a misrepresentation has been made to him by another party thereto and as a result thereof he has suffered loss, then, if the person making the misrepresentation would be liable to damages in respect thereof had the misrepresentation been made fraudulently, that person shall be so liable notwithstanding that the misrepresentation was not made fraudulently, unless he proves that he had reasonable grounds to believe and did believe up to the time the contract was made that the facts represented were true.

        (2)    Where a person has entered into a contract after a misrepresentation has been made to him otherwise than fraudulently, and he would be entitled, by reason of the misrepresentation, to rescind the contract, then, if it is claimed, in any proceedings arising out of the contract, that the contract ought to be or has been rescinded the court or arbitrator may declare the contract subsisting and award damages in lieu of rescission, if of opinion that it would be equitable to do so, having regard to the nature of the misrepresentation and the loss that would be caused by it if the contract were upheld, as well as to the loss that rescission would cause to the other party.

        (3)    Damages may be awarded against a person under subsection (2) whether or not he is liable to damages under subsection (1), but where he is so liable any award under subsection (2) shall be taken into account in assessing his liability under subsection (1).”

6.3.2 ADS' case, as I understand it, is that it entered the two contracts of guarantee with WMI following misrepresentations made by Mr. Brothers acting as agent for WM which in turn was acting as agent for WMI.  Or that WM was the directing mind and will of WMI.

6.3.3 Sections 2 and 3 of the Misrepresentation Ordinance have their exact counterpart in sections 1 and 2 respectively of the Misrepresentation Act 1967.  Of that Act, both Chitty on Contracts 25th Edition para. 421 and Spencer Bower on Actionable Misrepresentation 3rd Edition p. 178 were of the view that, in the absence of authority, an agent was probably liable for negligent misrepresentation.  Subsequent editions of Chitty, however, reflect the decision of Mustill J. in Resolute Maritime Inc. v. Nippon Kaiji Kyokai [1983] 1 WLR 857 that an agent who makes a misrepresentation is not personally liable under the Act.  At p. 860 in that case, the judge said:

“It is sensible to approach the problem by looking at the words of section 2(1) in isolation to see whether they point so clearly towards one conclusion that there is no need for consideration of the Act as a whole, or of the purpose which it was intended to achieve.  Mr. Pollock, for the plaintiffs, says that they do.  The draftsman has, he points out, chosen the word “party” to describe the representee” - (this must be an error for representor) - “in the opening words of the subsection, and has then chosen “person” to describe the representor in the remainder of the subsection.  This shift in language demonstrates, so it is contended, that the person intended to be liable is not the obligor under the contract, but the individual who actually makes the representation.  To this, Mr. Buckley, for the thirteenth defendants, replies that the alteration in language was for the purpose of euphony.  One could not speak of “another person thereto.”  This argument itself prompts the response that if the intention had been to make the obligor liable to the exclusion of the agent, the draftsman would have continued to use “party” throughout the remainder of the subsection, instead of reverting to the word “person.”  Finally, the defendants can reply by pointing out that since an agent who incurs no personal liability under a contract is not “a party thereto,” the agent can only be brought within the description of the representor if the words “by another party thereto” are read as meaning “by or on behalf of another party thereto” — which is not what they say.

In my judgement, none of these arguments is sufficiently clinching to provide an immediate answer to the problem, and one must look elsewhere for a solution.  The key is, in my view, to be found by looking at the position of the principal, in a case where he has authorised his agent to make the representation, and had no reasonable grounds to believe that the representation was true.  Common sense suggests that if anyone is liable under a statute concerned with representations inducing a contract, it ought to be a principal as party to the contract.  That this is, indeed, the case is shown by section 2(3), which contemplates that credit will be given as between the recoveries under subsections (1) and (2): and these relate to liabilities of the same person, as witness the words “he” and “his.”  The liabilities under section 2(2) must attach to the principal, for they are conferred as an alternative to rescission, a remedy which is available only against a party to the contract.  It follows, therefore, that the word “person” in section 2(1) must be read as including the principal.

It may, however, be objected that even if this is so, there is still room to read section 2(1) as creating an additional liability in the agent.  I do not agree.  The Act is concerned with representations made in the particular context of a contract, and it seems to me that it was aimed at the position of the parties to the contract.  It was therefore natural that there should be created under subsections (1) and (2) rights which are prima facie absolute, and independent of any general duty of care, a concept which plays no part in the law of contract.  The purpose of the Act was to fill a gap which existed, or was believed to exist, in the remedies of one contracting party for an innocent representation by the other.  But there was no such gap in the case of the agent; he was already subject to the ordinary liabilities in fraud and negligence, the doctrine of Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 having been recognised before the Act was passed.  What purpose would there be in creating an entirely new absolute liability, independent of proof that the representee fell within the scope of a duty of care, simply because the representor happened to be an agent, concerned in the making of a contract, but not himself a party to it?  I can see none; and, since, as I have suggested, the words of section 2(1) must be read as extending to the principal, I consider that their operation should be confined to him alone.

In arriving at this conclusion, I recognised that the opposite view has been expressed in the current editions of Chitty on Contracts, 25th ed. (1983), para. 379, and Spencer Bower & Turner, Actionable Misrepresenta­tions, 3rd ed. (1974), p. 178.”

6.3.4 ADS accepts the first part of the judge’s reasoning, that the Act includes the principal, but rejects the argument about the gap to be filled.  Mr. Cullen submitted that the judge was considering the position of brokers, i.e. persons independent of the contracting parties on whose behalf they act, where the question of vicarious liability arises.  However, where the person making a negligent misrepresentation is a servant or officer of a company, his principal, i.e. the company, has been held liable under the Hedley Byrne principle : see for example Esso Petroleum Co. Ltd. v. Mardon [1976] 1 Q.B. 801 and also Spencer Bower para. 156B.

6.3.5 Mr. Cullen contended that the “rights which are prima facie absolute” are not absolute in the sense of being fault-free because it is a good defence to show a reasonable belief in the truth of the facts represented.  Liability only attaches, therefore, if the representor made the representation fraudulently and if he had no reasonable belief in its truth.  That filled the gap which then existed in relation to innocent misrepresentation for which one party to a contract could not get damages against the representor.  However, Mustill J. went on to say that there was no gap in respect of an agent because he was already liable in fraud and for negligent misrepresentation under Hedley Byrne.  But the principal, argued Mr. Cullen, was already liable in such circumstances.  Therefore, the Act was nothing to do with closing any gap in liability attaching to principal and agent for negligent misrepresentation under Hedley Byrne.  The question which fell to be answered was whether liability for a negligent misrepresentation under the Act should apply only to the principal or also to the person making the representation and whose reasonable belief is the relevant factor in any defence.  According to Mr. Cullen there was no reason why it should not.  He said the need to establish a duty of care was a burdensome obligation.  The legislature, therefore, decided to extend liability for negligent misrepresentation without the need to establish a duty of care.  There were no apparent reasons why that liability should apply only to the principal and not to the person actually making the negligent misrepresentation.

6.3.6 Further, Mr. Cullen said the decision should be confined to cases involving independent agents such as brokers.  That decision should not apply to a director who may, depending on the circumstances, be an agent and therefore liable according to Hedley Byrne or be the company itself.  If the director is identified as the company, although he would be liable, for example for deceit, it would seem he would not be personally liable for negligent misrepresentation under Hedley Byrne : see Trevor Ivory Ltd. v. Anderson [1992] 2 NZLR 517.

6.3.7 Therefore, submitted Mr. Cullen, in the case of directors, at least, there was a gap to fill in relation to agents and the reasoning of Mustill J. was wrong.

6.3.8 Mr. Johnson submitted that section 3(1) is inapplicable for two reasons.  First, the alleged misrepresentations were not made “by another party thereto” which would be WMI or its subsidiaries but were made on behalf of them by or on behalf of WM, i.e. by an agent not by a party.  Second, even if it covers misrepresentation by an agent, liability is imposed only on the contracting party and not on his agent.

6.3.9 Mr. Johnson said that Mr. Cullen wrongly identified the gap that Mustill J. sought to fill in Resolute Maritime.  He argued that before the 1967 Act, a party to a contract could rescind in equity even for innocent misrepresentation but could not recover damages at common law unless the misrepresentation was fraudulent.  The Act filled that gap on a non-fault basis.  On the other hand, an agent was already liable in a fault-based cause of action for an untrue statement.  It would have made no sense for the no-fault liability of a contracting party to be extended to an agent simply because that non-contracting party was acting as agent for the contracting party.

6.3.10 Mr. Johnson said that the point made by Mr. Cullen about brokers was misconceived.  Either the person making the representation is an agent so that that representation is binding upon the contracting party, or he is not, in which case the representation cannot be brought home to the contracting party and the Act then has no application.

6.3.11 There are two authorities against Mr. Johnson’s first point:  Pepsi Cola International Ltd. v. Charles Lee Action No. 820/73, an unreported decision of Cons J. given on 18th January 1974, and Gosling v. Anderson [1972] 223 EG 1742, a decision of the Court of Appeal.  In each case, however, there was no argument on the point and an agent’s misrepresentation was brought home to his principal.

6.3.12 In Gran Gelato Ltd. v. Richcliff (Group) Ltd. and Others [1992] Ch. 560, the point was raised.  The question was whether a vendor’s solicitors owed a duty of care to the purchaser.  Having found that “all the indications point towards it being just and reasonable to impose on Gershon Young a duty of care in favour of Gran Gelato” in accordance with the decision of the House of Lords in Caparo Industries Plc. v. Dickman [1990] 2 A.C. 605, at p. 569, Sir Donald Nicholls V.-C. said:

“The only material difference is that in making the representations Gershon Young were acting not as principals but as agents on behalf of Richcliff.  They gave their answers as Richcliff’s solicitors, for and on behalf of Richcliff.  Does this make any difference?

By itself, it does not.  It is now established that the fact that the person making the representation was acting for a known principal does not necessarily negative the existence of a duty of care owed by him to the representee.  The mortgagee’s valuer may owe a duty of care to the mortgagor:  Smith v. Eric S. Bush [1990] 1 A.C. 831.  Further, in Resolute Maritime Inc. v. Nippon Kaiji Kyokai [1983] 1 W.L.R. 857, 861 Mustill J. held that no cause of action in damages lies under the Act of 1967 against a negligent agent acting within the scope of his authority.  One of the strands in his reasoning was that the Act does not need to be interpreted as having this effect, because there was no gap here which required to be filled.  In such a case the representee can sue the agent at common law, in accordance with Hedley Byrne & Co. Ltd. v. Heller & Partners Ltd. [1964] A.C. 465 principles.

That was in the context of agents generally.  In the particular context of inquiries before contract in a normal conveyancing transaction, Morritt J. expressed a different view in Cemp Properties (UK) Ltd. v. Dentsply Research & Development Corporation [1989] 2 E.G.L.R. 205, 207.  He observed that it would be absurd if the solicitor for one party to the transaction owed a duty of care to another party as well as to his own client.”

6.3.13 The Vice-Chancellor went on to hold that in normal conveyancing transactions a solicitor acting as agent of the vendor does not owe a separate duty of care to the purchaser.

6.3.14 In the Cemp case, the defendant vendor had been found liable under section 2(1) of the Act for misrepresentation by its solicitors.  The vendor sought, inter alia, an indemnity from its solicitors pursuant to section 1(1) of the Civil Liability (Contribution) Act 1978.  At p. 207, Morritt J. said:

“In these circumstances the plaintiffs’ alternative claim does not arise, but in any event in my judgment it would fail.  Section 1(1) of the Civil Liability (Contribution) Act 1978 provides as follows:

Subject to the following provisions of this section, any person liable in respect of any damage suffered by another person may recover contribution from any other person liable in respect of the same damage (whether jointly with him or otherwise).

Thus R & D would have to establish that DHB was liable to Cemp for the same damage.  As the disclosed agent acting within the scope of their authority, DHB could not be liable to Cemp under the Misrepresentation Act 1967 (see Resolute Maritime Incorporated v. Nippon Kaiji Kyokai [1983] 1 WLR 857 at p 861).  It may be that in some cases there are circumstances giving rise to a special relationship between the vendor’s solicitor and the purchaser from which a common law duty of care arises, but this was a perfectly normal conveyancing transaction in which the vendor’s solicitors answered inquiries before contract raised by the purchaser’s solicitors.  In those circumstances it would be absurd if the solicitor for one party to the transaction owed a duty of care to another party as well as to his own client.”

6.3.15 I am conscious that the decision of Mustill J. has been followed by very respected judges.  With the greatest respect, however, I am constrained to disagree.  It seems to me that, for the reasons advanced by Mr. Cullen, there has been unnecessary complication of what I perceive to be a very simple exercise.  That was an exercise on the part of the legislature to simplify and make fairer the law in relation to negligent misrepresentation inducing contract.  The need to establish a tortious duty of care was done away with.  In those circumstances, I can see no reason why there should not be, to quote a phrase from another part of this judgment, a level playing field for both principal and agent.  Had it been necessary for me to do so, I would have gone the other route from Mustill J.

6.4    the decision-maker

6.4.1 It is appropriate, before dealing with the individual allegations of misrepresentation, to consider the defendants’ submission that the real decision-maker in relation to the revised arrangements for the two vessels was EKR and that, in the absence of an appropriate pleading, ADS’ claim in misrepresentation must fail anyway.  The provenance of this submission is to be found in para. 24 of the re-amended defence:

“The overriding objective of the negotiations was, so far as WMI, the Ministry and/or EKR and/or DSKF and/or ADS were concerned, to ensure that delivery of the vessel would take place, by persuadeing MMB to waive compliance with the earnings covenant in its loan agreement and to exchange its existing transfer the security it held prior to delivery of the vessel over the Danish Kroner deposits referred to in paragraph 15(3) hereof (which was at all times complete and risk-free security for the whole of its US$ and £ Sterling advances (as pleaded in paragraph 15(2) hereof) to for the security over the vessel M.V. “SEALOCK”.  In so doing MMB would assume the attendant trading and operating risks associated with security represented by a bulk carrier in a falling depressed market such as that prevailing in or about the beginning of 1983.  The reasons why the Ministry and/or EKR and/or DSKF and/or ADS wished to ensure the vessel was delivered were that (i) a political decision had been made to save B&W from financial collapse and the delivery of and payment for the vessel, and the associated improved prospect for the delivery of and payment for hull 911, would assist B&W to stay in business, and/or (ii) entering into the revised arrangements as aforesaid was preferable to incurring the financial consequences of non-delivery, in particular very large payments by EKR to DSKF under the guarantee referred to in paragraph 15(6) hereof and to B&W under the guarantee referred to in paragraph 15(7) hereof.”

6.4.2 Paragraph 89A raises the same plea in relation to Annalock with appropriate alterations. The guarantees referred to are the predelivery DO and AB-K guarantees given by EKR to ADS and BW respectively (para 6.5.10).

6.4.3 In order to determine the validity of this submission, it is necessary to consider the parts played by both the Fund and EKR.  That involves 3 separate stages :  the events leading up to the placing of the building contracts with BW; and the respective roles of ADS and EKR in the negotiations leading to the revised arrangements.

6.5    The Contracts between BW and WMI

6.5.1 BW is an old and famous Danish name.  In the 1970’s, it was a large conglomerate controlled by one Jan Bonde Nielsen.  One of its divisions, as they were called, contained its shipbuilding activities.  By 1979, however, when WMI was investigating the purchase of Panamax vessels, BW was in deep financial trouble.

6.5.2 It is the irony of this case that what began as concern, shared by WMI, for the financial health of BW, concluded with a like concern for WMI.  Both BW and WMI became insolvent.  Only the BW shipbuilding yard, which was in July 1980 set up as an independent public company, survived.  That survival was only because of massive government or government sponsored support through the Danish Central Bank, EKR and the Fund.  And it is because of this support that the Defendants assert that, assuming any misrepresentations were made, those misrepresentations had no influence on the decisions that enabled WMI to take delivery of the two vessels, because those decisions were politically motivated by a desire to keep the yard, and the employment opportunities it represented, going.

6.5.3 Following negotiations between Mr. Brothers and BW in 1979, on 14th June heads of agreements were signed between WMI and BW for the construction of six Panamax vessels which would be owned by companies established by BW but bare-boat chartered to WMI subsidiaries.  That agreement was subject to various conditions.  It was entirely superseded on 11th August 1979 by a letter from WMI to BW confirming the purchase by WMI or its nominees of four Panamax vessels (two of which were subject to reconfirmation) for delivery in 1980 and 1981.  Three vessels were priced at Dkr 166 million and one at Dkr 175 million subject to variation for extras.

6.5.4 In accordance with procedural protocol, on 20th August BW, on behalf of WMI, applied to the Fund for loans of 90% of the contract price on delivery of the vessels, the loans to be paid in ten years at 7% interest from the date of delivery but with a grace period of two years.  Those terms being outside standard OECD terms, a copy letter was included as evidence of a matching situation.  On the same day, BW wrote to EKR advising it of this order and also of a further order for one ship from a Norwegian owner, and explaining that a building programme could be set up.  In this connection, Mr. Gideon thought that a minimum number of orders was necessary to get government backing to continue.

6.5.5 In its letter, BW continued that a “decisive and necessary element” was EKR’s assistance with financing arrangements and said that loans amounting to approximately Dkr 230 million would be needed in 1980 and 195 million in 1981.  The letter concluded:

“If B&W Shipyard should continue to exist, it is of primary importance to secure these shipbuilding contracts now.  At the moment B&W Shipyard has work only until the end of 1979, but the above export orders will ensure employment until the end of 1981, and B&W Machinery plant, as well as many Danish suppliers, will benefit from these new contracts.  With these orders the shipyard will be able to overcome two very difficult years in a reasonable and justifiable way.  B&W Shipyard is one of the world’s leading shipbuilding companies for the production of Panamax bulk-carriers and since this market seems to be developing again, there should be good opportunities to uphold the shipyard and thereby important export opportunities in the future.

On this basis, we would appreciate a prompt and favourable handling of the attached applications and apply for preliminary approval of the necessary guarantees and approval of the requisite guarantee framework for the preparation-phase loan.”

6.5.6 Mr. Gideon threw light on this.  The yard had practically stopped work and therefore had cash flow problems.  However, the yard seriously under-estimated the cost and difficulties of starting up again and this led to serious problems later.

6.5.7 The Fund worked quickly and on 31st August the administration, through Mr. Lyngsie, prepared a recommendation for its Board.  The paper noted that the Ministry had accepted that there was a matching situation and proposed making a loan to WMI or its subsidiaries.

6.5.8 Whether or not there was a matching situation appears to have been the subject of some debate.  There was a meeting of the Fund’s Board on 12th September, at which Mr. Fogh, who represented Danish shipowners, said he would not give his consent to the loans because the favourable terms given by the Brazilian shipyard, which gave rise to the matching situation, were explicable by a full order book and longer delivery dates.  As a result, no decision was taken on the applications from BW.

6.5.9 Mr. Gideon accepted that it is always difficult to assess if there is a true matching situation because an owner can shop around the world until he finds a yard with full order books and obtains good terms.  Mr. Nielsen of the Fund was of a similar view and said that there might be all sorts of hidden aspects of a matching situation, not least government assistance.

6.5.10 Because of the amount involved, EKR referred the matter to the Ministry for a decision.  When EKR learnt from the Ministry that the proposed arrangements were legal, it eventually wrote to BW on 4th October confirming it would provide export credit guarantees AB/K and a counter-guarantee for the Fund’s loans to WMI.  (EKR denoted its guarantees as follows :

A = commercial risks

B = political risks

K = during the construction period

DA = counter-guarantee after delivery

DO = guarantee for a pre-delivery loan to the Yard)

6.5.11 There seems no doubt that the delay between 20th August and 4th October did prejudice WMI’s orders.  Mr. Per Schroeder of BW, who was in Hong Kong looking after BW’s interests, telexed Mr. Sverdrup at the yard on 23rd September to the effect that he had spoken to Mr. Marden who was pessimistic about the deal and who produced details of better offers from other yards.  The telex continued:

“Furthermore, it was mentioned that the shipowning company finds it incomprehensible that political manoeuvres should ruin a business deal which would bring to Denmark in one single transaction 500 million worth of Danish Crowns in foreign currency and simultaneously ensure the employment of 1200 workers directly, plus a comparable number indirectly.

By the end of next week, on September 30, all contracts will become null and void, and I am convinced that the shipowner here in Hong Kong does not wish to extend the contracts unless a fully positive decision from the Danish Government and the Export Credit Council is received on Thursday 27 September at the latest.”

6.5.12 The political dimension was echoed in a number of contemporary Danish newspapers which noted that politics was keeping BW waiting for export credit guarantees, a wait which might lose them the WMI orders.  It appeared, and Mr. Gideon confirmed, that the then coalition government of liberals and social democrats was fighting about the guarantees, the liberals (known as Venstre) having some animosity towards BW, an animosity which appears to have been generated by Mr. J.B. Nielsen.  The papers were critical of Venstre’s position which might lead to the yard closing and the loss of thousands of jobs.  Then, on about 28th or 29th September, the government resigned.  The care-taker government seems to have acted swiftly and given its approval to the guarantees.

6.5.13 On 20th November, the Fund’s Board met again.  Again, Mr. Fogh would not agree and his view received the support of the Fund’s general manager, Mr. Engell-Jensen.  It was decided to recognize that a purely political decision had been made by the government to accept a matching situation, in contrast to the Fund’s responsibility for assessing the security basis of any loan.  Subject to a caveat about matching, the Board approved the loans.

6.5.14 In the end, as Mr. Gideon agreed, the relaxed terms for these loans were the result of a political decision.

6.5.15 On the same day, the Fund wrote to WMI that the two loans were offered by way of bonds and were subject to the securities mentioned before.

6.5.16 There was, however, still uncertainty as to the final position.  WMI wrote to BW on 1st December that it understood that, although contracts for two Panamax vessels had been signed with two of its subsidiaries, WMI had four weeks to satisfy themselves that BW had sufficient support to perform these contracts.  On 5th December, WMI asked its solicitors in London to carry out an investigation.  Enquiries seem to have confirmed that there was a tight but not a disastrous financial situation at BW.  On 20th February 1980, the solicitors advised Mr. Brothers of an EGM of BW, that the situation was very bad, but that it was probable the vessels would be delivered.  On 12th March 1980, Mr. Brothers agreed with BW to an assignment of part of the second instalment for the purchase of steel.

6.5.17 The difficulties of BW, however, could not be contained.  On 8th July, Mr. Sverdrup advised Mr. Brothers that the shipyard had been established as a separate company with effect from 1st July.  He also advised that an agreement had been reached with the yard’s steel supplier to postpone a payment of Dkr 70 million until 1982 so that this sum became effectively, as Mr. Gideon explained, subordinated capital.  EKR was providing a guarantee for construction finance of up to Dkr 225 million subject to Ministry approval.  To help in obtaining that approval, the yard asked WMI to pay the 10% due on delivery on the anticipated delivery dates even if delivery of the two hulls, 881 and 884, was delayed.

6.5.18 On 10th July, BW asked the Ministry to request EKR to provide guarantees of Dkr 225 million for the Yard.  Their letter said EKR, as well as the steel supplier and other creditors, would be fully repaid after five ships were built.  The shares in the yard were pledged to EKR.  The yard would report periodically to EKR on its programme and keep EKR informed of any circumstances which might increase EKR’s risk.

6.5.19 On 21st July, the Ministry wrote to both BW and the Fund.  It asked the Fund to disburse loans to finance building in instalments of one-eighth each.  In the event, one-sixth instalments were advanced, which assisted the yard’s cash flow.  The Ministry also advised BW it had asked EKR to give a Dkr 225 million comprehensive guarantee to finance construction.

6.5.20 In November 1980, BW went bankrupt.  However, a report by Hamlet Shipping to Mr. Schroeder recorded inter alia:

“The shipyard, a separately run company whose shares are owned by Burmeister & Wain a/s but effectively controlled by the Danish Government, will continue to operate independently.

In exchange for export credit for the shipyard, the voting power of the shares was handed over to the government.  This agreement will last for the duration of the credit, probably until 1983.

The shipyard is therefore protected from a general disposal programme following the parent company’s bankruptcy.

But it is probable that the government will want the shipyard’s ownership sorted out sooner rather than later, and would not stand in the way if a suitable buyer or buyers can be found.”

6.5.21 Mr. Gideon agreed that that was a fair statement.

6.5.22 BW seems to have turned the corner.  WMI’s first vessel, 881 Danelock, was delivered in December 1980, an occasion which received considerable attention in the February 1981 Edition of “The Motor Ship” which remarked upon the efficient hull design and new economic low-speed diesel engine.  This publication noted that nine similar vessels were then on order.  It also noted that the yard had successfully established the government’s faith in it as one of Copenhagen’s major employers.

6.5.23 WMI were pleased anyway.  It decided to order four more Panamax vessels and, through the yard, applied for loans from the Fund.  On 3rd February 1981, Mr. Faergemann prepared a recommendation for the Fund’s Board for four loans based on prices of Dkr 236 million, 242 million, 250 million and 258 million and OECD terms.  The paper noted an independent valuation of Dkr 175 million per ship.  The proposal was approved by the Board on 19th February.  Building contracts were signed on 24th February.  On 6th March, the yard applied to EKR for AB/K, DA and DO guarantees.

6.5.24 On 9th March, the Fund advised that the loan was approved subject to EKR’s counter-guarantee.  EKR were, in the meantime, considering WMI’s request that its own guarantee be substituted for that of a bank for any shortfall between the deposits and the loan.  The Fund indicated it wanted a bank guarantee but that if EKR found a WMI guarantee to be satisfactory the matter would be referred to the Board.  The Fund followed that letter up on 13th April when it telexed EKR that WMI was enquiring about the counter-guarantee and whether its own guarantee would be accepted.  Mr. Gideon was unable to explain the delay but thought it might be because of the guarantee framework given to the yard.  He recalled that in the spring of 1981, the maximum had to be raised from Dkr 225 million to 275 million before being reduced to 255 million.  The proposal for the increase had been put before the Ministry by EKR and the Ministry could have been considering it.

6.5.25 On the following day, however, EKR was able to inform the yard that it was willing to give counter-guarantees for the yard for the necessary loans on OECD terms, with WMI guarantees for any shortfall in the event of default by any subsidiary taking a loan from the Fund.  On 27th April, the Fund formally offered four loans to WMI or subsidiaries against WMI shortfall guarantees.  On the next day, the Fund’s administration sent a note to the Board advising members that, as EKR had accepted WMI’s guarantee without any additional bank guarantee, the administration had proceeded on the basis, as Mr. Gideon agreed, “If it’s good enough for them, it’s good enough for us.”  However, Mr. Gideon felt the Fund should put a higher requirement on the guarantee than EKR, and was surprised to see from the tenor of the documents, which he had not seen at the time, that the Fund seemed to have left a decision on the shortfall guarantees to EKR.

6.5.26 The yard was not yet, however, out of the wood.  On 30th April, the Fund formally advised the yard of the loan offered to WMI and indicated it would give the yard a single-instalment preliminary loan of 25% of the contract price, payable on certification by the yard of appropriate expenditure.  A manuscript note on the letter, however, suggested that the preliminary loans might be payable in six instalments, albeit at a higher rate of interest.  This would assist cash flow.  But the problems persisted.  On 5th June, Mr. Brothers was advised by the yard and other sources of the yard’s precarious position.  The immediate problem was a 20-day delay in the delivery of the latest Panamax which required the yard to seek credit of Dkr 40 million to continue, failing which bankruptcy proceedings might be commenced.  Mr. Gideon, however, asserted that this was a symptom of a more basic problem, namely the under-estimate of start-up costs and lack of productivity by the yard.  On a reading of the contemporary documents, that seems to me to be a fair assessment.  The Danish Government was reluctant to agree to further guarantees, but very quickly a productivity agreement was reached and the Ministry on 8th June requested EKR to increase the guarantee framework to Dkr 275 million and to authorize the yard’s banks to obtain a mortgage on newbuildings for Dkr 40 million credit.  It was, therefore, as Mr. Gideon agreed, a Ministry decision to keep the yard going.

6.5.27 It is a matter of dispute whether the yard used the extra Dkr 50 million facility.  Mr. Gideon’s impression was that it was used.  On 25th June, however, Mr. Brothers met Mr. Schroeder at the Yard.  In his note, he recorded he had been told the yard had received payment for hull 882 and had not used the credit facility.  Mr. Gideon was rather vague on this.  He explained that he was in a better position to know because of almost daily contact with the yard.  In my view, the contemporary document is more likely to be correct.

6.5.28 Mr. Brothers also reported the yard as being under-capitalized, with which Mr. Gideon agreed, because in 1980 and 1981 the yard’s deficit exceeded its equity.  It was, according to Mr. Gideon, the subordinated loan from the steel supplier that kept the yard going.  Mr. Gideon also accepted that, in July 1981, a 3-week delay in delivery could potentially have caused disaster.  He emphasised that the yard depended upon production for money.

6.5.29 From here on, the yard seems to have turned the corner.  There was apparently no further alarm.  At the end of 1981, the yard’s loss for 1980/81 was Dkr 150 million.  At the end of 1982, it recorded a profit of Dkr 88 million and had assets of Dkr 47 million in excess of liabilities.

6.6    ADS and negotiations

6.6.1 In January 1983, the Fund became aware, albeit unofficially, that WMI was in difficulty.  An approach from Mr. Brothers was therefore not unexpected.  Between 22nd and 24th February, Mr. Edelmann went to the BW yard to see Mr. Brothers.  His general recollection was that Mr. Brothers indicated that WMI and the shipping arm of the Group were going to face a liquidity crisis although not immediately.  The problem, however, could be solved if all bankers, including ADS, made a contribution.  A moratorium was being sought.

6.6.2 Following the meeting, Mr. Edelmann received on 25th February a telex from Mr. Brothers confirming that he was approaching bankers for refinancing under which only interest would be payable until conditions improved.  Mr. Brothers said that a moratorium on payments on Rangelock and Marilock were vital if WMI was to take delivery of Sealock on the basis of the original US$ loan from MMB.

6.6.3 By letter dated 28th February, on WM note paper, Mr. Brothers sent Mr. Edelmann a WMI consolidated balance sheet and profit and loss account for 1982, together with the draft letter to be sent to WMI’s bankers which indicated that unanimous support was required for a 3 year moratorium.  There should have been a cash flow in relation to lenders secured on existing vessels but a manuscript note indicated that it would not be ready until the next day.  The letter indicated that newbuildings were to be dealt with separately and that a cash flow would be forwarded in a few days time.  That cash flow was sent to bankers on 18th March.  It is in dispute as to whether it was ever provided to ADS.

6.6.4 Also included with Mr. Brothers’ letter was a graph for a period of ten years based upon the cash flow for secured creditors.  It was not exactly an encouraging document.  With a three year moratorium, WMI would go into deficit in mid-1986, a deficit which bottomed out at US$20 million between 1989 and 1990.  Break even would be reached again in mid-1992.  Without a moratorium, the deficit would begin in mid-1983 descending to US$60 million by the end of 1989 and recovering to a deficit of $17 million by the end of 1992.  In the draft letter Mr. Brothers said ‘WMI is now facing an immediate cash flow shortfall’.

6.6.5 By a private letter to Mr. Edelmann on 1st March, Mr. Brothers advised him that the cash flow would be arriving shortly and emphasised that it covered existing vessels and was on the basis of a three year moratorium.

6.6.6 On 2nd March, Mr. Brothers wrote to Mr. Edelmann and set out that WMI was seeking a moratorium on two payments in relation to Marilock, one payment in relation to Rangelock and postponement of the first payment on Sealock.  The instalments from the Dkr deposits were to be released and used to pay MMB.  Mr. Brothers also enclosed a cash flow in relation to Sealock which showed a cumulative deficit of US$8.3 million over a nine year period.

6.6.7 Mr. Edelmann discussed WMI’s request with EKR on 2nd March.  EKR were adamant that the existing Dkr deposits should not be touched.  However, in order to help the BW yard, EKR suggested that there might be a period of grace for several years in relation to Sealock, Annalock and Hull 912 and a longer period of repayment.

6.6.8 On 3rd March, Mr. Brothers wrote to Mr. Edelmann with a revised letter to WMI’s bankers and with a valuation of existing vessels.  This showed book value of US$145 million, a with charter value of $132 million and charter free value of $100 million.  There was also a schedule of loans and guarantees, amounting to US$134 million,.secured on the vessels

6.6.9 On 4th March, Mr. Edelmann prepared for the Fund’s board a note (App. 5/1) setting out the positions of WMI and EKR and indicating that MMB would be unlikely to agree to release of any deposit.  He then pointed out in the note that the EKR proposal was possible but would require the authorisation of the Ministry of Industry because the time frame for a normal OECD loan would be exceeded, while the Central Bank’s consent would be necessary because there would be a bigger subsidy than normal.  The note then recorded:

“The (EKR) indicated that such an emergency situation as the existing one should hopefully receive a favourable treatment.

The board is therefore asked to decide whether the Fund can collaborate to such a solution as outlined by the (EKR).”

6.6.10 On 7th March, the Fund’s board met and discussed WMI (App. 5/15).  Mr. Nielsen presented the note dated 4th March and indicated that the long term objective was to arrive at a ‘packet solution’ involving all three hulls.  Concern was expressed about the additional subsidy that would be involved at the expense of the Central Bank, the breach of OECD rules and whether the WMI Group might be in serious difficulties.  It was noted that because of the outlay already incurred in respect of Sealock, WMI might be reluctant to refuse delivery but could cancel the other two hulls with little loss.  In the event, the consensus was that if the Ministry of Industry and EKR felt that a packet solution was desirable in order to help the yard and because the Fund would not be at risk, there was really no reason not to comply with any request from the Ministry or EKR.  Accordingly, the chairmen were authorised if necessary to make a decision.

6.6.11 Following the meeting, on about 9th March Mr. Edelmann met Mr. Gideon to confirm that EKR would continue to guarantee the loan even if other securities became insufficient.  He understood that the decision was ultimately a political one to be taken by the Ministry in order to protect employment at the yard which would be in a difficult position if Sealock was not delivered.

6.6.12 Also on 9th March, Mr. Brothers wrote to Mr. Edelmann about Sealock.  He reiterated that the shipping industry was going through a bad time and explained the difficulty over Sealock was cash flow arising from depressed earning rates which were projected to be US$6,000 in 1983, rising to $10,000 in 1985 as compared with $14,000 for two earlier hulls delivered by the yard in 1980.  Mr. Brothers continued that WMI could not fund the cash flow deficit of $10 million on Sealock however far repayment of the loan might be stretched out if EKR insisted that the deposits were not touched.  He therefore proposed two possible solutions.  Solution A was a moratorium of three and a half years for the Sealock loan and a revised loan period of 12 years.  The Fund was to have as security the new deposit which would cover instalments for years four to eight only but with all interest.  This involved releasing cash from the deposits to pay MMB.  The Fund would also have as security amongst other things a second mortgage on the vessel, the value of the equity in which would grow as the bank was paid off.  WMI would also give a guarantee in case of any shortfall.

6.6.13 Solution B was a similar moratorium but the bank would keep the deposits as primary security until the market improved when it would swap the deposits for a first mortgage on the vessel.  WMI would again give a guarantee.

6.6.14 Mr. Brothers continued:

“Even if this can be agreed, there is still a shortfall in earnings but it is within manageable proportions.  Furthermore, as an arrangement relating to the provision of a first mortgage on the vessel can be agreed directly between ourselves and DSKF without involving our bankers, it means we can act very quickly not only to agree on 910 but also 911 and 912.  I understand this to be an essential ingredient to the overall solution.  I attach cash flows to illustrate the effects of those proposals.

Finally, in concluding, I think it is as well to make it clear that Wheelock Marden and Co. Ltd. cannot give any specific guarantees or other support in respect of individual vessels.  To do so would invite all our creditors to insist on the same treatment.  You will appreciate that on the ‘Marilock’ and ‘Rangelock’, there are significant cash shortfalls that have to be funded.  Furthermore, interest has to be paid on the loans raised to purchase the Krone deposits for 911 and 912.  Support, if forthcoming, will have to be by way of cash injection that will go toward improving the liquidity of the group as a whole.  I am sure you can understand the logic of this.  As far as other assets of WMI are concerned, I have sent you a detailed list of all ships and existing loans.  Although our loans are covered, the disastrous effects of the market have considerably reduced all asset values and you will appreciate it will be difficult to find much in the way of additional security through second mortgages etc. to cover our borrowings from you.  We can, however, always explore this avenue if you so wish.

Please forgive this rather long letter but I want you and your colleagues to be absolutely clear over the position here and I also hope that my comments and suggestions will assist in overcoming these present difficulties.”

6.6.15 On 15th March, Mr. Edelmann prepared a note for his board (see App. 5/23).  He explained WMI’s proposals and reported that EKR was prepared to help WMI, had asked the Fund and the yard to participate in negotiations with WMI, and would agree to Solution A only if no other course was open to secure delivery of Sealock and thus hulls 911 and 912.

6.6.16 The note then continued:

‘This solution must be avoided at any cost and subsequently all possible efforts must be made to keep a solution within the following negotiation framework’.

6.6.17 That framework was, inter alia, that the moratorium would be for Sealock only while hulls 911 and 912 were to be delivered under unchanged conditions; that any grace period was to be as short as possible while the loan period of eight and a half years was not to be extended, with the deferred repayments becoming due on the final date of that period; that a higher interest rate should be paid on the deferred instalments; and that WMI should prove it had initiated negotiation for a general moratorium.  It was also noted that EKR was fully aware of the increased risk being taken but was willing to do so on account of BW.

6.6.18 In the note Mr. Edelmann then summarised the security that would be available to the Fund including both the WMI and EKR guarantees.  Finally, Mr. Edelmann advised that the Ministry urged the Fund to participate in a solution within the framework, and asked the board to decide if the Fund, in co-operation with EKR, should participate in an agreement within the framework prescribed or, if necessary, corresponding with the WMI proposal.

6.6.19 On 17th March the board approved the proposed course.

6.6.20 On 22nd and 23rd March, there were meetings in London between Mr. Edelmann and Mr. Faergemann, Mr. Brothers, Mr. Fraser of MMB and three representatives of BW including Mr. Schroeder.  The problem was to persuade MMB to swap the deposits for a first mortgage on the vessel as its security for the US$ loan.  MMB wanted release to it of 6 instalments from the deposits which would reduce the loan to an amount more commensurate with the value of the vessel.  The Fund and EKR, however, were only prepared to release four instalments which represented approximately a 23% reduction of the Fund’s security.  After two days of discussion, a compromise was reached on the basis of 5 instalments, subject to MMB’s head office approval.  WM would give MMB a letter of comfort for the sixth instalment.  The Fund also wanted a share of any profits from the vessel after operating costs and to be informed about the status of Wheelock companies and the moratorium.

6.6.21 It is at these meetings that Mr. Brothers said he handed over the newbuildings cash flow of 18th March.  It is the ADS’ case that he did not.

6.6.22 Mr. Faergemann had the impression at these meetings that Mr. Brothers was saying that everyone had to give or contribute a bit and that the Fund should be as co-operative as all its other bankers, although the extent of the bankers’ co-operation was not known to the Fund.

6.6.23 On 29th March, Mr. Edelmann prepared a note for the board.  He reported that MMB had agreed to the swap but that, on 28th March, he had been advised from Hong Kong that the WMI Board only agreed the arrangement if there was a corresponding arrangement for hulls 911 and 912 and if their delivery was postponed until the market picked up.  He said that the administration took the view that no further steps should be taken.  Although not in that note, Mr. Edelmann had also been advised that WM would not give a letter of comfort until arrangements for 911 and 912 were worked out.

6.6.24 On 30th March, Mr. Brothers wrote to Mr. Edelmann to confirm the position but reporting that, if the Fund released the six instalments, MMB would not require a letter of comfort and the vessel could be delivered.  The Fund apparently accepted the position and Sealock was delivered on 7th April.

6.6.25 It appears that at the March meetings it was also agreed to meet again in London in April to discuss the other two hulls.  At all events, on 18th April, Mr. Schroeder of BW telexed Mr. Brothers to say that Mr. Gideon of EKR insisted on meeting on 21st/22nd April and that Mr. Brothers must be present.

6.6.26 The meetings took place and were difficult.  Mr. Brothers wanted a moratorium which Mr. Edelmann was not willing to give.  Further, LBI took a very narrow view and wanted only to ensure that they had sufficient security.  They would not accept US$4.75 million, which the Fund was willing to release from the deposits, as sufficient.

6.6.27 On 23rd May, to try and get things moving, Mr. Brothers telexed Mr. Edelmann.  He set out a number of conditions contained in the loan documents which might delay delivery of the vessels.  He suggested that the banks should agree not to insist on these conditions if the Fund agreed to defer some payments.

6.6.28 On 30th May, there was a meeting at the yard.  Mr. Edelmann and Mr. Faergemann represented the Fund.  Mr. Brothers gave an account of WMI’s problems which had by now become the subject of press comment. HKR was considering a three-year commitment to WMI of US$12 million.  Any proposal would, however, have to go to its shareholders.  Press reports made plain that considerable shareholder resistance was to be expected.  Mr. Brothers said he would be trying to get a bank moratorium and find a solution to 911 and 912 with LBI and Midland Bank.  Mr. Edelmann said he was not prepared to offer terms as relaxed as for Sealock.  In the circumstances, he saw no point in opening new negotiations until after the position of the two banks and HKR was resolved and the WMI annual general meeting had been held.

6.6.29 On 29th July, Mr. Brothers sent Mr. Edelmann a three-year cash flow for the WMI Group which assumed creditors, including the Fund in relation to hulls 911 and 912, accepting rescheduling by a three-year moratorium, but which did not include Spanish newbuildings or the US$12 million injection “planned” by the Group.  This cash flow showed a US$7 million deficit in June 1986.

6.6.30 On 4th August, Mr. Brothers wrote two letters to Mr. Edelmann.  He asked that, in keeping with negotiations with other secured creditors for rolling up repayments, the Fund defer the first five repayments which would be put in one balloon at the end of the loan period.  In relation to hull 911, he asked for an additional Dkr 5.2 million to cover extras.  Mr. Edelmann replied in a discouraging tone on 10th August, saying he would not put any proposal to the Fund’s Board which did not contain a high degree of certainty of delivery and, in any event, negotiations with EKR were necessary as “nothing can be done without their approval”.

6.6.31 Mr. Brothers replied next day that agreement with the Fund was critical as otherwise the two banks involved, who had indicated a willingness to cooperate, might liquidate the deposits.  After that it was “doubtful if we could ever recover to back to where we are today”.

6.6.32 The Board discussed the position on 15th August.  The latest cash flow, referred to in Mr Brothers’ letter, was noted although copies had not been provided for members of the board.  It was also explained that BW had purchased material and would suffer substantial loss if delivery did not take place.  At a further meeting on 3rd October it was concluded that any assistance for WMI should come from its parent.

6.6.33 Meanwhile, on 24th September, Mr. Brothers telexed Mr. Edelmann that WM had agreed to provide WMI with a secured credit facility of US$4 million for two years.  On 4th October, Mr. Edelmann and Mr. Faergemann met Mr. Brothers and representatives of BW and LBI.  Mr. Brothers explained that WMI was seeking to sell older tonnage.  He said WM had received a report that WMI was worth saving and had granted the US$4 million facility, secured by a pledge of WWW shares which were also subject to a pledge in respect of WM’s guarantee on Rangelock.  He said WMI were seeking a deferment of four or five payments on the two hulls.

6.6.34 Such deferment would have been worth about US$10 million.  Mr. Edelmann was astonished, pointing out that the Fund had already contributed $5.8 million to liquidity on Sealock while WMI’s parent was only prepared to assist with $4 million and even that was secured.  He said, however, out of consideration for BW, the Fund was prepared to help.  A proposal was made that, in return for the two banks swapping the deposits for a first mortgage on the vessels on delivery, the Fund would finance interest accrued to that date which would be $4.75 million.  Although Mr. Brothers offered a second mortgage on the Fenlock as security the Fund preferred a second pledge of WWW shares as appearing more valuable.

6.6.35 The Board considered the proposal on 8th November.  (App. 5/27) Concern was expressed about taking risks when the Fund was already 100% secured by way of the deposit.  However, as Mr. Edelmann pointed out, whatever happened, the Fund would not be at risk because of EKR’s ultimate guarantee.  Some members felt the Board should distance itself from any decision by EKR to take a risk and wished to emphasise that if EKR independently decided something the Fund would co-operate.  It was concluded that the Fund should contribute to a solution and, in principle, that would be assistance amounting to approximately US$4 million for both vessels together.  That assistance would not, however, be automatically increased if the parent increased its own support.

6.6.36 On 10th November, Mr. Edelmann met Mr. Brothers and representatives of BW.  He made it plain that the maximum support would be $4.75 million.  Eventually, it was agreed that this amount should be focused on Annalock and used to reduce the LBI loan, while hull 912 should, if possible, be sold by WMI.  The idea was that BW should acquire all the shares in the owner for $1.  The Board considered the proposal on 14th December and agreed that the administration should try to implement it so that it would be possible to negotiate an overall solution to BW’s problems.

6.6.37 Between 20th and 23rd December, all parties met in London.  LBI wanted a solution for Annalock that was not dependent on hull 912.  The Fund wanted a package for both.  The Fund’s position was that the $4.75 million maximum assistance was conditional on LBI swapping deposits for a mortgage on the vessel, and upon a pledge by WMI of WWW shares.  Mr. Edelmann said the only reason for non-delivery would be the bankruptcy of WMI.  Agreement to the discharge of the Fund’s second mortgage on Rangelock, which had been requested, depended on reaching agreement on the package.

6.6.38 Eventually, agreement was reached and signed to the effect that:  LBI would pay the floating-out instalment and swap security with the Fund;  WMI would take out an independent loan and use the proceeds to reduce the loan from LBI;  in due course, the Fund would release four instalments to enable WMI to repay its loan and make available a new loan to WMI for extras;  and BW would purchase hull 912 and, subject to delivery of Annalock, would meet all obligations in relation to hull 912.

6.6.39 Following formal approval by EKR, the agreements were implemented.  Annalock was delivered on 22nd March 1984.

6.7    EKR and negotiations

6.7.1 Mr. Gideon accepted that by 11th March 1983, EKR knew through the Fund about WMI’s problems, namely:

1) The downturn in the shipping market since the end of 1981 and a corresponding fall in the value of vessels;

2) Freight rates and operating expenses predicted by WMI;

3) The extensive new building programme, although not the details;

4) Cash flow difficulties in relation to secured creditors.

6.7.2 Mr. Gideon and other members of EKR had met Mr. Edelmann and representatives of the Fund on 2nd March.  They discussed WMI’s request for assistance.  It was at this meeting that Mr. Gideon said EKR were not willing to move in relation to ships already delivered but suggested the possible framework for a package for hulls 910, 911 and 912.  Mr. Gideon prepared a note setting out the position for an extraordinary meeting of the Council of EKR on 11th March.  The note stated that if the loan period was extended to 12 years, EKR would have an unsecured risk of Dkr 88 million after the 8th year which would be secured by a mortgage on the ship which the Fund had had valued at US$17 million.  Further, if WMI did not take delivery of hull 910, EKR was at risk in the sum of Dkr 20 million on the pre-delivery loan while the yard itself would face a loss of Dkr 60 million.  At the meeting, Mr. Gideon provided the Council with further information:

“- the operating profit in Wheelock Maritime International Ltd. had been DKK 140 million in 1981 and aprox. DKK 25 million more in 1982.

- the net capital of the said company amounted to approx. DKK 800 million at the end of 1981 and DKK 775 million at the end of 1982, including however ships of a book value of about DKK 1.2 billion.

- the said company will need a liquidity of USD 70 million in 1988 alone with the present number of ships (18 units) and without a moratorium as proposed by the company, and [including] this, will need USD 20 million provided that newbuildings not yet delivered - including n° 910 - can be self-financing.

- the company’s present building programme comprises - in addition to the three undelivered ships from B&W - 4 ships from Spanish shipyards where a one-year postponement of the delivery has been accepted and a two-year moratorium has been granted, plus 2 to 4 ships from Japanese shipyards which have also accepted a postponement of one year for the delivery as well as a moratorium of unknown duration, and finally 2 ships from Chinese shipyards where no postponement or moratorium has been heard of.”

6.7.3 In the minutes, one unidentified member is recorded as commenting that he:

“did not think that Wheelock Maritime’s financial situation was any different from other shipowners’ so that it was deemed that there was no need for special consideration, and that the proposed moratorium went against the OECD terms.  [He] would like to know whether at the time of application Wheelock Marden & Co. was not liable for Wheelock Maritime’s commitments, and suggested that EKR - as long as one of the mentioned alternatives were adopted - would in one way or the other profit from a possible future increase in value of the three undelivered newbuildings, that the take-over of Newbuildings 911 and 912 would also be ensured if EKR decided to participate in a moratorium for 910, that the deferred instalments in case of a moratorium would probably be charged a substantially higher interest on overdue payments and finally [he] emphasized that the Federation of Danish Industries could agree to the arrangement proposed in the note in consideration of the Ministry of Industry and the government.”

6.7.4 Mr. Richnagel, another member of the Council, then said:

“that one was aware of the missing commitment, but that the buyer had been found to be very serious, among others because Wheelock Maritime International had been able to have the deposits established for the various newbuildings and because the contracts had not been cancelled in connection with the shipyard’s earlier bankruptcy, and that EKR’s risk regarding newbuildings 910 to 912 was not different from the risk it was incurring in other big affairs, and that the OECD rules concerning ship financing were not binding as the question was to consider EKR’s creditor’s interests.”

(My emphasis - it is relevant in relation to illegality).

6.7.5 Finally, the Council authorized the Secretariat to negotiate accordingly and find the most favourable solution for EKR.

6.7.6 It was Mr. Gideon’s evidence that EKR and the Fund concentrated equally upon the yard’s loss potential and WMI’s difficulties and made a commercial decision to run the risk.  Mr. Gideon pointed out that EKR was in an unusual situation.  Normally, its security would lie in the ship.  Here, the loan had been fully secured by the deposits, so EKR was not afraid to give away a little thus putting itself in a position that was normal for EKR, namely accepting a possible risk.  That was a risk that other guarantors would not normally accept because of the length of the loan period which could run up to seven years or more.

6.7.7 Mr. Gideon would not accept that the Fund was indifferent to the negotiations because it always had the EKR counter-guarantee to fall back on.  In cross-examination, he said:

“Well, they had the guarantee, because of some sort of agreement between the Government and the Fund.  It was a requirement in their associations - statute of associations - that they should have a guarantee, but I am fully convinced at that time and today that the Fund at all times should behave as though they did not have that counter-guarantee.  They were the shipping experts.  They could not rely solely that the Government would guarantee their bonds and, as a consequence of this, they make one error after the other, so the Government had to make up and pay the claims to the Ship Credit Fund.  I do not think the Government would have been very much amused by this.  I think it was expected by the Fund that they would treat each case as though they did not have the counter-guarantee, but you are right, they had the counter-guarantee and they had full security, but that is not to say that they would not act seriously and honestly in this case and give us their best advice in the EKR.  They were expected to do that.”

6.7.8 He was, however, rather confounded by the minutes of the meeting of the Fund’s Board on 8th November 1983 (App. 5/27) which recorded:

“Mr. K. ENGELL JENSEN, Director, explained that the shipyard would be able to bear such a loss but that it should be the task of other enterprises to assist in this situation.  One could sympathise with the unfortunate fact that the Danish Export Credit Council should suffer a heavy loss, but the difficulty of the situation was that the Danish Export Credit Council considered the positions adopted by the Fund’s Board of Directors as deriving from expertise in the field even though the basis for the debate among the Board members has been that the commitment was backed up by an export credit guarantee.  It was therefore important that the Ship credit Fund of Denmark should adopt a clear position.

The Chairman found that the Danish Export Credit Council abused the Ship Credit Fund of Denmark with such reasoning.  Furthermore, it was unreasonable that apart from having undertaken to manage a subsidy scheme, the Ship Credit Fund of Denmark should also give further assistance.  As far as the authority of the Board was concerned, the Chairman was of the opinion that the Board members could not be held personally responsible.  The Fund’s practice has always been that, if the Danish Export Credit Council decides something independently, the Ship Credit Fund of Denmark shall have no objection to cooperating, and this practice would have to be made quite clear to the Danish Export Credit Council.”

6.7.9 Mr. Gideon could only say that it was his opinion at the time and could not reconcile the Fund’s apparent attitude.  He said that, before delivery of the ship, the Fund was not at risk.  After delivery, the Fund had to make a decision, the Fund was independent of EKR, and EKR and the Fund would each make their own decisions.

6.7.10 As far as Mr. Gideon and EKR were concerned, Mr. Gideon’s position was this.  In relation to DA risks, the credit worthiness of the buyer had to be looked at.  With reference to the WMI graph (App. 2/8) showing the position in relation to secured creditors, which had been supplied by Mr. Brothers, Mr. Gideon said the upper curve was the one to focus on because EKR knew WMI intended to negotiate a moratorium.  That curve showed a short-term problem, as opposed to a permanent problem, in the sense that after some years break-even was reached.  However, he did not expect Mr. Brothers simply to put his feet up after arranging the moratorium.  He thought that Mr. Brothers would work hard (as indeed he did), sell ships, arrange finance and keep WMI going.  Even the lower curve on that graph, showing the position without a moratorium, began to come up again and would probably break even eventually.  In essence, Mr. Gideon’s position was that there was a cash flow and not an asset problem on the part of WMI.  As the market improved, so would WMI’s assets.

6.7.11 Mr. Gideon and EKR appreciated the problems relating to Sealock.  Mr. Gideon said WMI wanted this ship to be self-financing because otherwise how could the company take it.  So he assumed that, with the help sought by WMI, it would be self-financing and that the same would apply to hulls 911 and 912.

6.7.12 Mr. Gideon accepted that, in order to see the overall position, EKR would need cash flows for newbuildings and unsecured creditors.  However, whether or not a cash flow for newbuildings would show an outflow rather than a profit, he did not have the knowledge to say.  He said he and EKR were not experts on ships.  Rather, they relied on the Fund for an assessment of ships and shipping.

6.7.13 He acknowledged that WMI’s accounts had used book values for ships.  He acknowledged that the market had declined since the accounts had been drawn up.  He was not prepared to accept, however, that there had been any dramatic change in the values of the ships.  He took the use of book values as a sign that WMI intended to continue trading and was encouraged by the fact that he and EKR had not been told anything negative about WMI.  He just thought that the shipping business was going through the usual cycle in the market.

6.7.14 Mr. Gideon did accept that, in spite of the Danish view that the WM Group would be behind WMI, it was clear from Mr. Brothers’ letter of 9th March 1983 that support was by no means certain.

6.7.15 It was in such circumstances that EKR were prepared to accept a risk, both in its own interests given its exposure under the counter-guarantees; and to help the yard in what was described as an “emergency” situation.  It was an ‘emergency’ situation in the sense that the yard would be taken by surprise and have a cash flow problem if WMI did not take delivery of Sealock and the other hulls.  Help, therefore, was the only proper course to follow if a crisis was to be avoided.

6.7.16 Negotiations with Mr. Brothers and MMB followed.  There is some dispute as to who was to be responsible for these negotiations.  According to Mr Edelmann’s note of 15th March 1983 (App. 5/23), it was EKR’s board that decided there should be direct negotiation with WMI/MMB and asked the Fund to ‘participate’.  It is tolerably clear, however, from the documents and other evidence that the “Danish side” was represented by Mr. Edelmann.  Mr. Gideon said, and I accept, that he attended the meetings in London only to familiarize himself with the participants and the general picture.  It was only with some reluctance that he conceded that Mr. Edelmann consulted him from time to time.  He said that it was not really necessary for such consultation because Mr. Edelmann knew the framework for negotiation which had been laid down by the Council of EKR.  He was adamant that he and EKR had no other role to play.  He said that the question of any additional subsidy, if indeed there was such additional subsidy, arising from the extended period for repayment of the loan and the possible breach of OECD rules arising from the extension, was for the Fund to consider in conjunction with the Ministry.  They were not matters of concern to EKR which would simply accept the risk and give a counter-guarantee, if they otherwise considered the risk an acceptable one, once the Ministry had indicated the legality of the position.

6.7.17 In carrying out these negotiations, Mr. Gideon expected the Fund to behave as experts in shipping and not look at the counter-guarantee.  Rather, the Fund would do its utmost to ensure that every loan to be made did not result in a claim.  He was of the view that, if the Fund simply left shipping business to EKR so that EKR incurred one claim after another, the arrangement with the government would end immediately.

6.7.18 In his original statement at para. 26, Mr. Gideon said this:

“I understand that the defendants allege that the motive for entering into the loan on relaxed terms was to ensure delivery of the vessel, to avoid loss to the B&W Yard, and to avoid a possible event of default under the loan agreement between the Fund and B&W.  This is misleading.  The Fund at all times held the guarantee of EKR and therefore would not have suffered had the Yard been unable to repay the Fund’s loan (although of course EKR would have suffered a loss).  I do not believe, however, that any such loss would have occurred.  The vessels were worth about US$15 million on the open market at the time between willing buyer and willing seller.  Discussions had been entered into with two large Danish ship-owning concerns (the Torm and A P MØller Groups).  We were naturally concerned to protect the position of the B&W Yard, but I believe a sale at about US$15 million would have been quite sufficient to enable the Yard to repay the Fund’s loan, and the ensure the future of the Yard.  There was no reason why we should wish, effectively, to give the vessels away to a bankrupt company with no real prospect of repaying the loans made to it.  We would not have done so.”

6.7.19 In cross-examination, Mr. Gideon clarified two matters.  He agreed it was the motive at the time but that was in the light of EKR’s expectation that WMI would be in existence in eight years’ time.  He repeated that he and EKR had not been told anything negative about WMI, and assumed the information received was correct.  EKR would not have agreed to delivery if WMI had said that it would go into liquidation.  EKR decided simply to maintain the counter-guarantee in spite of the changed circumstances.  At para. 43 of his supplemental statement, Mr. Gideon said:

“EKR was influenced by a desire to assist B&W, but not at any price.  It was not trying to avoid the financial consequences to itself of non-delivery.”

6.7.20 Later, in para. 46, he said:

“There is no doubt in my mind that if someone seriously suggested that there was a significant prospect of the immediate liquidation of WMI, we would have broken off any further negotiations with WMI there and then - there would have been nothing left to discuss.  Who in their right mind would have continued to negotiate with WMI if the prospects were that assets transferred to WMI would almost certainly within a short period become subject of a liquidation.  I am also of the view that had WMI or any of its representatives made any such statements, it would effectively have placed itself in a default situation.”

6.7.21 Second, Mr. Gideon agreed that, in his note for the EKR Council meeting of 11th March, he had outlined the possible risk to EKR, that is a loss of Dkr 20 million if Sealock was not delivered or Dkr 88 million in eight years’ time if WMI defaulted on the loan.  He said that was the maximum loss but not one which EKR would necessarily end up with.  But he also acknowledged that if the yard stopped trading, EKR was open to loss on the other hulls.  He explained, however, that as far as EKR was concerned, WMI was anxious to obtain the vessels.  Although there was no guarantee that WMI would be alive in eight years’ time, it was a risk EKR was prepared to run as against a certain loss if Sealock was not delivered.

6.7.22 The size of any loss to EKR would depend upon the disposal of any ship not delivered to the contracted buyer.  Mr. Gideon said there would not necessarily be a forced sale.  As the largest creditor of the yard, EKR might be prepared to isolate the ship, pending sale at a normal price, in order to avoid a bigger loss.  In the meantime, the yard could borrow up to the maximum as EKR was secured by the mortgage on the ship and borrowing on it would not be counted.

6.7.23 The March meetings ended in agreement for the Sealock on the basis of the release of five instalments from the deposits.  Subsequently, WMI’s Board refused approval.  Mr. Gideon made a note on 28th March of this position.  He said, and I accept, that it was a file note which he later amended to include the subsequent agreement to deliver Sealock on the basis of six instalments.  This was not reported to the Council until October.  Mr. Gideon explained that it was not necessary to do so because the agreement was within the framework laid down by the Council.

6.7.24 At Mr. Gideon’s request, BW prepared, on 15th April 1983, calculations of possible losses to EKR and the yard.  Mr. Gideon accepted the principles involved in these calculations but not the actual figures.  There appears to be some justification for that because on 24th May modified calculations were made at Mr. Gideon’s request and even these contained one glaring error.

6.7.25 Mr. Gideon’s disagreement with the figures was on the basis that the yard’s indirect costs were too high and the profit too low.  It was, however, an indication.  Mr. Gideon simply said to himself : “That’s it, we can’t do any more.  Leave it until a claim comes up”.  At that stage, EKR would instruct accountants to look into the yard’s accounts.

6.7.26 As far as indirect or fixed costs were concerned, Mr. Gideon complained that the yard had added depreciation and interest which was not acceptable to EKR.  It was pointed out that, in the modified calculations, these items appeared to have been eliminated.  Mr. Gideon asserted, however, that EKR had not accepted figures which EKR would want to calculate for themselves.  He said he would stick by the loss of Dkr 20 million on AB/K which he had included in his note for the extraordinary meeting of the Council on 11th March.

6.7.27 Under EKR guarantees, the yard’s costs, both direct and indirect, were guaranteed but not its profits.  It follows, therefore, that the yard would seek to maximize costs and minimize profit.

6.7.28 The yard’s calculations were prepared in respect of Annalock and to meet three different situations.  For each situation, the calculations were made for a sale : (1) on a cash basis; (2) with an OECD loan; and (3) with a soft Danish loan.  The common factor was a sale price of US$14 million/Dkr120.4 million.

6.7.29 Situation A, on the basis of immediate cancellation, involved the following Dkr losses:

Cash basis:	EKR-76 million
	Yard-27.9 million
OECD:	EKR-47 million
	Yard-24 million
Danish Loan:	EKR-33 million
	Yard-23 million

6.7.30 Situation B, involved cancellation on delivery by which time a further 10% of the price would have been paid by WMI on floating out.  This would lead to losses as follows:

Cash basis:	EKR-53 million
	Yard-25 million
OECD:	EKR-35 million
	Yard-23 million
Danish Loan:	EKR-22 million
	Yard-22 million

6.7.31 Situation C, calculated a selling price which would produce the same losses as situation A, but with cancellation on delivery.  The prices would be:

Cash basis:	US$11 million
OECD:	US$12.7 million
Danish loan:	US$12.9 million

6.7.32 Meanwhile, the April meetings of 21st and 22nd were preceded by a telex dated 18th April from Mr. Schroeder to Mr. Brothers which indicated that Mr. Gideon would not accept a substitute for Mr. Brothers and that the dates must be kept because Mr. Gideon had to put his recommendation to the Ministry.  Mr. Gideon said he had no recollection about EKR not accepting a substitute for Mr. Brothers.  He said the Ministry was not involved in the decision making (except in so far as OECD rules required) and thought Mr. Schroeder perhaps meant the EKR Council.  This seems to be confirmed by a note of the meetings dated 16th June made by Mr. Schroeder in which he recorded that Mr. Gideon was demanding a moratorium proposal within 14 days for submission to the Fund’s Board and to the Council.  The meetings of course ended in stalemate.

6.7.33 Negotiations, in which Mr. Gideon was not involved although he was kept informed by Mr. Edelmann, continued in a desultory manner until October when agreement was reached on a package for hulls 911 and 912.  The Fund reported to EKR by letter dated 6th October in which, after explaining the swap, it recorded:

“Simultaneously the banks/WMI (provided that WMI has not gone bankrupt) commit themselves to take delivery of the ships.”

6.7.34 Mr. Gideon prepared a note for a meeting of the Council on 28th October.  He set out the Fund’s letter in full and continued:

“Remark:  from the Secretariat

When the negotiations concerning the delivery of newbuilding n^o 910 were taking place, EKR was in a weak bargaining position.  The ship was ready to be delivered and failure by the buyer to take over the ship would immediately have created a serious liquidity crisis for B&W.

The Secretariat therefore exerted pressure to set up the guarantee that the buyer/banks would take over n^o 911 and 912 respectively in March and June 1984.  For both contracts a down-payment of 10% has been made.  The last 10% are to be paid approx. 3 months before delivery of the ship upon its coming out of dock.  A final solution to the problem of take-over of the 2 ships must be found at this point at the latest, seeing that otherwise the banks will probably not be inclined to further increase their engagements.

If no solution is found and the 10% payments are not made, B&W has made it a condition in its contract for building n^o 915 that this shipowner will instead take over in that case newbuilding 911 or 912.  B&W’s risk is thus reduced to 1 ship and liquidity problems will become correspondingly easier to solve, and there will be 3 months to find a solution to this. 

If a solution is found, such as proposed by the Ship Credit Fund, the only risk will be whether WMI is still “in existence” at the time of delivery of the ships.  EKR is already running this risk with its production time guarantee.  B&W will have further received about DKK 50 million per ship in advance.

The best solution would be of course that the buyer takes over the ships on the agreed payment and lending terms and conditions.  If EKR was not concurrently running a risk with the production-time guarantee and the pre-financing loans, it might be tempting to await the completion of the ships.

The second-best solution is the one proposed by the Ship Credit Fund, combined with a third-party agreement as outlined.  The risk taken by EKR thereby must be deemed lower than the risk already incurred by EKR due to the production-time guarantees and the sureties for the pre-financing loans.  Moreover EKR’s payment commitment extends over 8½ years with the possibility also that WMI repays the loans in the future.  Finally it should not be forgotten that, with its grant of guarantee/surety in connection with the delivery of a total of 7 ships, EKR incurs with B&W alone a risk of at least DKK100 million on a selling price of about DKK1.5 billion.”

6.7.35 The minutes of that meeting (in which names of some Council members have been edited out) recorded:

“Gideon informed [the Council] of the financing of the 5th vessel (new building no. 910) from B&W to Wheelock Maritime International Limited, Hong Kong, and about the background for the request from the owners for concessions in the agreed payment and loan terms for the take over of new building no. 911 and no. 912.  The solution referred to at the bottom of page 3 of the note could be recommended if the agreement at the same time was accompanied by a binding obligation from the financial institutions involved that delivery can take place.  The assessment of the agreement had to include the advantages the exporter achieves and that EKR does not assume any risk which is not already covered as well as [the fact] that it was only a case of approximately US$2 million for each of the two newbuildings.  Harmonisation of EKR’s accommodation in accordance with the size of the capital injection from WMI’s parent company is being sought.

[Blank] found that the proposed second best solution was almost as good as the latter.

[Blank] asked whether the first 6 instalments in connection with new building no. 910 and the suggested re-financing of interest on newbuildings no. 911 and 912 were to be released from the deposits and whether the securities after delivery consisted only of the deposits.

Gideon replied in the affirmative to the first question and explained that EKR also has a secondary mortgage over the vessels, but that during the production period, which means up until delivery can have taken place, there is no security as a starting point.

[Blank] assessed the owners’ situation pessimistically, but thought that the second best solution referred to was the best obtainable in the given circumstances.  He thought it necessary that in similar transactions where an owner might be thought to be pulling out, in future it ought to be ensured that the Ship Credit Fund held a pledge from the outset over the deposits provided.

Richnagel stated that, in connection with contracts with bonafide owners, EKR had previously been satisfied with usual prepayment without deposit, and that it could hardly be regarded as a reduction of the security that a deposit was provided.  Attention should be given in future to the possibility of already establishing a pledge over the deposits provided at the time the deposits were established.

Gideon noted in addition that in connection with new building no. 914 B&W had been given a pledge over the deposit.

[Blank] asked about the market value of the vessels.

Gideon estimated that the market value was approximately US$15 million.

[Blank] subsequently recorded agreement on the proposed second-best solution.”

6.7.36 After agreement was reached in London in December 1983, an agreement which EKR accepted because Mr. Gideon believed the arrangement was within terms previously accepted by the Council, Mr. Gideon briefed the Council about that agreement at its meeting on 3rd February 1984.  Thereafter, EKR appears to have played no further part in events leading up to delivery of Annalock on 22nd March.

6.8    Defendants’ submission

6.8.1 The submission ran thus.  Even assuming representations were made and were passed to ADS’ Board, the decision-making authority within ADS, no decisions were in fact made by the Board which was content to accept EKR’s guarantee and therefore simply deferred to EKR.  In turn, EKR made its decisions on the basis partly of a political need to assist BW and partly of minimising the immediate and unavoidable losses EKR would incur if the vessels were not delivered to WMI.  It was also suggested that it was in fact the norm for the Fund to follow EKR’s decisions.  The foundation for the submission was in two parts: one, the inference to be drawn from ADS’ attitude to financial information or a lack of it; two, the evidence showing expressly that ADS relied on EKR’s decision.

6.9    INFERENCE

Sealock

6.9.1 By the time the revised arrangements were agreed, ADS had considerable information available to it.  It was accepted by ADS’ witnesses that the ADS administration knew of the depressed state of the shipping market and the detrimental effect this had had on the value of ships.  It also knew of WMI’s newbuildings, that these had been ordered at the top of or in a buoyant market and that this, combined with the depressed market, had created WMI’s financial difficulties.  ADS had also received WMI’s draft accounts for 1982, schedules of book and market values of its existing vessels and a 10-year cash flow for secured creditors, i.e. existing vessels (App. 2/9).  ADS was aware of the limitation of that cash flow.  It was emphasised by Mr. Brothers.  ADS had also received a cash flow projection for Sealock which showed a deficit of US$10 million after 5 years if MMB declined to provide a moratorium.  Even with a moratorium, Sealock was still not self-financing or cash neutral.

6.9.2 ADS did not have, as I find (para. 6.13.45), the 18th March cash flow relating to newbuildings and unsecured creditors nor its graph (App. 2/13) which had been promised by Mr. Brothers in his letter of 28th February but which thereafter disappeared from ADS’ view.

6.9.3 It was further accepted by Mr. Faergemann and Mr. Nielsen that any newbuildings cash flow would have to be read cumulatively with the cash flow for secured creditors.  It was accepted by Mr. Faergemann that any deficit projected for Sealock was likely to be substantially similar for Annalock and 912 and that there would be further significant deficits for other newbuildings.  It would therefore have been possible for the Administration to calculate for itself, albeit in rough terms, the size of WMI’s deficit.  The result would have been alarming.

6.9.4 ADS also knew that the 3-year moratorium, which was an important feature of WMI’s plans, had not been arranged.

6.9.5 In spite of Mr. Brothers’ promise of a cash flow for newbuildings, and in spite of his repeated offers in March and April 1983 to provide further information, ADS did not ask for the cash flow or any further significant information; nor did it complain about the quality or quantity of information provided, at least not in writing.

Annalock

6.9.6 When agreement to revise the financial arrangements was reached in London in December 1983, in addition to its existing knowledge ADS had become aware of the secured US$4 million facility and that the 3-year moratorium was no longer being pursued.  Again, no further information seems to have been sought.  The defendants also emphasised that cash flows recently sent to ADS by WMI were not placed before its Board on 9th August 1983.

6.9.7 On that basis, the defendants submitted that ADS was not misled because it knew exactly the ambit of all documents it had received and either was satisfied with the information it had, or had little interest in receiving any more because it was content to rely on its guarantee from EKR.  In turn, EKR agreed to the revisions prompted by considerations of its own.

6.10    EXPRESS EVIDENCE

6.10.1 According to the defendants, ADS’ deference to EKR was apparent from the beginning.  On 9th March 1981, ADS explained to WMI the delay in approving the loan applications (para. 6.5.24).  It also said:

“Presently, our position is that we will demand a bank guarantee for the mentioned shortfall, but if the Export Credit Council considers the guarantee of Wheelock Maritime International Ltd. as satisfactory, we shall in due course put the question before our board.”

6.10.2 That deference to EKR, say the defendants, was understandable  because ADS would be fully secured by EKR against any risk of loss apart from the extra 5% interest to be charged on the deferred instalments and that, if recovered, was to be paid to the Danish Central Bank.

6.10.3 ADS' deference to EKR was confirmed voluntarily by Mr. Lyngsie, who is now senior vice-president of the management of the Fund and who has day-to-day responsibility for management of the loan department.  In his witness statement at para. 24, he said:

“The principal function of the Fund is to finance Danish built ships for Danish and foreign owners.  In some cases the Fund left it up to EKR to evaluate whether or not the Fund should take the risk and grant the Loan.  EKR guaranteed the Fund in full and obtained collateral to minimise its own risk.” 

6.10.4 That view is supported by contemporary documents.  Mr. Edelmann’s note dated 4th March 1983 for the Board asked it to decide if it could “collaborate” with EKR (para. 6.6.9).  At the Board’s meeting on 7th March (App. 5/15) there are statements about complying with a request or appeal from the Ministry of Industry and EKR, about not obstructing EKR, and (by Mr. Edelmann) that as ADS incurred no risk “a decision would actually have to be made on the risks incurred by [BW] and the Ministry of Industry/EKR”.

6.10.5 Then on about 15th March, Mr. Gideon of EKR wrote to ADS requesting it “to participate ... in the negotiations between... ”.

6.10.6 Mr. Edelmann’s next note dated 15th March for the Board (App. 5/23) set out the negotiating framework prescribed by EKR’s Board.  He concluded with a further reference to requests from the Ministry and by asking if the Board would co-operate with EKR in an agreement.

6.10.7 This attitude by ADS carried on in relation to Annalock.  Mr. Edelmann prepared a note dated 24th October 1983 for the Board in which he reported on discussions earlier in the month and said:

“If the Fund’s sole interests are considered, it must be maintained that there is no ground for the Board to enter into an agreement whereby WMI is given assistance and the value of the deposits is diminished.

However we are talking here about a considerable loss for B&W together with EKR if the banks lose their patience and liquidate the deposits and/or WMI does not take delivery of the two newbuildings.”

6.10.8 This note was discussed by the Board on 8th November (App. 5/27).  After a further reference to there being no risk because of EKR’s guarantee and a reference to a possible loss of Dkr40-50 million by BW, there came the passage about the Fund co-operating with any independent decision by EKR (para. 6.7.8).  Then Mr. Bagger said:

“ ... it would have to be made clear to the Danish Export Credit Council that in this affair, they acted on their own.”

while Mr. Fogh said:

“ ... the solution would have to be that the shipyard and the Danish Export Credit Council agreed on which risks should be taken, after which the Ship Credit Fund of Denmark would be asked to take care of the documentation even though the Shipowners’ Association should in principle declare themselves to be opponents of this relief measure.”

6.10.9 Through Mr. Gideon, EKR participated in meetings and negotiations with WMI and the banks in March and April of 1983 and again in March 1984 just before Annalock was delivered.  EKR was kept informed by ADS.

6.10.10 Mr. Faergemann was cross-examined on these documents.  As to the ADS meeting on 8th November 1983 and the “practice of the Fund”, Mr. Faergemann agreed that there was no reason not to co-operate with EKR as long as its security was in place.  Then in cross-examination on day 28/69:

“Q.  So the real decision was to be made by EKR in liaison with the yard?

A.  The decision whether they would stand by their counter-guarantee, which was essential for the Fund, of course.

Q.  Yes, but the decision as to which risks should be taken, third line?

A.  Yes.  I read that as they realised to the Fund -- EKR realised that for the Fund it is essential to have the counter-guarantee.

Q.  Right, and the corollary, the conclusion, was this at the time, was it not, Mr Faergemann:  provided that EKR were willing to accept the risk and maintain the counter-guarantee, then the Fund would be agreeable to go along with EKR's decision and deal with the documents, asked to take care of the documents?

A.  Yes.

Q.  So the real decision as to whether to give up these installments and reach agreement with the banks, the real decision had to be made by EKR, did it not?

A.  Yes, based upon -- how shall I say -- the analysis made by the fund's administration being regarded as experts by the EKR.

Q.  When you say "as being regarded as experts by EKR", this really takes one back to page 214, does it not, where in the middle of the page -- you remember we looked at that passage from Mr Engell-Jensen, the General Manager.  You see in the 6th line down from the top of that passage a phrase beginning:

"But the difficulty of the situation ..."?

A.  Yes.

Q.  " ... but the difficulty of the situation was that EKR considers the attitudes that are taken up by the Fund's Board to be resulting from the expertise in the field, even if the basis of the discussion in the Board was that an export credit guarantee made the basis of the commitment".

What is said there is that the EKR considered that the attitude of the Fund results from the Fund's expertise, whereas in reality the attitude of the Fund is dependent upon the Export Credit Guarantee being the basis of the committee (?commitment)?

A.  The expertise I mentioned before was in regard of the documents.

Q.  Certainly.

A.  Yes.  The expertise here must be evaluating the risk on the basis of the information and analysis made by the Fund.

Q.  Yes.  That is what EKR thinks is happening, it had said here.  EKR thinks that the Fund is using its expertise?

A.  But only EKR can evaluate the risk in this case.  All the relevant information was given to them and so they must make up their mind.”

6.10.11 Then, at day 28/73:

“Q.  We will leave page 214, but I must suggest to you, Mr Faergemann, that what is being said, and said plainly, in the middle of the page is in essence this:  that EKR considers that the conclusions, the attitudes taken up by the Fund's Board result from the Fund's expertise, but the Fund is actually having as the basis of its discussion the fact it is getting an export guarantee, so it will not be at risk.  Is that not the essence of what is being said there?

A.  I think I said before, the essence, as I perceive this paragraph in the document, is that EKR at that time had all the relevant information.  They had all the information the Fund possessed.

Q.  I see.  Right.

A.  So it was up to them to decide.

Q.  All right.  So on that basis, the final decision was for the EKR to make, whether or not it was prepared to continue the counter-guarantee in the changed circumstances?

A.  Yes.

Q.  If they said: "yes, we, EKR, are", then the matters could go ahead?

A.  Then there would be no reason for the Fund not to cooperate.

Q.  If they said "no", then the Fund would have to say "no"?

A.  At least they would have to make a new decision.”

6.10.12 Mr. Nielsen acknowledged that in practice the Fund always took an EKR guarantee and not some other “cast iron guarantee” as provided in the general rules.  He was then asked about a note relating to the WMI transactions prepared by Mr. Faergemann before he left ADS.  In that note, Mr. Faergemann expressed the fear there had been that MMB would not swap security with the Fund so that BW “would be left carrying the can which is why the Fund and EKR did not really have any choice”.  Asked if that was a fair appraisal at day 31/33, Mr. Nielsen said:

“A.  Well, we could object to that, but we would be helpful towards the yards, but we could easily object to it.

Q.  You could in theory, rather like in theory you could vary the agreements without EKR's permission, but all that is theory.

A.  Yes.

Q.  The practical situation was there was no real choice, was there?

A.  We would not like to take a choice.

Q.  Sorry, I misunderstand you, Mr Nielsen.

A.  We did not like to take that other line of action, because that would cause a lot of public reaction and so on in this case, and we still thought that, reminding of the cash flow curve and the hope that something would turn out, that here was a case where we would and the board would think of considering helping the yard through.

Q.  There was no real alternative to that in that situation, was there?

A.  There was, indeed.

Q.  In theory, but not in practical terms?

A.  It depends on how much notice you would take.

Q.  Provided EKR backed the Fund, the Fund, as it knew, would go ahead and give what accommodation was necessary; is that not the situation?

A.  That was a point and the position taken, yes.”

6.10.13 But shortly after at p. 36

“Q.  And the reason why WMI finances did not have to be investigated in greater depth was that the real decision to defer, in the end, six instalments in connection with 910 - the real decision in practical terms was made by EKR, was it not?

A.  No, it was made by the board.

Q.  Technically by the board?

A.  No, it was made by the board.

Q.  We will look at the minutes in a little while.  And that that was done, I suggest, following a policy determination by the Ministry of Industry?

A.  A policy determination?  What exactly do you mean, excuse me?

Q.  That the Ministry of Industry indicated that it wished the Fund to accede to the proposals made by EKR in relation to deferring the six instalments?

A.  No, they indicated that the Fund was allowed to go beyond the OECD rules, because the Ministry indicated it was in this force majeure situation where it was permissible to do that and they would take care of that side of the case.

Q.  It went beyond that, though, did it not, because there was a telephone call, do you remember, from the Ministry saying that they would like cooperation by the Fund in EKR's proposal.  I will show you in a little while.

A.  I have read about a telephone conversation somewhere.  I cannot remember --

Q.  You do not remember it independently?

A.  Independently, no, but --

Q.  All right.  I accept, of course, that in theory the Fund could have said to EKR, "Well, we are not going to do this.  We are not going to cooperate." As you point out, it was the board's decision in theory?

A.  Of course.

Q.  In practice, once the decision had been made by EKR with the approval of the Ministry, in the end the Fund simply fell into line, did it not?

A.  There is a division of functions and duties here.  The EKR had decided on how far they would go according to the OECD rules and all that, with the help and support of the Ministry.  There was still the other side of the question of approval of the loan was a matter for the Fund, and at the end of the road these two things had to match each other.

Q.  And the Fund, once it was assured that it would still be backed by EKR, fell into line with EKR's wishes?

A.  Or the other way around.

Q.  But it was never the Fund's proposal to EKR that this should be done, Mr Nielsen?

A.  There were a number of proposals from the Fund, but EKR had the very, very strong feeling about not charging their own deposits.  As I told you, I was not surprised by that, because that was a rather sacred thing, not to charge deposits of already delivered ships.  They were closed cases.

Q.  So long --

A.  I was just on the verge of saying that that meant that if some support should be given to the owner, it could only deal with those ships that had not been delivered yet.  You could only look forward and not back.

Q.  In general, so long as EKR was prepared, as it was, to give the counter guarantee the shipowner would perform, then there was nothing to be concerned about as far as the Fund was concerned, was there?

A.  We were still concerned about the situation and the performance of the shipowner.”

6.10.14 Mr. Nielsen was then cross-examined about Mr. Edelmann’s remark at the board meeting on 7th March 1983 about the decision being that of EKR (App. 5/15).  At day 31/55:

“Q.   ...  So his advice, really, at that stage, Mr Edelmann's advice, or suggesting it should be kept in mind "as the Fund has no risk at all, a decision has to be made on the risks of the yard, the Ministry and EKR".  It is really their decisions, their approach which should determine the Fund's reaction; that is the substance of his comment, is it not?

A.  I would not say it was so automatically. If we in the Fund and the board make decisions, we have to look at the security, but that did not mean that we have the right to make any decision on behalf of the EKR saying that we could be irresponsible.  I think that the note here is indicating a number of considerations put forward from the board members - for instance, Mr Fogh's remarks at the top of 91 about the status and the strength of this very large group, and there are other of the bankers that are giving a lot of consideration to the basis of the decision, but at the end of the exchange of views, it has been decided - it is based on Mr Kristian Edelmann's remarks that it could be viable to make this decision, because the Fund itself was supported by the EKR.

Q.  He is not saying that at all.  He is not saying it is reasonable because the Fund is supported; he is saying the Fund has no risk, and then he goes on to say a decision would actually have to be made on the risks of the shipyard and the Ministry.  He is really saying it is their assessment which should determine the situation, is he not?

A.  Their assessment?

Q.  It is their risks, their assessment of the risks which should determine the situation.  If they decide to do this, we should go along with them; that is the substance of what he is saying, is it not?

A.  I see, yes.”

6.10.15 Later Mr. Nielsen somewhat guardedly, his answers being “I suppose so, yes” and “I guess so”, accepted that ADS should really go along with what the Ministry or EKR wanted.  He also agreed that the initiative for finding a solution came from EKR.  When it was put that ADS really had no interest in WMI’s cash flows because it had decided to follow EKR, he said:  “I accept that is the true situation”.

6.10.16 The ADS board meeting of 8th November 1983 (App. 5/27) was taken up with Mr. Nielsen.  He was asked about the chairman’s remarks, at day 32/22:

“Q.  ...  It could not be clearer, could it?  He is saying the practice of the Fund has always been if EKR itself decides something, the Fund will go along with it; is that not what he is saying?

A.  He is saying that, but I would like to draw your attention to the fact that, at the end of Mr Engell-Jensen's remark - "Therefore, it was important for the Ship Credit Fund of Denmark took up a clear attitude" - that I interpret here - I have not seen the actual Danish text - I interpret that we should keep it informed.  As the chairman says, "I would like to draw your attention to the fact that here we are in all actions and all decisions beyond the normal rule.  We are dealing with something that we could not normally do, because we needed the clearance and acceptance by the EKR due to the relationship to the OECD rules, because we were in a field where we had no active powers whatsoever to act.

Q.  I accept this was a very unusual situation, I suggested that to you yesterday.  That is not what the chairman is saying.  He is saying in the last sentence not that this is an exceptional case, so here exceptionally we will have to do what EKR decide.  He is saying the practice of the Fund has always been that if EKR shall independently decide something, the Fund shall have no objection to cooperate.  This is the usual form, is it not?

A.  But I will not agree that - the practice of the Fund has been that we should, if the Danish Export Credit Council independently decides something, which they do in unusual cases outside the normal programme and the normal course of events, then we had to follow up.

Q.  Certainly, that does not appear from what he says, does it?

A.  I would not like to argue with you on that point.  I am just referring to my recollection of the cooperation - kind of cooperation we had with the EKR.  Within the normal framework we decide on our own.  Beyond that limit, there was a close cooperation and full contact and information to EKR, because we were, so to speak, working in another room.

Q.  So, just to get your approach to this clear, Mr Nielsen, are you saying this:  you would not agree with what the chairman is saying here that the practice has always been that if EKR independently decides something, the Fund has no objection to cooperate?  You say that is only in unusual situations?

A.  Yes, because otherwise the EKR would not have any cause to come and ask for something.

Q.  In an unusual situation, it is your position what is said here would be correct and that the Fund would then go along with what EKR decides?

A.  And wished us to do.

Q.  Yes.  If you were asked to do something by EKR in, for example, this situation --

A.  That would have a strong impact on the reaction of the Ship Credit Fund, because we were beyond the limits of our normal rules and regulations and what our loan - lending terms and conditions allowed us to do, yes, of course.

Q.  Indeed, even on your approach it would go much further than having a strong influence, would it not?  It would then fall within what the chairman says, that if a decision is made by EKR, the Fund would have no objection to cooperate?

A.  Yes.”

6.10.17 Mr. Johnson then referred Mr. Nielsen to an ADS board meeting on 14th December 1983, at day 32/31:

“Q.  ...  "The board agreed that the administration should try to implement the outlined packet solution so that it will be possible to negotiate an overall solution of the problems of the shipyard at the beginning of 1984.  Mr Bagger enquired whether the Fund would still be covered by EKR.  Mr Edelmann confirmed this.  Mr Hirsch pointed out that in these matters the Fund only administered the guarantee matters of the EKR."

That, certainly, even on the limited view which you expressed to my Lord earlier that it was in exceptional matters that EKR made the decision and the Fund followed - that would certainly be applicable in this case dealing with WMI in the situation which had developed, would it not?

A.  Yes, but the decision that you are relating to was taken in the process of negotiation and give-and-take and when a final decision was reached between the parties, and it seems to me that most of what goes on here is reflecting a sort of concerted action from various parties to find a solution, but no-one in the game could finally go out and make the final decision without having the EKR's support, but it was not dictated by the EKR; it was a concerted action through negotiation and, when that was finalised, then I can support that the whole operational thing of keeping track and monitoring the loans and putting up the loan documents was in the hands of the Ship Credit Fund.

Q.  It goes further than that, does it not, Mr Nielsen?  Certainly, in this case, the decision-making was by EKR in liaison with the yard and the Fund, in spite of some murmurs, made it clear, looking at the board meeting minutes as we have seen them, that it would agree to what had been fixed upon by EKR, the Ministry, provided that the EKR guarantee remained in force?

A.  Yes, I agree with you, if I may be allowed to add --

Q.  Certainly.

A.  -- if the project was acceptable and eatable (sic) to the Fund in the case of the situation.  There have been cases, not in this one, where the Fund could go and tell the Export Credit Council for this and that reason of precedents, relationships or other owners and yards, "We are extremely unhappy with this and that element of the solution".  This would be brought to negotiations to overcome that detail.

Q.  That was not this case?

A.  Not as far as I remember, no.”

6.10.18 Mr. Nielsen was then referred to Mr. Lyngsie’s evidence in para. 24 of his witness statement (para. 6.10.3) at day 32/73:

“Q.  I am asking you if you agree with it.

A.  I think it is fair.

Q.  The situation is this, is it not, that in your statement and in your supplementary statement, from time to time you assert that if the Fund had known particular facts or alleged facts, then the Fund would have reacted in a certain way - you say that of a number of matters?

A.  Yes.

Q.  But the true position is this, is it not, Mr Nielsen, that there is no reason whatever to believe that the Fund would have taken any different course from the course it took; it left the decision, in this case, this exceptional case, to EKR and the Ministry and went along with that decision so long as the counter guarantee was in place and it would have done whatever was known to it, would it not?

A.  Mr Johnson, this is here where I feel that I cannot object to your presentation, because from a strictly legal point of view, you are of course right, but in the atmosphere in the cooperation in day-to-day work, there was a thought of cooperation between the two institutions that were different, because the EKR did not ever approach the final client - that was the ship credit yard.  The input came from the Ship Credit Fund to the EKR, and in this process, there was a lot of give-and-take and going back and forward to find what was accepted and here the Ship Credit Fund has to make its own evaluations as to the chance, probability, of accepting the EKR guarantee, and then, at the end of the day, I can come closer to your presentation - at the end of the day, when we have received the EKR guarantee, the thing was of course settled and that was the purpose of it.

Q.  As I think you told us earlier this morning, in exceptional cases of this kind which was outside the normal powers of the Fund, the effect of the decision whether or not negotiated terms should be confirmed and resulting in agreement, was a decision which EKR and the Ministry made and the Fund would go along with it, as we have seen in the minutes, provided the counter guarantee was in place; that is the position, is it not?

A.  Yes, I agree with you, because when we got stuck and hit our heads against the OECD roof, the Fund, as a decision-maker on its own, was faced with a problem, because we would endeavour to do something that was illegal in quotation, because we were going beyond our mandate.

Q.  It had to be an EKR/Ministry decision?

A.  It has to be communicated, informed and negotiated and then, at the end of that process, the EKR, in that system, has to consider whether they could support the Ship Credit Fund.

Q.  Its decision, I think one of your board members said - once that decision is made, provided the counter guarantee is in place, we will take care of the documents?

A.  We would take care of the documents, because EKR never did the documentation.  They were - the expression I do not know how to say it - it was a wholesale organisation, so to speak, whereas we were the retail organisation and had to deal with the documentation.”

6.10.19 Upon the basis of all that evidence, the defendants submitted that it was plain that ADS had expressly passed responsibility for revising the arrangements to EKR.

6.11    refutation

6.11.1 ADS' refutation of these allegations begins with Mr. Brothers.  In para. 85.4 of his witness statement dealing with the meeting in Denmark on 23rd February 1983, Mr. Brothers said:

“Mr. Edelmann said that he would have to discuss the matter with the DSKF Board.  I undertook to provide him with some detailed financial information on WMI which he asked for following my return to Hong Kong.  Mr. Edelmann asked me at the meeting to provide him with financial information on WMI to assist him with a presentation to be made by him at a DSKF Board meeting to be held on 7th March 1983.  I agreed to do so.  My recollection is that Mr. Edelmann’s request for information was in general terms and he did not ask for any specific information.”

6.11.2 Two thing are therefore established immediately.  The Administration wanted financial information about WMI.  That information would find its way to the Board by way of a presentation.  Further Mr. Brothers accepted in cross-examination that Mr. Edelmann was interested in financial information. 

6.11.3 Thereafter there was a flow of information.  Mr. Brothers acknowledged that Mr. Edelmann did not tell him to stop the flow because it was not wanted.  The cash flow of 18th March apart, the only material ADS did not receive, but the banks did, was the cash flow of 8th February.  True, Mr. Edelmann did not seek it.  But equally it was, by the beginning of March, out of date.

6.11.4 ADS had the cash flow of 3rd March (App. 2/9-12) showing the position in relation to secured creditors and the positions with and without a 3-year moratorium.  ADS' witnesses were criticised for focusing on the position with a moratorium which showed a maximum deficit of US$20 million.  I find that criticism unjustified.  On the basis of the position without a moratorium, projecting a maximum deficit of US$60 million, it is clear that ADS would not have discussed the matter further.  If any progress was to be made in reaching a mutually acceptable solution, it was necessary to look at what could be achieved.  That was the purpose of producing the cash flow and would have been expected to be of encouragement to ADS.

6.11.5 Absent indications to the contrary and there were none, ADS assumed

(1) WM would provide support.  Even without any representation as to WMI being part of a group, that was a fair assumption given the Danish approach to support of ailing subsidiaries (para. 6.13.11) and the relatively modest sum which would be required.  As to the amount required, Mr. Chalmers demonstrated that US$10 million injected immediately would have been worth almost the required amount by year 6.  The figure being canvassed between WM and WMI shortly after was US$12 million  Added to that would be increasing equity in the fleet as debt was paid down.

(2) A moratorium would be actively pursued, probably successfully.  Mr. Brothers assumed that ADS assumed this.

6.11.6 Following this, Mr. Edelmann prepared his note dated 4th March for the Board (App. 5/1) which speaks for itself.  It contained information on or references to

(1) the 3-year moratorium;

(2) WMI’s likely liquidity crisis;

(3) the cash flow graph for secured creditors;

(4) the new building programme;

(5) Pacnorse, the principal cause of WMI’s losses;

(6) WMI's accounts;

(7) ADS' exposure to the WM Group;

(8) support from WM.

6.11.7 Because it was not yet ready, there was no reference in that document to the cash flow of 18th March.  Nor is there any reference later - which is not surprising in view of my finding.  Assuming it was right and appropriate to do so, could ADS have constructed an approximation of that cash flow, as the defendants argued it could?  In my view, ADS could not, apart from concluding that newbuildings were likely to produce a cash deficit rather than the reverse, have even attempted to estimate the likely position.  There were three main reasons:

(1) Apart from the BW hulls, ADS had no information about the size, price, financing or charter-hire arrangements.  It certainly had no idea that no less than 7 newbuildings were due for delivery in 1983.

(2) ADS did not know any details about individual arrangements for deferral of deliveries, cancellations, moratoria or reductions in price.

(3) WMI’s purpose in seeking accommodation from ADS, as well as the arrangements mentioned in (2), was to render newbuildings cash neutral as far as possible.  Hence, the Sealock cash flow which was designed to persuade ADS that help was needed.

6.11.8 Although Mr. Faergemann agreed in cross-examination that he could have done the calculations as postulated by Mr. Johnson, in re-examination he explained his position.  He pointed out that he did not have all the necessary information and said that as far as he was concerned, the 18th March cash flow would have caused serious reconsideration and would have been put before the Board.

6.11.9 Mr. Gideon approached the question of newbuildings in a much broader manner.  In the minutes of the EKR meeting of 11th March 1983, Mr. Gideon said that WMI would “need US$20 million provided that newbuildings not yet delivered - including 910 - can be self-financing” (para. 6.7.2).  He was asked whether he had any reason to assume they would be self-financing and said at day 40/83:

“ ... we certainly had the impression that what Wheelock Maritime were seeking with 910 was to make the ship self-financing, otherwise how could they take delivery of the ship?  So, we thought the same would be the position for 911 and 912.”

6.11.10 He was pursued about this later at day 42/48

“Q.  Do I take it that, since this proviso was obviously of importance, you discussed with the Fund the question whether there was grounds for thinking that the newbuildings would be self-financing?

A.  No, I do not think so.  How should they know about this?  I think - well, I think we went over this extensively, and, as I just put it, I have no idea of knowing whether the newbuilding would be self-financing.  What I supposed was that, if WMI took on new ships, they would be self-financing, because otherwise they could not take them on in the situation they were - so I just say this curve covers the situation, even with the new ships taken on, because they are to be self-financing.”

6.11.11 Mr. Gideon was there referring to the with-moratorium curve on the graph of the cash flow for secured creditors (App. 2/8).  He was then taken to the Sealock deficit and was asked at day 42/50:

“MR JOHNSON:  Q.  ...  You agreed the figures which shows a very large cumulative deficiency on what it projected for the employment of the Sealock, so how can you say that you assumed that WMI would only take a ship if it would not lose money on it?

A.  That was what Mr Brothers explained in his letters, that there was no way in which they could take on 910 unless it was at least self-financing - they could not take on 910 with a deficit of $10 million, and I just assumed that he would have the same attitude to any ship he would take on.  Whether or not that would be the case - I cannot see that my assumption contradicts anything, I am sorry.”

6.11.12 It is correct that there is no evidence Mr. Edelmann asked for the cash flow for newbuildings which he had been promised.  There was, however, a high degree of goodwill and trust between WMI and ADS at that time.  It seems to me not unreasonable to infer that Mr. Edelmann anticipated he would get it when ready and anticipated it was unlikely to be too alarming because of what WMI was doing to try and achieve cash neutrality.

6.11.13 Perhaps Mr. Gideon best summed up the position when he was being cross-examined about the graph of the cash flow for secured creditors and why he regarded the problem shown as short-term.  He said at day 40/39:

“A.  Well, I do not think that that would be the end of Mr Brothers' work, that he would leave it with the moratorium and do not care about the rest of it.  I would think that he would work very hard, he would try to sell ships, he would try to arrange for another sort of financing on his way, try to keep the company going, and he would just not put his feet up at the table and say, "Well, that is that.  I have just arranged a three-year moratorium.  I do not need to do any more".  I certainly think he worked very hard on this.  That was his job, was it not, Mr Johnson?”

6.11.14 It was Mr. Edelmann’s note dated 4th March which was the basis of the board meeting on 7th March (App. 5/15).  As I have already set out, the Administration initiated proposals for discussion.  At the meeting, Mr. Nielsen spoke to the note and discussion followed which included the possibility of obtaining a WM guarantee and covered the financial situation of WMI and the WM Group as a whole.  Certainly, there were also references to the Ministry, to EKR and to the absence of risk.  But the conclusion plainly was that, after detailed discussion of that note as well as other factors, the Board was prepared to consider joining in a package deal.  In my view, the Board manifestly relied on the information which had been received from WMI.

6.11.15 The ADS scheme was unacceptable to WMI because, unless some of the deposits were released, WMI was still left with a US$10 million deficit on Sealock.  WMI replied on 9th March (paras. 6.6.12-14) with solutions A and B and an explanation that there could be no WM guarantee.  This letter Mr. Edelmann communicated to his Board with his note dated 15th March in which he suggested a grace period and release of deposits and emphasised that WMI must show it had entered negotiations for a moratorium.  The Board approved that proposal on 17th March.

6.11.16 Thereafter, Sealock was delivered.

6.11.17 The next real piece of information from WMI was on 29th July when Mr. Brothers sought to re-open negotiations on Annalock and 912 and sent a cash flow dated 7th July (App. 2/15-16).  Mr. Edelmann rejected the application.  Mr. Faergemann prepared a note dated 9th August for the Board in which he enclosed Mr. Brothers’ two letters but not the cash flow.  He simply reported the current position.  The Board met and discussed the position on 15th August.

6.11.18 I cannot see why failure by Mr. Faergemann to send the cash flow to the Board shows a lack of interest in financial information.  The cash flow which was for 3 years was not alarming, in fact it was the least alarming of all WMI’s cash flows and did not include the US$12 million investment being contemplated .  There was at that stage no proposal for the ADS Board to consider.  In any event, one member of the Board specifically

“ ... referred to the “cash-flows” mentioned in the letters which would have to be known in order to appraise the contents of the letters.”

6.11.19 Another member

“ ... referred to the fact that in its letter of July 29, 1983 Wheelock Maritime International Limited had stated that additional decisive information would be available in August 16, 1983, and inquired whether this information had been received.”

6.11.20 Negotiations resumed on 4th October in Copenhagen.  It is not in dispute that Mr. Brothers provided details of WMI’s financial position including the Rothschilds’ report that WM was worth saving.  There was discussion about this and about support.  ADS expressed their astonishment at the support WM had provided.  Armed with this information, Mr. Edelmann agreed to revise the existing arrangements but ADS would not provide more help than WM, wanted security and an exchange of deposits. 

6.11.21 Mr. Faergemann reported to the Board by note dated 24th October.  His report left open whether the Board should decide to help EKR and BW.  The Board met on 8th November (App. 5/27) to discuss the note to which Mr. Nielsen again spoke and on which Mr. Edelmann elaborated.  Following the meeting, ADS pursued the possibility of security by way of the WWW shares and asked for WWW’s accounts.

6.11.22 Against that background, ADS finally agreed to revised arrangements for Annalock.

6.11.23 I am afraid I do not see how it can fairly be said that ADS was not interested in financial information about WMI.  The newbuildings cash flow apart, Mr. Edelmann at all times wanted to be up-to-date on WMI’s position.  In August 1983, he was not prepared to negotiate with WMI until its position was clarified.  The information he received was passed to the Board. It is true Mr. Edelmann or Mr Faergemann did not always pass cash flows to the Board.  Mr Faergemann was constrained to agree in cross-examination that he could not remember a cashflow being sent to the board.  Being practical, however, it made sense to pass on the gist of financial information in notes to the Board and provide the detailed documents if requested, as occurred at the meeting on 15th August.

6.11.24 Perhaps Mr. Edelmann can be criticised for not pursuing the newbuildings cash flow.  All the indications, however, were that newbuildings would essentially be cash neutral so nothing particularly startling therefore was to be expected from such a cash flow.  In my view, this omission does not suggest some lack of interest on the part of Mr. Edelmann or the ADS Board.

6.11.25 I come to the conclusion, without hesitation, that ADS has demonstrated that it was interested and continuously interested in WMI’s financial position.

6.11.26 Did ADS nonetheless abdicate responsibility for making a decision in favour of EKR?  It is helpful to remember the Fund’s structure and purpose (para. 2.1.2 and following).  As the ADS documents show, its Board consisted of businessmen from different areas of commerce.  The members were not inhibited from expressing their opinions which sometimes conflicted.  They were not appointed to act simply as some sort of conduit between an applicant for a loan and EKR.  They would undoubtedly have resigned very quickly if they thought they were some form of rubber stamp.  Their function plainly was to decide whether or not to grant loans to applicants, each application being decided on its merits.

6.11.27 Equally, it is clear that the Fund worked closely with EKR.  There was good reason for this as Mr. Nielsen took the opportunity to explain in re-examination, when seeking to clarify the Fund’s “no risk” position, at day 32/115:

“A.  I certainly do not want to quarrel with Mr Johnson.  I want to state that Mr Johnson is perfectly right in saying that in looking at the supplementary guarantee from EKR it looks that there was no risk and so on, but I do not fully accept the following sequence saying that then we would act more irresponsibly than otherwise.  This is where I have my real problem.  In an attempt to try to explain why I have difficulties here, I must tell you that, in Denmark, we have a bond market which is the world's largest in relative size to the number of population and the size of the economy, GNP and so on.  It was developed in 1850 and since then and up until now there has been no single loss on this market for any investor due to default.  Of course, there are investment losses when interest goes up and down and the market quotation changes.  When the Ship Credit Fund was established, it was decided to base it on the bond system, because we had this financial tool which was quite unique.  The problem with the Ship Credit Fund was that it was based on security on movable property whereas the rest of the capital market as far as bonds was based on immovable properties.  That tended to indicate for the investing public that you have a first-class bond in the immovable and a second-class in the movable part of the market.  It was a specific  interest to secure that the quality of the Ship Credit Fund's bonds were as high as possible to create an effective demand on these bonds and the tool was to see to it that the big investors were allowed to buy these bonds and the big investors were the life pension funds and insurance companies and other of these institutional investors that had strict rules and regulations as to what they could invest in.

This matter was resolved by trying to make additional security on the Ship Credit Fund's bond issues to make it possible that they will match the quality of the rest of the market and for that particular reason it was established this supplementary security on these bonds so an efficient and effective market and demand could be established, meaning that the support - the cost carried by Central Bank of the support scheme could be lowered as far as possible.  Therefore, all this talk about supplementary securities.  This did not mean that the board and the administration did act irresponsibly, of course not.  They were trying to act very responsibly and, if not for other reasons - you cannot point to just one - the prestige and the members and where they came from led them to consider not to cause any losses in the way they acted.  I can only refer to the loss track or records of the Ship Credit Fund all through the years since its establishment - that has been extremely low, looking at this case aside.

To this I almost suggest that Mr Johnson said that was because of the security.  To that I would answer then I would suggest you look at the EKR's loss record towards the Ship Credit Fund, which was equally very low, so there is statistical proof on this basis that the Ship Credit Fund was trying to act very carefully and limit the exposure to losses, regardless of the fact that I have to admit that there was this supplementary security, but the motivation for that supplementary security was inspired in some other consideration on the capital market.  Thank you.

Q.  Thank you, Mr Nielsen.  This morning I think in answer to a question from Mr Johnson, you indicated that you wanted to say something about the relationship between the Fund and EKR.  Is that what you had in mind?

A.  This was something of that sort, yes, because I have been a little bit uneasy that I had only the opportunity to accept the strictly legal position that there was a security from the EKR and that was the end of that story and this was what I felt rather uneasy about - it was not the end of that story.  Now I have the chance to try to fulfil or to describe the whole picture.”

6.11.28 Under its rules, the Fund had to have EKR’s guarantee before it could finally approve the loan.  In practice, the Fund’s Board would consider a loan application and, if satisfied, approve it subject to EKR providing its counter-guarantee.  EKR would assess whether or not to accept the risk on the basis of information provided by the Fund and, it seems, would take into account the Fund’s own assessment.  Each, I am satisfied, made an independent decision, albeit influenced at least in part by the other.

6.11.29 I do not, in the circumstances, attach any significance to the fact that initially ADS had to refer to EKR whether or not WMI could provide a guarantee, nor to the reference to EKR concerning revision of the arrangements.  Had ADS revised the loan arrangements without such reference, EKR could no doubt have disclaimed liability under its guarantee and the members of ADS board would have faced possible personal consequences.

6.11.30 It is therefore not surprising that Mr. Edelmann went to see Mr. Gideon on 2nd March 1983 when they discussed the problem and possible solutions.  These were set out in Mr. Edelmann’s note of 4th March to the Board in which he said, if the Board decided to collaborate, he recommended management being authorised to negotiate with WMI and EKR so as to assist in delivery of the three BW vessels but in such a way that there was a global arrangement with all the banks involved and that security was not impaired.  That basis for negotiation was important.  I agree with ADS that Mr. Edelmann was anxious not to put ADS at risk.  Mr. Edelmann plainly wanted to ensure ADS got its money back by way of its own arrangements not from EKR.

6.11.31 Mr. Edelmann’s note was considered by the Board on 7th March.  At that meeting there was wide-ranging discussion about WMI’s position; EKR and the Ministry were mentioned, as was the Fund’s risk-free position.  Mr. Fogh even said further support for WMI was unreasonable.  The Board was clearly sympathetic to EKR, BW and the Ministry and less well-disposed towards WMI.  They were conscious that whatever happened they were free of risk as long as they had EKR’s counter-guarantee.  On a fair reading of the minutes, however, I am persuaded that the Board did not lose sight of its usual aim, i.e. to avoid calling on EKR.  Were it otherwise I would have expected someone unequivocally to have said “let’s leave it to EKR”.  I would not have expected the chairman to close by asking the Administration to try and get a guarantee from WM.

6.11.32 After the EKR council meeting on 11th March, Mr. Gideon wrote to ADS on about 15th March requesting it to participate in negotiations.  The suggestion by the defendants in cross-examination was that this indicated EKR were taking over direct negotiation with WMI.  Mr. Gideon rejected this.  He said negotiations were at all times run by ADS.  I accept that.  There is really no foundation for the suggestion, particularly when Mr. Gideon’s participation in the meetings on 22nd and 23rd March was confined to attendance on the 2nd day only during which he made little contribution.  Mr. Edelmann played the principal role and succeeded in negotiating terms stricter than those EKR would have accepted.

6.11.33 Mr. Edelmann’s note of 15th March for the Board in which he set out EKR’s frameworks for negotiation demonstrated, in my view, ADS’ independence.  Mr. Edelmann proposed stringent modifications (paras. 6.6.16-17).  The Board decided ADS should co-operate and participate in such an agreement.

6.11.34 That note, of course, refers to a request from the Ministry.  The Ministry’s role in this affair is rather obscure.  The defendants urged me to view Mr. Gideon’s evidence that the Ministry had no role with considerable suspicion.  They submitted that there are probably documents not discovered by EKR that would throw light on this.  I ruled EKR were not liable to discovery.  Mr. Gideon offered a degree of voluntary discovery by EKR but none of the documents thus discovered helped.  The ADS Board had a representative from the Ministry, Mr. Andersen, who had made a phone call.  If the Ministry was concerned to ensure ADS’ co-operation, there would surely be some reflection of this in the Board minutes in the form of direct intervention by Mr. Andersen.  If it was not thought that he carried enough weight, then the Ministry would possibly have communicated direct in writing with ADS.

6.11.35 It is beyond doubt that EKR’s decision to countenance revised arrangements was prompted at least in part by a desire to help BW which in turn probably had some political overtones.  Beyond that I am satisfied that there was no particular political pressure or influence on the decision.  The Ministry’s role, I find, was confined to understandable support for any measure that would help BW and, had it been thought necessary, to seek approval from the European Commission for the revised arrangements (Part 8).

6.11.36 There was also another significant difference of approach between ADS and EKR before delivery of Sealock.  By 11th March, EKR was already prepared to face similar revisions for Annalock and 912.  ADS was not.  As matters developed, both agreed that sale of the two vessels was acceptable and ultimately, of course, 912 was sold without loss.

6.11.37 When negotiations over Annalock and 912 resumed in October 1983, they were conducted by Mr. Edelmann.  EKR was not present.  ADS’ approach, limiting help to US$4 million with security and exchange of deposits, was therefore formulated without reference to EKR.

6.11.38 The Fund reported to EKR on 6th October, omitting reference to its intention to take security.  This was another indication perhaps of its intention to rely upon its own arrangements rather than EKR’s backstop.  On 24th October, Mr. Faergemann prepared his note for the Board in which it was left to the Board to decide whether to help EKR and BW.  While the decision was thus simply put, the recommendations are important

“If the Board of Directors consequently decides that DSF should help B&W and EKR, it is then recommended to authorise the management to enter into an agreement between the banks/WMI and DSF, whereby DSF commits itself to refinance the interest accrued on both banks’ loans since 13-7-1983.  The Fund hereby gives an assistance which corresponds essentially to that of the parent company.  The fact that the amount must necessarily be somewhat bigger, is because the two banks insist upon an identical treatment, and further insist upon a refinancing including the accrued interests as far back as 13-7.  1983.

It seems regretfully necessary in any case to treat one of the banks with some caution.

The prerequisite to consent to such a refinancing must be that a guarantee giving a reasonable cover for this amount is obtained.

The management has endeavoured to get information on World Wide Wheelock Shipping Inc., but it has proved difficult to obtain specific data before the Board Meeting.  There are grounds to believe that the shares are worth more than the US$ 10 million referred to earlier.  DSF has proposed to WMI to take these shares as a pledge.  WMI has expressed its reluctance to mortgage these shares any further, but has, as an alternative, offered guarantee in a bulkcarrier, the “Fenlock”, built in Japan in 1981.  The cash sale value of this ship appears to be about US$ 14 to 15 million (the management has not yet given an estimate).  The ship is, for the time being, mortgaged for US$ 11.7 million with the Bank of America and this bank, by the way, has not given its consent to a second mortgaging.  There is consequently an undocumented non-mortgaged value of US$ 3 to 4 million in this ship.

We recommend that the refinancing should be guaranteed (if possible) by a third pledge (with the right to be advanced) of world Wide Wheelock Shipping Inc.’s shares, after a maximum of US$ 10 million has gone to WMI’s parent company, together with a second mortgage on m/s “Fenlock”.

If only one of these guarantees can be obtained, it will then be more advantageous to secure pledge of World Wide Wheelock Shipping Incorporated’s shares, also taking into account that the parent company’s loan and the charter agreement must be deemed to be repaid and/or expired within the three coming years.”

6.11.39 In my view, these recommendations smack of a careful and independent approach to WMI’s problems and how to ensure that ADS’ guiding principle - not to rely on EKR - could best be maintained.  Again this note was the basis of the Board’s meeting on 8th December.  It was the Fund’s own limited proposal which was discussed and approved.  The position of EKR and BW was clearly acknowledged.  EKR’s anxiety to help BW plainly influenced the Board’s decision.  It is important to remember, however, that the premise for the negotiations and various decisions was always WMI’s request for a moratorium and release of deposits.  Ultimately, the Fund was prepared to go some way towards helping WMI, the extent of that help being dictated by the information it had received from WMI and the picture it had formed of WMI’s financial position.  The Board approved a proposal which was less generous than EKR would have been prepared to accept.

6.11.40 That proposal was further refined following a meeting with Mr. Brothers at BW.  The financial help was to go to Annalock while 912 was to be sold.  The Fund’s board approved on 14th December.  At that meeting, when discussing the minutes of its previous meeting, one director Mr. Engell-Jensen said:

“... that even though the shipyard could bear its share of such a loss, one should show some understanding for the unfortunate fact that the Danish Export Credit Council should suffer a loss of this magnitude, but the difficulty in this situation was that the Export Credit Council considered the positions adopted by the Fund’s Board of Directors as deriving from their expertise in this field, even though the basis for the debate among the Board had been that the commitment was backed by an export credit guarantee.  It was therefore important that the Ship Credit Fund should adopt a clear position.”

6.11.41 That remark must, however, be looked at in the context of what EKR was doing.  Mr. Gideon prepared a note (para. 6.7.34) for the EKR council meeting on 28th October (para. 6.7.35).  At that meeting, the Fund’s proposal for limited help was adopted.  It appears to me, therefore, that the Fund and EKR were taking comfort from each other.  EKR was relying on the Fund for a proper appreciation of WMI’s position and for negotiation of an acceptable arrangement - the Fund was comforted by the knowledge that if necessary it had EKR’s counter-guarantee.  And it is in that context that the evidence of Mr. Faergemann and Mr. Nielsen must be considered.

6.11.42 I am satisfied, however, that ADS, while comforted by and relying on that counter-guarantee, equally relied upon the information it received from WMI and the financial picture which emerged.  But for that, it would not have agreed the revised arrangements which it did.  I am persuaded that ADS did not rely exclusively on the guarantee for its decisions.

6.12    EKR - RELIANCE AND MOTIVE

6.12.1 It is not now necessary for me to consider the position of EKR.  I should, however, complete the picture.

6.12.2 Until the six deposits were released in relation to Sealock, neither ADS, EKR nor BW were at any risk.  Assuming a swap of the deposits, these deposits which WMI had established fully covered repayment of ADS’ loan.  The effect of the revised arrangements was to leave ADS unsecured to the extent of Dkr 75.5 million and BW and EKR becoming at risk under their guarantee and counter-guarantee respectively.  Hence, BW’s successful application in March 1983 to EKR for an AB guarantee.

6.12.3 The defendants accept EKR acted prudently and with commercial common sense in deciding whether to agree to the revised arrangements.  It weighed likely losses, if Sealock was not delivered because the arrangements were not revised, against the possibility of loss in the future if the arrangements were revised.  Initially, WMI proposed extending the loan to 12 years with a 3½-year moratorium.  That would have led to a risk on the part of EKR of Dkr 88 million after 8½ years.  Mr. Gideon’s note for the EKR council meeting of 11th March said:

“In estimating the risk on DKK 88 million in 8[½] years which is secured by mortgage on the ship, one must take into account that, if WMI does not take over 910, EKR’s risk as a result of the production-time guarantee will be of about DKK 20 million.  In addition, B&W will incur a loss estimated at DKK 60 million, which will entail immediate liquidity problems.”

6.12.4 As the defendants submitted, EKR expected that after 8½ years they would have the benefit of a mortgage over an otherwise unencumbered vessel, the value of which might then well have exceeded the value of US$17 million placed on it by the Fund.  It appears to me, therefore, that the defendants were accepting that EKR was relying upon the prospect of WMI repaying.

6.12.5 The more important point made by the defendants, however, concerned the reference to BW’s “immediate liquidity problems” and a statement earlier in the EKR note that BW could, according to information on its liquidity, postpone delivery to the end of the month, that was March 1983.  This led to a lengthy cross-examination of Mr. Gideon, the substance of which was that if BW did not receive Dkr 214 million, the balance of the price, there might be real liquidity problems and a knock-on effect on other vessels under construction leading to further losses for EKR under other DO guarantees.

6.12.6 Criticism was heaped on Mr. Gideon for failing to accept BW had a tight liquidity situation, insisting its financial position was sound and that there was no concern for a liquidity crisis.  In my view, the criticism was unjustified.  Mr. Gideon dealt capably with cross-examination, provided satisfactory answers and emerged unscathed.  I found him to be an honest and reliable witness.  He explained that BW’s financial situation in 1983 was different from that in 1981, a contention borne out by BW’s accounts which show profits of Dkr 88 million, 101 million and 38 million for 1982, 1983 and 1984 respectively, and equity of Dkr 47 million, 159 million and 186 million for the same years.

6.12.7 Mr. Gideon also explained that the real problem with Sealock was the short notice at which arrangements had to be made.  He said if necessary the vessel could probably have been sold, as was done with 912, and even at current prices would not necessarily have entailed any loss (other than loss of profit to BW).  The vessel was a valuable asset.  It could, if necessary, have been isolated pending sale and further credit extended to BW until such sale.  Mr. Gideon emphasised that the role in which EKR eventually found itself was the usual one of a guarantor having to take a risk, a role which EKR usually assumed.  Until the deposits were released, EKR unusually ran no risk.  So it simply decided to take the risk of WMI being in existence in 8½ years’ time. 

6.12.8 The EKR notes and minutes do not express any concern for EKR’s overall exposure to BW nor any concern for BW’s survival.  The passage in cross-examination on which the defendants rely for asserting that Mr. Gideon considered DO exposure, was a misinterpretation of Mr. Gideon’s evidence at day 41/75:

“Q.  Because at the time, when you obviously took some care in preparing this note for the extraordinary meeting, you had to consider this very unusual situation and it seemed to you at the time that you had to contrast the certainty of the 20 million loss now with running a risk of being liable for a bigger sum in eight years time - that was the situation as you saw it then, was it not?

A.  Yes, and we had the DO obligation as well to consider, the obligation under the credit framework to consider, and that was bigger than 20 million - it was even bigger than the delayed payments.”

6.12.9 All Mr. Gideon was saying was that EKR’s DO exposure on Sealock, which was Dkr 96 million, was higher than its AB/K risk of Dkr 20 million.  Mr. Gideon really summed it up thus at day 41/79:

“A.  You have to weigh it up - not against, Mr Johnson - you have to weigh it up - not against a certain loss of having delivered the ship, but you have to weigh it up, our situation, that WMI belonged to a very well respected Group.  We had no reason to disbelieve that they would not, as they continued trading, they would not be in business in eight and a half years.  We had looked at the graph - there was a gap even with the moratorium, but that, probably one way or the other, has been resolved.  We were not given any guarantee that WMI would be in business after eight and a half years, but we were never given a guarantee in any cases that any shipowner would be alive after eight and a half years.  We just returned to normal.  That is the situation you must consider now - would we take a situation of a certain loss of not delivering the ships, or should we go forward and deliver them to WMI?  As you very rightly put it, they had an interest in taking over the ships - why not then run a risk, which eventually is what we were in business for.”

Annalock

6.12.10 There is no doubt that from the beginning EKR was keen to see a solution for all three vessels.  The minutes of the EKR council meeting of 11th March show all three vessels were discussed and a global solution was suggested.  In the end, the council approved only the proposal which Mr. Gideon’s note had placed before it, i.e. for Sealock.

6.12.11 Then on 18th April, Mr. Schroeder of BW telexed Mr. Brothers to say Mr. Gideon had advised that the meetings of 21st and 22nd April could not be postponed because Mr. Gideon had to put a recommendation to the Minister.  Next, there was a meeting on 30th May at BW.  In his note of the meeting, Mr. Brothers recorded:

“Mr. Edelmann stated that the Fund’s thinking had somewhat changed since the last meeting in London.  At that time, there had been, in their minds, some pressure to arrive at an early solution whereby in exchange for a ‘guarantee’ that the Banks concerned would finance the vessels, the DSKF would offer a loan moratorium.  DSKF now accepted that there would be no such guarantee from the Banks and at the same time was much more prepared to adopt a ‘wait-and-see’ attitude.  In this respect, it wanted to see whether or not the Group’s various creditor banks would agree to the proposed rescheduling arrangements and also whether or not the proposed US$12 million from Hong Kong Realty would be forthcoming.”

6.12.12 Mr. Gideon was criticised for denying that there was at any stage anxiety on the part of EKR.  Again, I find the criticism unjustified.  The EKR minutes hardly suggest anxiety - perhaps an understandable and common sense desire to sort out the whole problem once and for all but the opportunity was not taken.  As to Mr. Gideon’s denial, I can find no such reference in cross-examination.  Mr. Gideon simply said of Mr. Schroeder’s telex that it was in error as there was no recommendation to be put to the Minister.  Mr. Gideon thought Mr. Schroeder might have meant the EKR council.  Mr. Schroeder did not, as had been anticipated, give evidence.  In relation to Mr. Brothers’ note, Mr. Gideon agreed that EKR’s attitude would be that of the Fund and said at day 44/22:

“A.  Well, it took some months before a solution came and I think we must have had at that time the same feeling as the Fund, that we wanted to have a solution to 911 and 912 in fairly good time before the delivery, but not necessarily maybe in the month of May.”

6.12.13 It was suggested that the wait-and-see attitude was a result of the calculations prepared by BW in May (paras. 6.7.29-31).  These showed losses significantly reduced if the 10% floating-out instalments were paid because the resale price of the vessel could then drop to about US$11 million before outweighing the benefit of the instalment.  At the time, a price of US$14 million or more was in contemplation.  Mr. Gideon agreed the effect of the payment of the instalment but said it did not lie behind EKR’s motives.  He said BW’s figures were still wrong and he simply decided not to take the calculations further but wait for a claim for BW.  He agreed EKR would want to assess risks and likely exposure, and then at day 44/51:

“Q.  So it was a risk situation, even though it was not a claim, and surely it was just the situation in which you would make sure that you had a pretty good assessment of what your exposure was; is that not right?

A.  As we have discussed before, there was a buyer willing to take over the ship if that could be arranged and, as we normally were used to running risks, that is all right - if we have some trust in that the buyer would exist in some years time, that could be arranged.  I do not think we compared it with the AB-K problem.  If you remember my note to the Council on 11 March, I think I mentioned there that the risk for EKR on the AB-guarantee would amount to 20 million Kroner and that does not compare very much to the relaxed terms - the balloon side - so we had in mind that, if possible, if it could be arranged and if we considered the risk as a fair risk, we would go a long way to accommodating a willing buyer to take the ship.”

6.12.14 That again sums up, in Mr. Gideon’s straightforward manner, what EKR were doing.  An important component was WMI’s continued existence as to which the financial information from WMI would be crucial.  Having got Sealock out of the way, there was more time to deal with the other two vessels.  Eventually, EKR recognised in October (para. 6.7.34) that a solution had to be found soon otherwise the banks would not agree to the floating-out instalments.  The solution was finally found in December.

6.12.15 Clearly, as the defendants submitted, EKR was motivated by a desire to protect its own financial interests as well as those of BW.  Equally clearly in deciding to accept the risks involved, EKR took into account WMI’s ability to remain in business and pay off loans for which EKR relied on WMI’s financial information passed on by ADS. 

6.13    THE MISREPRESENTATIONS

6.13.1 I now turn to deal with the specific allegations in the re-re-amended statement of claim.  Some have not been pursued.  Those remaining are:

(1)  Para. 4.1.1

6.13.2 This contains both an express misrepresentation and one by omission.  It is necessary to set out this allegation in full

“4.1.1    The Plaintiff was, at all times, given to understand that it was dealing with the Wheelock Marden Group of Companies as a whole.  Such impression was first given in around 1979 when the Plaintiff was initially asked by WMI to provide funding for a number of vessels to be delivered to the Group.  Such impression was reinforced:

(1) when vessels funded by the Plaintiff were delivered to other subsidiaries of the First Defendant not connected with WMI, and when the Marilock, funded by the Plaintiff, was initially ordered by a subsidiary of Allied Investors Corporation, which subsidiary was subsequently transferred to WMI before delivery;

(2) when the Plaintiff during the course of the said negotiations received the accounts of both WMI and the First Defendant;

(3) by the letter written by the First Defendant, referred to in Paragraph 3.4 (1) above sent to the Plaintiff; and

(4) by the Fifth Defendant who gave Mr Edelmann to understand that the First Defendant, although it was not formally guaranteeing the Sealock loan, would not let its subsidiary, WMI, fail.

As no time was such impression corrected by either the First or Fifth Defendants or anyone on their behalf.”

6.13.3 The last sentence constitutes the separate misrepresentation by omission.

6.13.4 The letter referred to in sub-para. (1) was from WM, signed by Mr. Brothers and dated 28th February 1983, sent to ADS enclosing WMI’s secured creditor cash flow for 10 years (para. 6.6.3).

6.13.5 ADS was asked for particulars of “such impression was first given” and replied:

“By a representative or representatives of the First Defendant and WMI (the Plaintiff is unable to give further particulars of such representative or representatives) to Mr Bent Mebus on behalf of DSF at a meeting in or about August 1979 at the offices of B&W’s lawyers Messrs Bech-Bruun in Copenhagen.

Mr Bent Mebus was told that the First Defendant would not provide a guarantee as it was against company policy but they outlined the First Defendant’s financial strength and said the First Defendant would stand behind its subsidiary.”

6.13.6 As to the falsity of the representation, ADS alleged it became false when WM decided not to support WMI.

6.13.7 The express misrepresentation was characterised by ADS as that “ADS was given to understand that it was dealing with the WM group of companies as a whole and the WM Group would not let its subsidiary fail”.  The defendants made two preliminary points about that

(1)    “Dealing with [Group] as a whole” is imprecise and meaningless.  Insofar as it meant dealing with a particular company which was part of a larger group, it was true.

(2)    The misrepresentation is contained in the 1st sentence of para. 4.1.1.  The matters pleaded in sub-paragraphs (1) - (4) and in the particulars support the misrepresentation but are not misrepresentations in their own right.  Even if proved, they do not establish the misrepresentation if the misrepresentation pleaded is inherently bad.  The alleged omission would also fail.

6.13.8 In opening, Mr. Cullen spoke of “the concept of a group with a parent company who would support”.  That was ultimately refined to meet the defendants’ objections as

“ADS was given to understand that it was dealing with the WM Group as a whole, that is to say, it was given to understand that it could take comfort from the fact that WM and its subsidiaries were part of a large group of companies of high repute :  ADS was entitled to the expectation that the Group would come to the subsidiary’s aid if the need arose”. 

6.13.9 While accepting that the particulars, even if valid, could not make the misrepresentation good if the defendants’ point was successful, ADS argued that in practice if the particulars could have been misrepresentations in their own right and established, then the plea was also made out.

6.13.10 Mr. Cullen explained that the two questions to be asked and answered were first, what was it intended to convey and second, did it convey that to the representee.  He submitted that, between businessmen, to say you are dealing with a group means you can take comfort from it (in other words, the group would stand by the subsidiary), there being no other purpose for such a statement.

6.13.11 I accept that Mr. Mebus, Mr. Nielsen, Mr. Faergemann and Mr. Lyngsie applying their own and Danish conceptions of conglomerate morality all agreed that, based on their understanding that they were dealing with the Group, they assumed WM would back WMI if necessary.

6.13.12 I also accept that the impression as pleaded carries with it the necessary implication of support, which is reinforced by the particulars.  The defendants can have been, and indeed were, in no doubt about what was alleged.  Only one impression was alleged.  When or if it was established and whether it was strengthened as time passed depends on whether any of the particulars are established.

6.13.13 The impression was said to be first conveyed to Mr. Mebus in 1978 or 1979 when he was having preliminary discussions about the loans to WMI for BW vessels with amongst others “people from WM”.  These people told Mr. Mebus WM could not give a guarantee because it was against company policy.  In his witness statement at para. 7, Mr. Mebus said:

“Nevertheless, they took pains to indicate that WM was a first class company, and they outlined to me its financial strength.  They also stated that the Group always honoured its obligations, although they gave no specific examples of this.  They stated further that WM would stand behind its subsidiary.  I recognised, of course, that WM, WMI and the owning companies were separate legal entities and therefore, strictly, would have to stand or fall on their own.  I understood, however, that DSF was dealing with a large and reputable group and therefore it need not fear that it would fail to honour its subsidiaries’ obligations.  In my experience, large reputable public companies do not let their subsidiaries fail.”

6.13.14 Mr. Mebus could not remember the exact words, only the gist.  He agreed it was possible he was reflecting his belief in the evidence rather than a specific statement.  I am sure he remembered the gist accurately.  He said his understanding from the meeting was WM would stand behind its subsidiaries.  That seems to me to be not unreasonable because “the people” would surely have wanted to establish their credentials.  Mr. Mebus was not shaken in his evidence.  I am satisfied this particular representation is established.

6.13.15 Apart from sub-paragraph (4), I am also satisfied that the other particulars are established although worth little weight.  Sub-paragraph (4) depends on the untested statement of Mr. Edelmann where, in para. 35, he said:

“ ...  I have a recollection that during a conversation with Robbie Brothers, I asked for a guarantee from [WM].  He indicated that it was not the group’s policy for the parent company to give guarantees, as they would have to enter all the guarantees in their books, and as all their other creditors would request similar assurances.  This is a view regularly adopted by shipowners, and one which the Fund often accepts.  My recollection is supported by the letter of 9th March 1983, in which Robbie Brothers put that view in writing.  I did, however, understand Mr. Brothers to indicate that it was not to be expected that [WM] would let WMI fail.”

6.13.16 Mr. Brothers’ letter is at para. 6.6.12-14.  In the letter, Mr. Brothers qualified support by the words “if forthcoming”. 

6.13.17 At para. 50 of his draft statement, Mr. Edelmann said that at the meetings of 23rd and 24th February “Mr. Brothers said things to the effect that the problems would be resolved because of the position of WM”.  There is support for what Mr. Edelmann said in four places

(1) In his note dated 4th March for the Fund’s board, Mr. Edelmann said WM “will commit itself to inject new capital” if the 3-year moratorium was made.  That strongly suggests some positive remark by Mr. Brothers.

(2) Mr. Brothers denied telling Mr. Edelmann that WM would not let WMI fail because that would have destroyed his negotiating position.  In cross-examination, however, he admitted that while he was careful not to give any commitment, he said he told the meeting that he believed there would be support for WMI at some time in the future, or words to that effect.

(3) Mr. Schroeder made a note of what Mr. Brothers told BW on 23rd February, namely

“tecy insolvent in 1983
\ go to the bankers
WM to do an injection”.

(4)  Mr. Freeland made a note of the meeting of 24th March in which he recorded:

“13th April WMI accounts
meeting of WM directors determining how
much support will be put in”.

6.13.18 While agreeing in cross-examination that he had no reason to suppose his note was not accurate, Mr. Freeland said, as he said in his witness statement, that Mr. Brothers did not say support would definitely be forthcoming, only that WMI would be asking for support.

6.13.19 I accept Mr. Brothers’ evidence that he never made any commitment about support.  I am unable, however, to resist the conclusion that, by placing the emphasis which he obviously did on support some time in the future and how this might be forthcoming, he could only have conveyed to Mr. Edelmann that WM would not let WMI fail.

6.13.20 I find, therefore, that the necessary impression was given to ADS.  Was it, however, false?  It became false when, according to ADS, WM decided not to support WMI.  Such a decision became manifest at the earliest in November 1984.  Before that date, the issues were WM’s intention and the honest belief of the defendants.  I have already made findings about the belief of WM and Mr. Brothers.  It follows that at the relevant time this representation was not false nor was there any failure to correct.

(2)  Para. 4.1.2

6.13.21 This pleads:

“The explanation given for WMI’s need to restructure its finance, as set out in its proposals, was that it had a cash flow problem but such problem was described as being merely short term.”

6.13.22 It is alleged that this representation was made orally by Mr. Brothers to Mr. Edelmann; and in writing by way of the draft letters to WMI’s bankers contained with the letters dated 28th February and 3rd March 1983 from Mr. Brothers to Mr. Edelmann.

6.13.23 There was a meeting on 22nd and 23rd February at BW.  According to Mr. Edelmann, although he was unable to remember the exact words, he recalled that Mr. Brothers indicated that WMI faced a liquidity crisis by which he, Mr. Edelmann, understood WMI was running out of money and that it had a cash rather than an asset problem.  He did not, however, understand that the problem was immediate, merely that Mr. Brothers foresaw a crisis.  Indeed, Mr. Edelmann remembered that, throughout their dealings, Mr. Brothers indicated it would be two to three years before WMI ran into serious trouble.

6.13.24 The two draft letters which sought a 3-year moratorium on payments of principal both stated “WMI is now facing an immediate cash flow shortfall”.  This indicated to Mr. Edelmann that the problem was short-term.  He said ADS was never told that WMI was dependent on third party support.  As Mr. Faergemann agreed, “immediate” means “at once”.  But as Mr. Edelmann pointed out in his statement, the 10-year graph, which accompanied the first letter, showed no substantial deficit until 1986 if the moratorium took place.

6.13.25 So there is a contradiction here.  Was there to be a cash flow problem starting at once, as the letters suggest and Mr. Faergemann accepts, or was there to be a long-lasting problem starting sooner or later depending upon the moratorium?

6.13.26 In my view, Mr. Nielsen summed it up correctly, namely that there was a long-term problem which would be solved in the short-term by the moratorium.  That would allow time for WM to make arrangements to provide support.

6.13.27 I confess to difficulty with this plea.  Looked at in isolation, ADS was perfectly aware that something much more substantial and sustained than a mere blip in cash flow was involved.  I cannot see how ADS was misled.  The gravamen of the complaint was put thus by Mr. Cullen in closing at day 157/36:

“What my clients did not know was that it was not the short-term problem shown on those secured creditors, because underneath there was the newbuildings which turned it into a catastrophe.  So, having been told there was a short-term problem - the expression used here by all the Defendants, and we say Mr Brothers actually used that term to us - we say that was a misrepresentation, because unknown to us and known to Mr Brothers there was the 18th March cashflow which showed that this was no short-term problem.”

6.13.28 To put this in context, it becomes necessary to look at further parts of the plea in relation to Sealock:

“4.1.4 A cash flow projection for WMI was sent to the Plaintiff (in the letter from the First Defendant dated the 28th February 1983 referred to in Paragraph 3.4(1) above) which gave two projections, first, on the basis that all WMI’s lenders consented to the proposed refinancing and, second, on the basis that they did not.  The former projection indicated that no substantial cash deficit would arise before mid-1986.

4.5 All the above representations were not true and did not present to the Plaintiff a true picture of, and (as to Paragraphs 4.1.2 and 4.1.4) did not represent an honest opinion as to, the financial position of WMI and its prospects or of the First Defendant’s position with regard to the support of WMI.  The situation as it was known to the First and/or Fifth Defendants at the time (which knowledge is more particularly pleaded below) was completely different.

4.6 Further, the First and/or Fifth Defendants omitted to state the true position of WMI.  Further and/or alternatively the First and/or Fifth Defendants omitted to correct the false impression given by the above representations by stating the true position to the Plaintiff.  In the circumstances, the said omissions amounted to misrepresentations of WMI’s position.”

6.13.29 These include three alleged misrepresentations :

(1) The cash flow with the letter of 28th February (it was a graph relating to secured creditors; the actual cash flow dated 3rd March came later) was misleading because it implied the newbuildings would be cash neutral and because without the cash flow of 18th March for newbuildings, it gave the false impression that WMI would not have a deficit until 1986.

(2) A failure to correct the impression that ADS was dealing with the WM Group as a whole.  I have already dealt with this.

(3) Crucially, a failure to supply the cash flow of 18th March which had the effect of distorting or falsifying the picture presented by the cash flow relating to secured creditors.

6.13.30 (1) is totally unsustainable.  ADS knew exactly what it represented at the time it was received.  ADS also knew that a cash flow for newbuildings was being prepared.  The cash flow for secured creditors, therefore, carried no implications about newbuildings and was not in itself misleading.

6.13.31 As to (3), the picture presented by the secured creditors’ cash flow, however, was of a huge deficit which could be reduced to manageable proportions by a 3-year moratorium.  I have already found that Mr. Brothers had made it clear that his intention was that newbuildings should be or should substantially be cash neutral.  The cash flow of 18th March, however, changed the picture completely.  If it was not provided, in my judgment there was an omission “to correct the false impression given by the representations by stating the true position to” ADS.

6.13.32 ADS’ allegation was not, as the defendants tried to argue, that the secured creditors’ cash flow itself was falsified, but rather the impression it created was false and should have been corrected.

6.13.33 The crucial issue then is whether Mr. Brothers handed the newbuildings cash flow to Mr. Edelmann in London on 23rd or 24th March 1983.  It is important to realise that, while the graph showing the effect of the cash flow was but a single sheet, the whole cash flow ran to over 20 pages of computer print-out of assumptions and calculations.  It was a bulky document.  It was not a single scrappy sheet of paper.

6.13.34 There is no doubt that Mr. Brothers took it with him to London in March 1983.  He stopped in Geneva where he showed it to Mr. Ortiz-Patino who, although he did not understand all the financial information and intricacies, for the first time obtained a good view of WMI’s position (and if Mr. Ortiz-Patino was appalled, as he was, it is difficult to resist the conclusion that ADS’ reaction would be no different).  Once in London, Mr. Brothers said that on 24th March he saw Mr. Edelmann in Mr. Freeland’s office and there handed over the cash flow.

6.13.35 Mr. Brothers had, of course, written to Mr. Edelmann on 28th February promising the cash flow “probably on Wednesday”.  Mr. Edelmann was expecting this cash flow.  That, I accept, is hardly a sound basis for suppression of a document.  Indeed, it was sent to the banks.

6.13.36 Although ADS’ witnesses were astute to say that they were interested in WMI information, there was no request for this cash flow.  While that would be explicable if ADS had in fact received the cash flow, but either ignored it or mislaid it, it is equally explicable by the assumption on the part of ADS that newbuildings would be cash neutral.

6.13.37 Mr. Freeland’s note of the meeting on 24th March which referred to WM “determining how much support” (para. 6.13.17(4)) contained reference to

“$4 million 1983, $7 million 1984 deficit”.

6.13.38 Those figures reflect the deficits shown in the cash flow.  But they only reflect 2 years.  Mr. Brothers could have mentioned these relatively small deficits.  Had Mr. Freeland seen and reviewed the whole cash flow, however, it seems likely he would have noted rather more than he did.

6.13.39 This cash flow was disastrous.  I cannot conceive Mr. Edelmann’s reaction would have been other than to pack his bags and go home.  The cash flow went far beyond anything anyone was expecting, including Mr. Brothers.  It would almost undoubtedly have put an end to the current negotiations and severely damaged Mr Brothers’ hopes of saving WMI.

6.13.40 ADS has no trace of the cash flow.  The suggestion that Mr. Edelmann and ADS were simply not interested in it because they were preoccupied with EKR and BW does not hold water.  At para. 6.11.23 I have already examined how Mr Edelmann and Mr Faergemann dealt with cashflows.  No doubt Mr Edelmann would have mentioned this cashflow had it been given to him.  It is clear that he had a somewhat jaundiced view of the whole WMI affair and would have been quite uninhibited in drawing the board’s attention to this document.

6.13.41 Discussions in London about delivery of Sealock took place on 22nd/23rd March.  What Mr. Brothers said in cross-examination was this on day 95/41:

“A.   ...  When we got to London, we had two days of meetings with EKR and the shipyard and the various banks -- the one bank, in fact.  Those meetings were solely directed at the problem in hand, which was, namely, the delivery of 910.

In order to brief Mr Edelmann about the financial position of the company, I did not want to do it in the circumstances of an open meeting where there were a number of other people there.  I suggested to him, that he should come round to Mr Freeland's offices at Norton Rose the following day, which was 24th March, I think, after we finished the meetings.

Indeed, in Norton Rose's offices, I sat down with Mr Edelmann, and I brought him up-to-date on what was going on and I handed him over this particular cashflow at that time.

Q.  Why did you not want it to be provided at the earlier meetings, on 22nd and 23rd?  Surely the Danish side were entitled to have the latest up-to-date financial information?

A.  We did not discussion financial background at all at those meetings, my Lord.  They were solely directed at the negotiations for the delivery of 910.

Q.  Surely the delivery of 910 concerned financial considerations?

A.  I think, as far as DSKF was concerned, they did not need any additional financial information because if they had done they would have asked for it and they did not.

Q.  Do you mean to tell me you had this document which should have been sent to them, but you did not give it to them during the negotiations because they had not asked for [it.  How] could they know it existed?

A.  You say it should have been sent to them, but, in fact, I hand carried it back and they got it probably before anyone else --

Q.  I am sorry, Mr Brothers, to interrupt you, but what I am talking about specifically is why this document, which contained information they should have seen, it was a matter that was obviously relevant to what you were discussing at the meetings, was not given to them at the meetings?

A.  Because, my Lord, we were discussing at the meeting the mechanics of how we were going to deliver 910.  There was time for a discussion on the financial side and we had scheduled to do that after the meetings had been completed and, indeed, we did.  That was the way Mr Edelmann wanted it, and that was the way we did.

Q.  At this stage, the question of the number of deferred payments was still in the air, was it not, that is what you were discussing?

A.  It was a matter of the negotiations, yes.

Q.  Surely it was important for the Danes to see the latest financial information based on an assumption of six instalments, six deferments?

A.  It was really up to the Danes to say what they thought was important and what was not, my Lord.

Q.  They did not know it existed, how could they ask for it if they did not know it existed?

A.  I cannot say at this time whether they knew it existed or not, but they certainly knew that it was coming because I had written to them and told them that.

Q.  What they did not know was that you had it in their pocket?

A.  They may well have known that.  I cannot recall now saying to Mr Edelmann:  "I have it in my briefcase and I will give it to you later", or whether I gave it to him when we had our meetings.  Certainly they were expecting it.  They did not regard it themselves as critical for the meeting because at any time during those meetings they could have asked for it and we could have had a separate discussion on it.

Q.  They could have said what?  What could they have asked for?

A.  "Where are the cashflows, and could they please have a chance to look at them before continuing the meeting".

Q.  Mr Brothers, you promised to give them any additional information.  If you did not proffer it, why should they think you had it sitting in your briefcase with you?

A.  I am not saying that they did not know that I had it.  I cannot recall now whether I told Mr Edelmann:  "It is sitting in my briefcase and I will give it to you the day after tomorrow", or whether I just produced it.  I really cannot say that.

The fact of it is I can remember producing it and I can also remember quite clearly that we deferred discussion on the financial side of Wheelock Maritime basically until after the meetings had taken place and so that we could really have a quiet hour or two on that particular subject.

Q.  I think what is extremely unlikely, is it not, Mr Brothers, is that the person negotiating the financial future, as it were, of the yard, of possibly the Fund of WMI, knew that there was a cashflow in existence and did not ask for it?

A.  My Lord, it really was not unlikely, because both EKR and DSKF were far more concerned about how the ship could be delivered.  They were not concerned about the financials of Wheelock Maritime.

Q.  I have to suggest to you that that is obviously wrong.  Besides that, the suggested or the assumed deferments of six instalments on each vessel was something that was obviously going to be something very close to their hearts?

A.  It was close to their hearts, yes.  They were obviously interested in it.  We have to remember that Mr Edelmann actually was the person who suggested the six payments in the first place --

Q.  Mr Brothers, if I might say so, please do not change the subject.  What we are talking about is not who suggested it in the first place.  We are talking about the fact that you had financial information there based, in part, on six deferments of three vessels and this was not handed over to the date?

A.  First of all, my Lord, these were only assumptions in the cashflow and the Danes knew well enough that we were expecting, if we were to take delivery at all of 911 and 912, that we would get the same terms we would for 910 --

Q.  I am sorry, Mr Brothers, you know this was not the point.  The point was this was information that was obviously of great interest to them.  You were asking either that they knew that you had it and did not bother to ask for it or you had it, but did not think it was important?

A.  I do not see how the information could be of interest to them.  It would not have helped them in one way or the other.  They knew already that we expected to get the same terms for 911 and 912 if we did not cancel them.  If they had wanted the information, if they had needed to see it, of course they could have had it.  I brought it over specifically for that purpose.  There was no question of withholding anything or anything of that nature.  It was just agreed or decided that the matter -- the briefing on the financial side of Wheelock Maritime would take place after the negotiations had taken place on 910.  That was how we both wanted it.

Q.  Mr Brothers, I must suggest to you that you deliberately did not hand over this document?

A.  We always made a point of giving all of the information to all of the creditors.  We did not deliberately withhold information from anybody at any time.  It would have been totally out of character and totally unnecessary to have held back any information from DSKF.

Q.  Perhaps it was just a negotiating stance not to give it to them?

A.  It was not a negotiating stance at all.  In fact, it would probably help our negotiations to give it to them, not the opposite.”

6.13.42 I am wholly unable to accept that.  The final answer is staggering.  The general thrust of the passage, that Mr. Edelmann should have made the running and asked for the cash flow, is simply unacceptable.  Mr. Brothers, during 2 days of negotiation about Sealock, had in his briefcase a financial document which on any reading was going to cause concern.  Mr. Gideon’s assertion in para. 26 of his original witness statement, albeit in a general context, that there was no reason to give vessels away to a bankrupt company with no real prospect of repaying loans made to it, was an apt and realistic appraisal of this situation.

6.13.43 Mr. Brothers had the cash flow in his briefcase.  I am satisfied that, appalled by the consequences that would have undoubtedly flowed from its disclosure, Mr. Brothers kept it there.  It is worth remembering what Mr. Brothers said about “extremely wide-ranging repercussions” concerning the problem that arose over Rangelock (para. 3.5.3).

6.13.44 There are no two ways about this issue.  Either the cash flow was handed over as Mr. Brothers asserted, or it was not and deliberately not.  There is no room for a halfway house, as Mr. Johnson suggested, that Mr. Brothers was mistaken and simply forgot to hand over the cash flow.

6.13.45 I find Mr. Brothers deliberately withheld the cash flow and, notwithstanding his belief in support, he was dishonest in doing so.

6.13.46 I am satisfied that ADS has properly pleaded and established a misrepresentation by omission, namely failure to correct the false impression about WMI’s financial situation created by the 28th February graph and subsequent cash flow.

(3)  Para. 14.1.3

“On 4th October 1983 there was a meeting between, inter alia, the Plaintiff and the Fifth Defendant at which the Fifth Defendant purported to explain the financial position of WMI.  The Fifth Defendant reported that the First Defendant had received a report from its financial advisers to say that WMI was worth saving and he gave the impression that the First Defendant would act on that advice and give WMI the necessary support to ensure its survival.”

6.13.47 It is not ADS’ case that Mr. Brothers said WMI would be supported, rather that he disclosed the gist of the report in order to create the impression that WM was going to save WMI.  ADS argued that there would have been no point in mentioning it unless the intention was to create such an impression.  In further and better particulars, however, ADS put its case more positively, namely that Mr. Brothers stated that WM had received Rothschilds’ report “and that WMI ought therefore to receive assistance from [WM]”.  In my view, the pleaded case and the argued case are inconsistent.  In a case involving fraud such an inconsistency is unacceptable.  This allegation must fail.  But it would have failed anyway.

6.13.48 This allegation was plainly derived from a note dated 24th October which Mr. Faergemann prepared of the meeting that day.  In it, he recorded:

“During the meeting R. BROTHERS gave an outline of the company’s current situation:  it was mentioned in particular that WMI is trying to sell some older tonnage, and also that it has entered into a “sale and lease-back” arrangement with LBI concerning “Rangelock” (see attached document).  BROTHERS explained moreover that WMI’s parent company, Wheelock Marden & Co. (WMCO) had received from its financial consultants a report concluding that WMI was worth saving, and therefore should be given assistance by its parent company.

Because of this, WMCO has committed itself to grant WMI a loan of US$ 4 million over the next two years.  The loan will be given according to more specifically agreed conditions and against a guarantee in the form of a pledge of shares in World Wide Wheelock Shipping Inc.  This company is a holding company in which WMI owns 51 per cent of the share capital.

It should be noted that the above amount of US$ 4 million is based among others on the pre-condition that the Ship Credit Fund (DSF) will agree to postpone 4 (four) to 5 (five) instalments on each of the newbuildings no. 911 and 912 in connection with the delivery, which as a whole corresponds respectively to US$ 4,872,000.- (911) and US$ 5,124,000.- (912), i.e. a total of US$ 9,996,000.-.

The management expressed its stupefaction at this assumption and pointed out that the Fund had, at no time whatsoever, implied that such an assistance could be expected.  On the contrary, it should be underlined that in the Spring of 1983, the Ship Credit Fund, the Export Credit Council and B&W had contributed US$ 5.8 million to WMI’s liquidity in connection with the delivery of 910, and that in August of this same year, the management had replied to WMI that a solution formula such as the one assumed would not even been submitted to the Board of Directors.

The management also remarked that 4 million dollars must be considered as insufficient assistance for the company’s liquidity and that the parent company’s will to assist WMI may be seriously doubted, if one considers that the proposed 4 million would only be made available against full covering guarantee.”

6.13.49 Mr. Edelmann clearly derived his draft statement from that note.  In it he said:

“ ...  I refer to the note of that meeting dated 24th October 1983.

Mr. Brothers stated that WMI was seeking to sell older tonnage, and that [WM] had received a report from their financial advisors indicating that WMI was worth saving.  That WMI would therefore be receiving assistance from its parent company.  We were aware that WMI had requested assistance of US$12 million, but were informed that the assistance took the form of a Loan of only US$4 million, which was secured by a First Pledge of 250 shares of World-wide Wheelock Shipping Inc. (“WWW”), a joint venture Company between WMI and Worldwide Shipping, a Company controlled by Sir Yue-Kong Pao.  We were given to understand that WMI held 50.4% of the beneficial interest in the shares of that Company.

The WWW shares were also the subject of a pledge in favour of [WM] to cover a Guarantee of US$6 million for charter-hire of the vessel “Rangelock”, which had been the subject of a sale and lease-back refinancing arrangement between WMI and LBI.  The shares of WWW were thus pledged to [WM] by WMI as to approximately US$10 million of their value.  At first sight the fact that the parent company took collateral from its subsidiary should have been a warning sign, but the impression which I got was that despite the policy of the parent not to give Guarantees, they had done so and they indicated to me that they intended not to let WMI fail.  The fact that collateral was taken was, in my view, merely to avoid other Creditors requesting similar Guarantees as mentioned in Clause 34 above.

Mr. Brothers indicated that he hoped that the Fund would release 4-5 repayments on new building number 911, totalling approximately US$4,872,000.  We were given the impression that provided the loans were refinanced, the difficulties of WMI would disappear.

I expressed surprise at Mr. Brothers’ proposal.  We indicated that we took the view that the funding provided by [WM] was insufficient, especially as the Fund was required to provide more than [WM], the parent company of WMI, and as we had already contributed to WMI’s liquidity.

We did, however, indicate that we were prepared to contribute to a solution in view of our desire to assist the yard.  We were, however, concerned about the financial standing of WMI, especially in the light of the total potential liabilities of that Company towards ADS.  We therefore required the Guarantee of WMI to be supported by other substantial securities.”

6.13.50 It is appropriate to consider the next alleged misrepresentation at this stage.

(4)  Para. 14.1.4

“14.1.4  Further, at the meeting of 4th October 1983 the Plaintiff was given the impression that the support of a secured loan of US$4 million that had been offered by the First Defendant was sufficient to ensure the survival of WMI and that if the Plaintiff agreed to the proposed rescheduling of the Annalock loan WMI’s problems would be solved.  The Fifth Defendant failed to inform the Plaintiff of the recommendations of Schroders and Chartered and WMI’s prospects as shown in the latest cashflow forecasts dated the 1st and 5th September 1983 which indicated that the support given by the First Defendant was wholly inadequate.”

6.13.51 In further and better particulars, ADS said it was a natural inference from statements referred to in the previous misrepresentation that US$4 million would be sufficient to ensure survival.

6.13.52 In cross-examination, Mr. Faergemann agreed that the words in his note “ought to receive assistance” were reported by Mr. Brothers as the recommendation of Rothschilds.  Further, in that note ADS’ doubts about the US$4 million and about WM were clearly expressed.  In cross-examination, Mr. Faergemann’s attention was drawn to the two different aspects of the final paragraph, i.e. insufficient assistance and will (or willingness) to support.  Mr. Faergemann agreed that willingness was the major word and there then followed, at day 28/27:

“Q.  So, would it be right to say that, at that time, alarm bells sounded so far as the Administration was concerned about the degree of commitment by the parent company to support WMI?

A.  Yes, I remember there was disappointment as to the willingness of the parent company and to the expectations the Fund had had so far.”

6.13.53 Mr. Faergemann was referred to the statement of Mr. Schroeder made upon the basis of a detailed manuscript note.  Mr. Schroeder said that Mr. Brothers explained that Rothschilds had made two proposals for support, namely US$12 million; or three instalments of US$4 million each, supported by a 3-year moratorium (in fact, the original recommendation was for US$12 million by way of three annual cumulative instalments of $4 million each; the revised recommendation was for $12 million on condition debts were rescheduled, or $4 million over 2 years).  WM had opted for the latter as WMI did not need US$12 million, US$4 million having been calculated to be sufficient for two years when the position could be reviewed.  Mr. Faergemann was asked if he remembered words to the effect that WM was being looked to for short-term support sufficient for two years when the position could be reviewed.  He said, yes.

6.13.54 In fact, Mr. Schroeder’s manuscript note records Mr. Brothers as saying: “We are only looking for a breathing-space as we are counting on better days in the future”.  Mr. Brothers echoed this in his witness statement when he said: “I made it quite clear the support WM would be giving, following Rothschilds’ report, would be to provide a breathing-space for two years”.  It was put to Mr. Faergemann that Mr. Brothers said this in the context of the Fund’s view that US$4 million was not sufficient liquidity assistance.  Mr. Faergemann said: “I do not know but it would probably have been”.

6.13.55 It seems to me to be beyond doubt that ADS were aware that WM and WMI were taking part in what was a holding exercise.  ADS were under no illusion that US$4 million were going to save the day.  There is no substance in these misrepresentations.

6.13.56 It follows, in my view, that the alleged misrepresentations cannot be sustained.

(5)  Para. 14.1.6

6.13.57 This plea was of alleged omissions, confined to the meeting of 4th October and the alleged misrepresentation as to the sufficiency of US$4 million.  The omissions were:

(1) Failure to disclose the S&C report and recommendations; and

(2) If the representation was not a misrepresentation when made, it had become untrue by the December meetings or by 22nd March 1984 and should have been corrected (answer to request 160).

6.13.58 As to (1), the S&C report dated back to April 1983 and was not, in my view, relevant to what was perceived to be a temporary measure on the part of WM and WMI.

6.13.59 As to (2), there was no representation or inference drawn as to the sufficiency of US$4 million to become untrue.

6.13.60 Accordingly, these misrepresentations are not established.

(6)  Para. 14.7

6.13.61 ADS plead that the defendants failed to correct the false impression given by the misrepresentations, including those made before 8th April 1983, and the omission to do so amounted to a misrepresentation of WMI’s position.

6.13.62 The only misrepresentation established is the failure to supply the newbuildings cash flow which had the effect of falsifying the picture portrayed by a combination of the secured creditors cash flow and the assumptions that newbuildings would be largely self-sustaining.  The complete picture was never shown.  The defendants were plainly under an obligation to disclose this because ADS had asked for, and Mr. Brothers had promised, financial information.  In any event, given the nature of the transactions between them and that Mr. Brothers had made financial information available, plainly he was required to inform ADS of any material alteration to the picture which had been provided.

6.13.63 The 10-year cash flow in the S&C report, which showed funding requirements of US$56 million in January 1990 with a moratorium and US$105 million in August 1989 without a moratorium, was not disclosed.  I do not accept the excuse that this was in the nature of a private report.

6.13.64 The 10-year cash flows of 31st May were not disclosed.  These showed deficits of US$51 million in July 1990 with a moratorium and US$85 million in August 1989 without a moratorium.

6.13.65 The 3-year cash flows of 7th July, which Mr. Brothers did send to ADS, presented a picture more in keeping with that shown in March:  a deficit after 3 years of only US$7 million with a moratorium, and US$23 million without.