Abela and Australian Prudential Regulation Authority
[2008] AATA 653
•29 July 2008
Administrative Appeals Tribunal
DECISION AND REASONS FOR DECISION [2008] AATA 653
ADMINISTRATIVE APPEALS TRIBUNAL )
) No: N2006/0739
GENERAL ADMINISTRATIVE DIVISION )
RePaul Mario ABELA
Applicant
AndAustralian Prudential Regulation Authority
Respondent
DECISION
TribunalProfessor GD Walker, Deputy President and Mr SE Frost, Member
Date29 July 2008
PlaceSydney
DecisionThe decision under review is set aside.
..............[sgd]................................
Professor GD Walker
Deputy President
CATCHWORDS – Australian Prudential Regulation Authority disqualification – whether applicant is a fit and proper person to be or act as a director or senior manager of a general insurer – whether applicant’s conduct in relation to HIH demonstrates that he failed to show the judgement, probity and competence to adequately perform the functions of a director or senior manager of a general insurer – complaints about applicant’s behaviour not made out – decision under review is set aside.
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RELEVANT ACT/S:
Insurance Act 1973 (Cth) (the Act): ss 2A, 24, 25A, 29, 30, 63
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CITATIONS
Hughes & Vale Pty Ltd v New South Wales (1955) 93 CLR 127
Re Burroughs and Australian Prudential Regulation Authority [2007] AATA 1960
Kamha v Australian Prudential Regulation Authority [2005] FCAFC 248
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AUTHORITIES
Prudential Standard GPS 520
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REASONS FOR DECISION
19 July 2008
Professor GD Walker, Deputy President and Mr SE Frost, Member
Basic facts
1. The applicant Mr Paul Mario Abela is currently a director within the tax and legal services division of PricewaterhouseCoopers (PwC) in Sydney. He holds the degrees of Bachelor of Economics, Bachelor of Laws and Master of Laws from the University of Sydney. He has been a solicitor and chartered accountant since 1989. He worked in legal practice for about two and half years with the law firm of Mallesons Stephen Jaques.
2. Between March 1994 and mid-September 2001, he was employed by the HIH insurance group (HIH). During the financial periods ending 30 June 1999 and 30 June 2000 he held the position of group tax counsel.
3. A delegate of the respondent on 27 March 2006 disqualified the applicant under s 25A(1) of the Insurance Act 1973 (Cth) (the Act). The applicant applied for internal review of that decision and on 25 May 2006 a delegate of APRA confirmed the applicant’s disqualification dated 27 March 2006 under s 63(4) of the Act.
4. On 22 June 2006 the applicant lodged with this tribunal an application for review of the decision.
5. APRA contended that the applicant is not a fit and proper person to be or to act as someone referred to in ss 24(1)(a), (b) or (c) of the Act for the following two reasons:
(a)First, the applicant's conduct in relation to HIH’s practice of “netting-off” of inter-company balances demonstrates that he failed to show the judgment, probity and competence to adequately perform the functions of a director or senior manager of a general insurer within the meaning of s 24(1)(a) of the Act. In this context “netting-off” refers to the practice, when there is a series of loans and borrowings between related corporations, of reporting them in a return as a single net figure rather than as separate credit and debit amounts.
(b)Secondly, the applicant's conduct in relation to HIH’s accounting treatment of its future income taxation benefits (FITB) demonstrates that he failed to show the judgment, probity and competence to adequately perform the functions of a director or senior manager of a general insurer within the meaning of s 24(1)(a) of the Act.
6. APRA also contends that the applicant has continued to assert that his behaviour in relation to the above two issues demonstrates no failure of knowledge, competence, judgment, probity or diligence on his part. The applicant’s assertion demonstrates the necessity for this tribunal to affirm APRA’s decision in the interest of public protection.
7. At the hearing, the applicant was represented by Messrs Jeffrey Hilton SC and Michael Izzo of counsel instructed by Addisons Lawyers, while the respondent was represented by Mr James Stevenson SC and Ms Vanessa Whittaker of counsel instructed by Sparke Helmore Lawyers. The documents before the tribunal comprised the documents produced pursuant to s 37 of the Administrative Appeals Tribunal Act1975 (the T documents), taken into evidence as Exhibit R1, together with the other documents tendered by the parties at the hearing.
Applicable law
8. Section 24(1) of the Act reads as follows:
(1)A disqualified person must not be or act as:
(a)a director or senior manager of a general insurer (other than a foreign general insurer); or
(b)a senior manager, or agent in Australia for the purpose of section 118, of a foreign general insurer; or
(c)a director or senior manager of an authorised NOHC.
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9. By virtue of s 3(1) of the Act, a senior manager of a general insurer is a person who has or exercises any of the senior management responsibilities set out in paragraph 17 of the Prudential Standard GPS 520 (see para 13 below).
10. APRA was empowered to disqualify the applicant pursuant to s 25A(1) of the Act which reads as follows:
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APRA may disqualify a person if it is satisfied that the person is not a fit and proper person to be or to act as someone referred to in paragraph 24(1)(a), (b) or (c).
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11. APRA’s power to disqualify the applicant pursuant to s 25A(1) of the Act must be read in the context of the main object of the Act which is set out in s 2A of the Act as follows:
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2A Main object of this Act
(1)The main object of this Act is to protect the interests of policyholders and prospective policyholders under insurance policies (issued by general insurers and Lloyd’s underwriters) in ways that are consistent with the continued development of a viable, competitive and innovative insurance industry.
(2)This Act, and the prudential standards determined by APRA under this Act, achieve this mainly by:
(a)restricting who can carry on insurance business in Australia by requiring general insurers, and the directors and senior management of general insurers, to meet certain suitability requirements; and
(b)imposing primary responsibility for protecting the interests of policyholders on the directors and senior management of general insurers; and
(c)imposing on general insurers requirements to promote prudent management of their insurance business (including requirements concerning capital adequacy, the valuation of liabilities, reinsurance arrangements and the effectiveness of risk management strategies and techniques); and
(d)providing for the prudential supervision of general insurers by APRA.
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12. Section 30 of the Act provided at the relevant time that:
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(1)In this Part, a reference to assets of a body corporate does not include a reference to:
(a)an amount due from, or a loan to, a person who, when the debt came into existence or the loan was made, was:
(i) a director of the body corporate;
(ii) a director of a body corporate that was related to the body corporate;
(iii) where, by virtue of subsection (7), this section applies in relation to a trust—a trustee in respect of the trust, or, if the trustee is a body corporate, a director of that body corporate; or
(iv) the spouse of a person referred to in subparagraph (i), (ii) or (iii);
(b)an unsecured loan:
(i) to a person who, when the loan was made, was an employee of the body corporate; and
(ii) that exceeded $1,000 when it was made or that was made under an agreement under which the body corporate agreed to lend that person amounts in the aggregate exceeding $1,000;
(c)an asset that is charged for the benefit of a person other than the body corporate to the extent that it is so charged;
(ca)where the whole or part of the undertaking, business or property of the body corporate is subject to a floating charge, that undertaking, business or property to the extent that it is so subject;
(d)an amount due from, or a loan to, another body corporate that is related to the first-mentioned body corporate except:
(i) an amount or loan to the extent that APRA has, under subsection (2), approved the amount or loan as an asset for the purposes of this Part;
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13. Prudential Standard GPS 520, made under s 32 of the Act, relevantly provides as follows:
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Senior managers
17.Senior manager in relation to a regulated institution means a person (other than a director of that regulated institution) who:
(a)makes, or participates in making, decisions that affect the whole, or a substantial part, of the business of the regulated institution; or
(b)has the capacity to affect significantly the regulated institution’s financial standing; or
(c)may materially affect the whole, or a substantial part, of the business of the regulated institution or its financial standing through their responsibility for:
(i) enforcing policies and implementing strategies approved by the Board of the regulated institution; or
(ii) the development and implementation of systems that identify, assess, manage or monitor risks in relation to the business of the regulated institution; or
(iii) monitoring the appropriateness, adequacy and effectiveness of risk management systems; or
(d)for a Category C insurer, is nominated as the senior officer outside Australia, to the extent that the person meets the definition in subparagraphs (a), (b) or (c).
18.For the purposes of the definition of senior manager in subsection 3(1) of the Act, the responsibilities set out in subparagraphs 17(a), (b), (c) and (d), when exercised for a regulated institution, are senior management responsibilities (except when carried out by a director).
Criteria to determine if a responsible person is fit and proper
21.Each regulated institution must clearly document the competencies required for each responsible person position.
22For paragraphs 25A(3)(b), 27(2)(b), 43(2)(b) and 44(3)(b) and subparagraph 44(1)(a)(ii) of the Act and for the purposes of determining whether a person is fit and proper to hold a responsible person position, the criteria are whether:
(a)it would be prudent for a regulated institution to conclude that the person possesses the competence, character, diligence, honesty, integrity and judgement to perform properly the duties of the responsible person position;
(b)the person is not disqualified under the Act from holding the position; and
(c)the person either:
a. has no conflict of interest in performing the duties of the responsible person position; or
b. if the person has a conflict of interest, it would be prudent for a regulated institution to conclude that the conflict will not create a material risk that the person will fail to perform properly the duties of the position.
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Issue
14. Whether the applicant is not a fit and proper person to be or to act as someone referred to in sub-paragraphs 24(1)(a), (b) or (c) of the Act. That raises two sub-issues:
(a)whether his conduct in relation to HIH’s practice of “netting off” of inter-company balances demonstrates that he failed to show the judgment, probity and competence to adequately perform the functions of a director or senior manager of a general insurer within the meaning of ss 24(1)(a) of the Act; and
(b)whether his conduct in relation to HIH’s accounting treatment of its FITB demonstrates that he failed to show the judgment, probity and competence to adequately perform the functions of a director or senior manager of a general insurer within the meaning of ss 24(1)(a) of the Act.
Evidence
15. At the hearing the applicant gave oral evidence and Mr Richard Philip gave oral evidence for the respondent. Numerous affidavits and statements were tendered, together with a large volume of documentary evidence. The tribunal’s attention was drawn to a substantial quantity of relevant material. As the evidence unfolded, the issues were somewhat narrowed and refined, but a considerable amount of relevant documentary evidence remained for consideration. For the sake of clarity, we propose in these reasons to refer only to those parts of the material which, it seems to us, offer the most assistance in resolving the issues.
Applicant’s evidence
16. At the hearing the applicant adopted his statements of 5 October 2007 and 16 April 2008 (Exhibits A1 and A17)), including two volumes of supplementary materials (Exhibit PA1).
17. In Exhibit A1, after outlining his qualifications, the applicant explained that during the June 1999 and June 2000 financial years he was group tax counsel with the HIH Insurance Group. He was not involved in the tax affairs of the FAI Insurance Group until after Kathryn Koukoulas left HIH in October 1999.
18. His primary responsibilities included advising HIH on tax matters, meeting tax compliance obligations, calculating the periodic income tax charge or benefit arising from the various businesses and transactions of the group and calculating the periodic gross current and deferred taxation asset and liability balances of HIH and each of its corporate members. How those amounts were to be disclosed in the relevant financial statements fell outside his duties and responsibilities.
19. He reported directly to the general manager finance, William (Bill) Howard, but in relation to tax matters he often dealt directly with the chief financial officer, Dominic Fodera. In relation to APRA returns, all his dealings were with Fred Lo. Certain staff were assigned to assist him.
20. For the greater part of the time he worked for HIH, he was not involved in preparing APRA returns but operated as a tax specialist. In about March or April 2000, however, he was asked to review some APRA returns, commencing with those for the quarter ended 31 March 2000. At that time Fred Lo signed the returns as company secretary. A number of HIH’s APRA returns for the December 1999 quarter (signed by Fred Lo on 11 February 2000) had not been accepted by APRA. They contained a number of errors which APRA did not identify, but the applicant understood to be primarily asset classification misdescriptions and reconciliations and inconsistencies, and disclosed insolvent positions as at that date. On 3 March 2000, Fred Lo signed revised APRA returns for the December 1999 quarter.
21. The need to rework a number of the December 1999 returns had caused Mr Lo a great deal of embarrassment. Bill Howard had agreed with Fred Lo that the applicant would review the returns before they were submitted to Fred Lo for signature. The applicant was told that the review’s aim was to ensure, as far as possible, that the returns contained no asset classification misdescriptions or reconciliation inconsistencies. Although he was extremely busy with his tax responsibilities at the time, he undertook the task because there was no-one else readily available who could do it. Both Fred Lo and Bill Howard wanted to introduce his style of review of the group tax returns, an intensive review with a “keen eye for the detail”, into the APRA return preparation process, even though the applicant had no prior experience with APRA returns.
22. At no stage did he understand that he was required to settle HIH’s interpretation of s 30 of the Act. He had noted that there was little technical guidance on the interpretation of s 30, such as rulings, determinations, or guidance notes.
23. He reviewed HIH’s March 2000, June 2000 and September 2000 quarterly APRA returns. After examining each set of quarterly returns, he would arrange a meeting with Fred Lo, who would normally sign the quarterly returns at the end of a meeting and instruct the applicant to lodge them with APRA.
24. During one of those meetings, when discussing the netting-off of inter-company receivables and payables, he recalled saying to Fred Lo words to the following effect:
I have practised tax law for many years now and I am very aware that the administration and practice of legislative provisions do not necessarily reconcile with a literal reading of the relevant provisions. Is this netting-off practice an example of such an instance in the case of the Insurance Act because apart from moving assets to settle inter-company balances and offsetting balances between the same companies any other form of set off does not seem to be in accordance with the actual words of s 30?
25. In reply Fred Lo said to the applicant words to the following effect:
I know where you’re coming from but this practice has been going on for quite some time now and it’s never been raised by Andersen’s as an issue. The regulator had ample opportunity to raise with HIH any concerns it might have had with this practice and it never did. So what we’ve been doing in this regard is I believe in accordance with the established administration of s 30 by the regulator. If it wasn’t we would have heard from the regulator some time ago.
26. Later, and probably at a different meeting, he said the following to Fred Lo:
I am not aware of any technical materials published by either the ISC or APRA that specifically refer to the s 30 implications of netting-off inter-company balances, nor am I aware of any document from either the ISC or APRA to HIH that expressly supports HIH’s practices. In these circumstances, HIH should as a minimum include an inter-company asset attachment to the APRA Return and to disclose in that attachment that the inter-company receivable asset balance disclosed in that return is a net figure made up of both debit and credit balances. In recent years HIH has not consistently made such disclosures in its APRA returns.
27. He recalled Fred Lo being in agreement with this approach and he consented to the applicant's suggestion to consistently include an inter-company asset ADP attachment to the APRA return and to disclose quite clearly in that attachment that the total inter-company asset balance is the sum of debit and credit amounts.
28. Unlike most of the APRA returns lodged immediately before his involvement in revising the APRA returns, almost every APRA return that he had reviewed and discussed with Fred Lo in relation to the June 2000 and September 2000 periods included an ADP attachment for the inter-company receivables asset and an ADP attachment that disclosed an inter-company receivables asset total comprising both debit and credit amounts.
29. When he met with Fred Lo to discuss the June 2000 and September 2000 quarterly returns, he pointed out to Fred Lo that having regard to the uncertainty surrounding netting-off and the s 30 implications of the bank letters of credit issued on behalf of HIH, he had not signed the section of the quarterly checklist headed “Compliance with Applicable Laws/Regulations”. Instead he had merely noted that the main s 30 issue remained unresolved. He did so in order to make it quite clear that Fred Lo, rather than himself, held responsibility within HIH to settle those kinds of technical issues and that he could not be held responsible for not making any appropriate disclosures in the returns.
30. His involvement in the June 2000 annual returns was much more limited. He was assisted in this process by Colleen Chapman of HIH and Allan Docherty of Andersen Audit.
31. Some time before 26 September 2000, when Fred Lo had signed most of the June 2000 quarterly returns, the applicant had a telephone conversation about netting-off with Richard Philip of APRA. Mr Philip commented that if there were no netting-off, certain HIH insurers might not be statutorily solvent, but did not at any time categorically state that netting-off was prohibited. Mr Philip acknowledged that he was aware that other licensed insurance groups had adopted the practice and that there were no published APRA or ISC statements, guidelines or legal opinions to which he could refer on the issue.
32. When the applicant discussed that conversation with Fred Lo, Mr Lo said:
The netting-off practice has been in place for a very long time and it has not been challenged by a great number of highly qualified and experienced people. To date the ISC's and APRA’s administration of the Insurance Act has been totally consistent with the view that this practice does not infringe s 30. To be making some noises about this practice after all this time, that APRA employee [Richard Philip] is not being commercial or practical especially as these balances can be settled within 30 days.
33. Being concerned by the downward trend of the solvency margin in some of the HIH insurers, he had suggested to Dominic Fodera possible solutions, including merger of at least two of the three main licensed insurers, which would also simultaneously reduce the relevance of the netting-off practice. Mr Fodera had said that he did not want to merge any of the three main licensed entities because Mr Williams (the chief executive officer of HIH) did not want to return any insurance licences, and because such mergers would lead to a large write-off of tax losses.
34. In one of his meetings with Mr Fodera shortly after the June 2000 quarterly returns were finalised and lodged with APRA, he again expressed a number of his concerns about netting-off. Dominic Fodera had replied by telling the applicant to keep settling inter-company balances as often as possible, adding that they would deal with any APRA concerns with netting-off when they formally raised it with the group.
35. In making these and other comments, he had agitated for change and in doing so had gone well past the expectations and responsibilities of his role within HIH in relation to APRA returns.
36. He also discussed the netting-off concept with lawyers and accountants outside HIH, at Mallesons Stephen Jaques, Minter Ellison and Arthur Andersen. He did so because he was unaware of any relevant publications by the ISC or APRA that dealt with the s 30 implications of netting-off and he wanted to obtain an opinion, preferably from an external professional adviser who had no prior involvement in HIH’s application of s 30. The lawyers, however, told him that his concern was an accounting matter, while the accountants said it was a legal matter. He therefore did not seek to obtain a formal opinion from any external adviser on the issue.
37. Having taken a number of active steps (summarised in para 75 of his statement, Exhibit A1) to deal with the netting-off issue, he felt that given his position with HIH, there was nothing further he could do.
38. He then went on to outline his role in relation to the recording of future income tax benefits in the HIH consolidated financial statements for the financial year ended 30 June 2000, including the application of the “virtual certainty” test in AASB standard 1020 and his three memoranda dated 17 October 2000, known as the “October memoranda”.
39. His understanding was that he had been asked to identify ways in which the various tax losses could be recouped in the future by having regard to the relevant provisions of the tax laws of the various jurisdictions in which HIH operated. He did not see himself as developing or expressing any opinion or making any judgment on the degree of certainty of recouping those tax losses and was not in a position to perform the analysis required by the virtual certainty test.
40. The applicant had often reflected on his conduct while employed by HIH and considered what he would have done differently if he were to find himself in a similar position again.
41. At the time he was being required to work under ever-increasing pressures. The HIH-Allianz joint venture and the purchase by HIH of a shareholding in Ness Security Products Pty Ltd occupied much of his time and attention during the last quarter of 2000. The negotiation and implementation of the Allianz joint venture was particularly protracted, adversarial, labour-intensive and subject to extreme time pressures. At that time he was also unaware that Fodera, Lo and Howard were at that time engaged in criminal behaviour.
42. From his subsequent experiences he has concluded that his experiences at HIH during 2000 were quite unique. His dealings with Mr Fodera and the reactions and responses of his superiors within HIH to his various suggestions, were unusual. HIH senior management tended to deal with problems only when they reached crisis proportions.
43. He had made numerous suggestions for improving or rectifying any deficiencies, errors or omissions that he had identified but had neither the authority nor the capacity nor the responsibility to change the outcomes of which APRA now complain.
44. He considered that APRA’s complaints were made with the benefit of hindsight, especially in relation to netting-off. With the benefit of hindsight, he would himself do a number of things differently (para 121).
45. He always prided himself on his integrity, professionalism and technical proficiency and his reputation was of the greatest importance to him, including in his dealings with clients. He had been able to achieve and maintain the very high performance standards required of a director within the tax and legal services division of PwC and had consistently received very positive feedback from clients and PwC partners.
46. In his oral evidence, the applicant stressed that he did not seek a role in the insurance industry and wished only to practise as a chartered accountant.
47. In relation to the March 2000 review of the revised quarterly returns for December 1999, the applicant recalled in response to a question from Mr Stevenson that he had taken part in the review at the request of Mr Fred Lo or Mr Bill Howard or both. Mr Lo had told him that he had faced some criticism over the December 1999 return and had been embarrassed by it. He had therefore asked the applicant to conduct the review of the return which he had signed on 11 February. The return was reworked and re-signed in early March. Mr Lo had said he did not know what was wrong with the returns in their original form.
48. The applicant considered that by conducting the review, not only in relation to the December 1999 quarter but also in relation to subsequent periods, he was not taking responsibility for the returns. Mr Lo had simply wanted some additional comfort that the figures matched and were correct. At that stage the applicant had been aware of ss 29 and 30 of the Act and had understood their literal meaning. From Mr Lo, however, he had gained the impression that the Act was not administered in accordance with the literal meaning of those sections. He agreed that the legislation was designed to ensure that insurance companies remained solvent in order to protect policyholders, and he wanted the returns to be correct. At that stage, however, he was not interested in insurance industry policy issues.
49. The reviews took two or three days in all to cover a full set of group returns. Mr Lo had devised a checklist that was to be completed each time a quarterly or annual report was finalised (Exhibit PA1, vol1, p1).
50. The hand-written note opposite the check item “Compliance with applicable law/regulations” (PA1, vol1, p6) was placed there because Mr Lo had wanted to know why the applicant had not signed that item on some previous checklists. The note, which he had written himself, expressed the main part of his reason, which was elaborated in para 52 of his statement (Exhibit A1). He had there explained that having regard to the uncertainty surrounding the netting-off issue and the s 30 implications of the bank letters of credit issued on behalf of HIH, he had not signed the section of the checklist in question. Instead he had noted that the main s 30 issue discussed with Mr Lo had remained unresolved. He had taken that course of action to make it clear that Mr Lo, rather than himself, held responsibility within HIH to settle those kinds of technical issues and that the applicant could not be held responsible for not making appropriate disclosures in the APRA returns.
51. The applicant rejected Mr Stevenson’s suggestion that the main issue was netting-off. While that was an important reason, the most damaging issue from the viewpoint of HIH’s solvency was the matter of the letters of credit. He was also uncomfortable about the practice of netting-off and had no documentary evidence on the matter.
52. The applicant had also signed the 2000 annual checklist, but Mr Lo was aware that he had not reviewed those returns.
53. The applicant knew that receivables from related corporations were excluded from consideration as assets unless they had been approved by APRA. He therefore asked Mr Lo why that was the only asset shown in the returns on a net basis. He had seen the practice of netting-off referred to in the December 1999 returns and in the inter-corporate balances schedules. It was referred to in the FAI ADP schedule filed in February 2000 (Exhibit A19, tab 11). But if two transactions offsetting each other took place between the same two companies, they would not even appear in the schedule.
54. Asked whether he was aware that the practice was not permitted by s 30, the applicant said he had been looking for the reason for the practice, and that was why he raised the matter with Mr Lo. No objection had been raised to the practice. He had known that documentation and approval would be needed, although he did not ask for them in relation to the March return.
55. He had met Mr Richard Philip from APRA in 2000 when he had spoken to him about the quarterly returns and the netting-off issue. This was before 26 September 2000, probably in mid-2000. The applicant was adamant that Mr Philip did not say that netting-off was inadmissible or wrong. He had, however, said that without netting-off the company would be likely to be statutorily insolvent. He did not say that it was wrong however, and the applicant had not concluded from what he said that he meant that it was in any way inadmissible. The applicant acknowledged that he had not told the Royal Commission that Mr Philip had said he was aware that other licensed insurance groups had adopted the practice of netting-off intercompany balances (Exhibit A1, para 61), but that was because he had not been asked that question. Mr Philip had, however, said that it was not common practice. That statement had not been deliberately omitted from Exhibit A1.
56. Although Mr Philip had said that if the returns had been prepared on the basis of not netting-off intercompany balances, the company would be insolvent, the applicant had already been aware of that as a result of information received from a third source.
57. The proper approach was to include the asset in the return but not include the inadmissible number. Line item 84 as shown is a net dollar figure that is broken down in the ADP (presumably meaning automatic data processing, although the witness was not certain of that) attachment. If the asset were not included, the return would not tie in with the balance sheet. The asset’s admissibility was a separate question. On a literal reading of s 30, the gross loans to related bodies corporate should have been shown.
58. The applicant had been concerned about Mr Philip’s view that if the transactions were not netted off, the companies would be statutorily insolvent. The applicant had wanted to ensure that the APRA returns were correct and was frustrated that the company was still considering the netting-off issue in 2000. It should have been considered by APRA and HIH earlier.
59. He had been the only person dealing with APRA on this issue as far as he knew. Mr Philip had said he had known about the netting-off issue for some time and the applicant had not asked him how he knew. He was concerned that the HIH returns were not transparent. He had related Mr Philip’s remarks to Mr Lo.
60. He had examined the December 1999 FAI return when he was looking at all returns back to June 1999 while preparing solvency statistics for Mr Fodera. He had thought the returns were not transparent as far as netting-off was concerned, as the earlier returns had not disclosed it.
61. He had asked Mr Philip for written confirmation of his view on statutory insolvency in order to take it to Level 42, the executive floor at HIH. Mr Philip had said he was “not a fan” of the netting-off practice and the applicant gained a sense that he was unsure of its legal status but leaned towards the view that it was unlawful. The applicant thought that if HIH was going to follow a practice at odds with s 30(1)(d), it would need to be documented. He received the email of 16 October 2000 from Mr Philip but did not think it would be the only writing he would receive from him on the netting-off issue.
62. The applicant had thought that line item 84 infringed the provision and expressed his view to Mr Lo. He discussed the lack of documentary evidence and pointed out that he thought the letters of credit were not allowable, and that outside legal opinion had confirmed that view.
63. As the applicant had predicted, Mr Lo brushed off the comment about netting-off. He had told Mr Lo that in his view the true position would have to be shown: line item 84 would need to show the gross amount, with the admissible part extricated into another document. HIH did not consistently report the true position. He did not, however, tell Mr Lo that HIH should prepare its returns correctly. Mr Lo had said that Arthur Andersen (Andersen) had approved the returns and it was Mr Lo’s decision on whether to submit them. The applicant had said that the loans should be disclosed, but ultimately, it was up to Mr Lo to decide what should be included in the returns.
64. He had been intrigued to see that the earlier returns approved by Andersen and duly lodged had shown a single net figure at line item 84 and in the ADP attachment. The practice was not transparent and he thought it unusual that a large insurance company would show only a limited range of liabilities, not consistently reporting both related bodies corporate assets and liabilities.
65. He had formed no view on whether the administration of the Act supported the practice, but thought Mr Lo’s comments were not substantiated by past returns. Mr Lo had clearly meant that the practice was acceptable because HIH had been lodging net returns and there had been no complaints from APRA.
66. Mr Lo’s dismissive comment that the objection was “not commercial” was a standard HIH way of dismissing objections. The applicant himself had not looked at issues in light of whether they were uncommercial or not. It was not the kind of response he would have given, but he did not pursue his objection because the matter was Mr Lo’s responsibility. His own function was to see that the returns were accurate and he had not done sufficient analysis to know if they were correct.
67. Although he had not categorically told Mr Lo that HIH should not be netting-off, he did not sign the relevant part of the checklist. That was not done in order to protect himself but in order to ensure that the returns were compliant. He was not in a position to challenge an interpretation adopted by the company. He had no responsibilities in relation to the Act, that being Mr Lo’s area. He had been in that role himself only a couple of months.
68. The applicant rejected the proposition that he was well placed to object to the practice. His role was to deal with matters of detail, not with broader issues. But if HIH wished to adopt a practice contrary to s 30, the return should disclose that fact.
69. It had not occurred to him in 2000 that the company might be insolvent, although the trend line was downwards. The letters of credit issue did, however, threaten insolvency. But netting-off was never as large an issue because the dollar amount was smaller, and the law in relation to letters of credit was quite clear, more so than in relation to netting-off.
70. In his discussions with Mr Fodera on the netting-off question, he had not said that HIH should not be lodging returns on that basis. Asked whether he thought he should have, he replied that he preferred the approach of lodging the returns on a gross basis and adding a letter saying that netting-off constituted a better approach. In hindsight he should have told Mr Fodera that it should not be done, but at the time he lacked sufficient knowledge and information to do so. Nevertheless, he agreed that he should have pursued the matter further than he did. Even if he had, however, it would not have changed anything.
71. If Mr Philip had been more certain of the legal position, the applicant said, he would have pushed harder and taken active steps to have the practice changed. But Mr Philip was not definite about the matter and he felt himself on uncomfortable ground. For that reason he discussed the practice with the company’s outside lawyers and accountants. He needed an external opinion from someone who was not part of the audit team, because otherwise he could not bring the issue to a head within HIH. He was starting to challenge the established view, and both Mr Lo and Mr Fodera clearly understood that he did not approve of that form of reporting. But he needed backup and support, but was unable to obtain it in relation to netting-off.
72. He had passed Mr Philip’s email to Colleen Chapman asking her to provide formal responses to Mr Philip’s questions. He had considered her answers inadequate, and she had offered no comment in relation to some matters, including line item 84. He had remonstrated with her over the matter at the time, but at that stage other events overtook him as the group was at breaking-point and collapsed on 15 March 2001.
73. He had calculated the group’s future income tax benefits and had been aware of the virtual certainty test in accounting standard AASB 1020. His October memoranda on that subject contributed to the position HIH took but formed only part of a complex task. It was he who derived the figure of $228,000,000 that had been used in the 30 June 2000 accounts signed by the directors on 16 October showing that amount as an asset, but he had not known that the figure actually disclosed would be the one that he had calculated. His view was that virtual certainty was an audit issue, and he had not been aware that Andersen had queried the matter.
74. The applicant did not accept that he had been asked to prepare a memorandum to support the manner in which the tax losses would be recouped. His understanding was that he was asked simply to report on how HIH was proposing to do it and that he was merely offering ideas. His attention being drawn to the Royal Commission transcript, p11521, line 54, he explained that he had been asked to state what his involvement had been. He had done so, and said what he had done and was clear on the matter. He was not aware of what others in the group were doing, and did not think he was qualified to carry out a full virtual certainty analysis because it included a review of future budgets and forecasts. Only Mr Fodera would know who had done what. Consequently, his memorandum did not deal with the entire issue, although it had contributed some support to the HIH position on recoupment.
75. Nor did he know of anyone else in his department in HIH who could perform the entire virtual certainty analysis. His own view was that the approach was consistent with standard 1020, but the offsetting provision was not an area of focus for him because he had thought that most of the balances were in the same companies, and the remaining part was not material. It was a non-issue.
76. In re-examination the applicant explained that he had not thought that the literal meaning of s 30(1)(d) settled the matter because there was a long-standing practice over many years that had not been contradicted. He had lacked the experience and background that the people with whom he was talking had in relation to APRA matters.
77. His non-response to the 16 October enquiry stemmed from the fact that the group was at “breaking-point”. This was a quarter in which the Allianz joint venture had been announced, on 13 September. HIH had to meet certain preconditions before 31 December. He had to satisfy those conditions and liaise with the lawyers concerning documents needed for the start of the venture on 1 January. The negotiations were quite difficult and adversarial. They drained his team and his resources. At the same time there were other enquiries on a range of issues to be dealt with. All this came on top of the need to lodge the APRA returns and the tax returns, a heavy load for a small team. Morale at that time fell sharply because of the mood within the company and productivity followed suit. He could only have done what he in fact did.
Mr Philip’s evidence
78. At the hearing Mr Richard Philip adopted his affidavit dated 4 March 2008 (Exhibit R2 with two volumes of annexures) and gave oral evidence. He is currently a professional trainer in APRA’s learning and development division. He joined APRA on 1 July 1999, departing in August 2005 and rejoining the organisation in January 2006.
79. From 23 August 1999 until 15 March 2001 he was manager of team 2, branch 1 in the Diversified Institutions Division. The team was responsible for reviewing returns submitted by the HIH group and he reported to Mr Phillip Clift, who had overall responsibility for team 2.
80. Mr Philip's role as manager of team 2 included day-to-day management of the analyst responsible for the prudential supervision of the HIH group and analysis of statutory returns, including those submitted by HIH. In addition to the HIH group, the team was also responsible for supervising a total of 33 other licensed insurance companies.
81. A significant part of the statutory solvency scheme established by s 29 of the Act was the identification of certain assets that were to be excluded from the solvency calculation under s 30 of the Act. That section defined a series of assets not allowable for solvency purposes and gave scope for approving some classes of those assets. There was no comparable regime for liabilities, so that all liabilities were deducted from total assets to arrive at net assets. All assets covered by s 30 were then deducted from net assets. The initial solvency calculation was automatically performed by APRA’s general insurance computer system, known as Genisis, which performed the calculation from the figures supplied on the forms submitted to APRA. Approved assets were then added back by the analyst manually to give adjusted net tangible assets.
82. Mr Philip's first involvement with HIH returns was the analysis of the APRA quarterly returns for the end of June 1999, which were analysed by APRA in September 1999. The quarterly returns for June, September and December 1999 and the 1999 annual returns were analysed by Mr Martin Nosek. Mr Philip then reviewed his internal memoranda dealing with his analysis of the returns. His analysis of the December 1999 quarterly return for FAI indicated an issue about netting-off related body corporate liabilities.
83. On or about 25 May 2000 APRA received the March 2000 quarterly return for FAI. Analysis of it began on 7 August 2000 and Ms Melanie Wong prepared an internal report, which Mr Philip received on 8 September 2000. In his view, the return was compromised by information obtained during a credit risk visit to HIH in July 2000 (after the return was received but before Mr Philip received the analysis). He did not himself analyse the return.
84. Although the March 2000 FAI return indicated netting-off of related body corporate liabilities to an amount of $210,000,000, the analyst’s report did not identify that issue. He was therefore unaware at that stage of netting-off practices disclosed in the March 2000 FAI quarterly return. The ADP attachment to that return indicated significant receivables and payables indicated by positive and negative numbers.
85. During August 2000 he had a telephone conversation with the applicant during which the applicant told him that all annual adjustments would be reflected in the June quarterly returns and that the returns would be corrected for the disclosure issues identified in the credit risk visit in July 2000. The HIH group quarterly returns for June 2000 were received by APRA on 5 October 2000.
86. On analysing them, Mr Philip realised that the returns netted off related body corporate liabilities and receivables. The ADP attachment listed all figures, but the net figure was carried over to the balance sheet, contrarily to proper accounting treatment. The September 2000 quarterly returns also included an ADP attachment but carried over the net figure to the form.
87. After reviewing the 2000 quarterly returns, Mr Philip sent the applicant an email dated 16 October 2000 attaching a spreadsheet and document (RP5 to exhibit R2, Vol 2). In it he asked the applicant whether there was any reason why, in FAI and HIH C&G, inter-company loans were disclosed on a net basis.
88. Shortly before emailing the applicant on 16 October 2000, Mr Philip telephoned him to discuss his concerns about netting-off. His statement recounts that conversation as follows:
… To the best of my recollection, I asked Mr Abela, ‘why are the HIH Group companies inter-company loans disclosed on a net basis?’. Mr Abela’s initial response was that ‘this is the way the company [I assumed HIH Group] has always done it’. I responded that ‘well, it’s wrong and should not be done that way’. I do not recall whether, during the course of this telephone discussion, Mr Abela also asked that I provide him with something in writing setting out my concerns as to the netting off practices disclosed in the June 2000 quarterly returns. However, my email of 16 October 2000 set out my concerns as to the netting off practices in the HIH quarterly returns. I also note that it was not my standard practice to ignore any request made to me to respond in writing, although if a request was intended to be used as evidence of APRA's policy then I would generally request that I be briefed with full particulars of the specific circumstances before I committed APRA’s views to writing.
…
89. The applicant later told him that because of his work on the Allianz deal, his response to the questions raised in the 16 October 2000 email would be delayed. He again emailed the applicant on 18 December 2000 seeking a response to the questions raised in the 16 October email, adding some further questions. He did not recall receiving any response from the applicant.
90. APRA received HIH’s September 2000 quarterly returns on 9 or 10 January 2001. Mr Philip analysed them and prepared a series of spreadsheets to show the effect of the netting-off of inter-company liabilities as compared with the June 2000 quarterly returns (RP9 to exhibit R2, Vol 2). The effect of his calculations in relation to HIH C&G was to show that whereas the September 2000 return showed adjusted net tangible assets of $291,413,000, the adjusted figure, taking account of the proper recording on inter-company liabilities, reduced the adjusted net tangible assets to $65,255,000, which meant a solvency deficiency of $51,698,000. The return as lodged had shown a solvency surplus of $174,470,000. Similar results emerged in relation to FAI and CIC. He therefore sent an email from home on 20 January 2001 to Mr Clift, setting out his conclusions. At that time his concern was more with the statutory solvency requirements and he did not consider that there were implications for commercial solvency. He was not aware that the netting-off practice was further raised with HIH after January 2001 as there were many other issues surrounding the group’s operations at that time.
91. Commenting on para 61 of Exhibit A1, Mr Philip said he did not recall any telephone conversation with the applicant before 26 September 2000 about netting-off. He reiterated that he had categorically stated that netting-off was prohibited by s 30, and repeated that he had said “it’s wrong and should not be done that way”. He denied acknowledging that other insurance entities adopted the practice and did not recall telling the applicant that there were no published APRA or ISC statements or guidelines and that he could not refer the applicant to any legal opinions on the issue.
92. In cross-examination Mr Philip agreed that it was important to document communications with regulated entities, but added that it was also necessary to develop a working relationship. Even an important telephone conversation would not always be noted if there were clear guidelines in existence to which the APRA officer could refer. If giving a decision or an interpretation on a point of doubt, the officer would record the matter in writing, and it was his practice to send emails to the HIH group in relation to complex matters or points of interpretation. In many cases, if they involved policy matters, they would be signed, and perhaps drafted, by Mr Thorburn, his supervisor.
93. Mr Philip agreed that the notes of meeting dated 20 September 2000 (Exhibit A19, tab 27) were written by him and related to letters of credit. Those present included Mr Fodera, Mr Lo and others, but not the applicant. He had attended HIH meetings throughout 2000 at which the applicant had not been present, but thought there had been a meeting later in 2000 that the applicant had attended. He could not recall whether he had made a note of his meetings with the applicant, or indeed whether he had ever made a note of such a meeting. The matters discussed at meetings could flow through into other documents, without there being notes of the meeting itself.
94. Asked whether this pattern made it difficult to know eight years later what had been said at such meetings, he agreed.
95. Despite Mr Nosek’s comments about the netting-off practice, he had stated (p809) that there were no issues with the company. He thought that was a reasonable statement for him to make because if there were any errors in the return an analyst would pursue them with the corporation. He could not recall, however, if he had asked an analyst to do so. He agreed that he should have taken that step but thought he might have done it, but could not recall if he had given Mr Nosek that task before Mr Nosek left. He could not recall when Mr Nosek had departed.
96. He knew about the non-compliance with s 30 but did not think it was a major issue because the companies appeared solvent. The notes on HIH Insurance (Exhibit A19, tab 19) were probably produced by Mr Nosek. He thought they were in the nature of notes to himself to sum up matters of which he had to remain aware. He did not know if they had been prepared for the purpose of the handover to Mr Nosek’s successor, Ms Melanie Wong.
97. He had not noticed the netting-off issue in relation to the March 2000 returns because he had relied on an analyst, but agreed that the returns (RP2 to exhibit R2, vol1, p216) made it obvious that netting-off was taking place because negative figures had been used.
98. The report of 28 August 2000 (Exhibit A19, tab 20), detailing the findings from the credit risk visit, does not list the applicant as an attendee at any of the meetings conducted during the visit. Mr Philip could not recall his being there. The evaluation of credit risks focussed on the asset side, including investments and loans. Inter-company loans were not an area of focus for the visit and were not examined in the course of it.
99. Although he would normally request copies of recent quarterly or annual returns for the purposes of such a visit, he did not know if he had them when he arrived at HIH on that occasion. The team had been driving the agenda and the conduct of the visit, and he did not recall reading the returns for himself. While it was possible that he did, he did not think he had done so. The full returns and the ADP attachments, however, would have shown the existence of netting-off.
100. The report of the credit risk visit showed that FAI was of interest to APRA because it was holding higher risk assets.
101. Mr Philip could not recall whether or not he had read the FAI quarterly return in detail before the credit risk visit on 24 to 27 July 2000, but thought it more likely that he had. Asked whether he thought it must have been obvious to the investigating team that the investments included inter-corporate loans, he replied that it could be an accounting question. As a member of Philip Clift’s team, he could recall meetings with HIH, but they had dealt with equity investments, not netting-off. He could not say whether netting-off had arisen for discussion in those meetings and there were no notes of them. At that time APRA might not have realised the significance of the issue, the main focus being investments, while the existence of positive and negative figures in the ADP attachment was a separate question. APRA might not have been looking at overall solvency as opposed to the recoverability of particular assets. He denied that he was advancing that explanation in order to avoid admitting that he had noticed that netting-off was taking place. He also rejected the suggestion that he was following a consistent pattern of attempting to move the fact of his awareness of netting-off to a later time.
102. In response to a question from Member Frost, Mr Philip explained that the Genisis software program performs solvency calculations by taking a large number of items from the return forms (but not the attachments), automatically deducting other items and producing a total for net assets. Some line items are taken into account automatically, but he was not sure whether item 84 was one of them. In the result the system produced a figure for adjusted net assets, with scope for adding back s 30 assets that had been approved. Genisis compares the figures in the current report with those in previous reports.
103. Mr Stevenson took Mr Philip through a large number of relevant documents, including the APRA corrections to the FAI Insurance September 2000 quarterly return (RP9 to Exhibit R2, vol2, p820). Mr Philip could not recall whether he had performed a similar exercise in relation to all the companies in the group for the whole of the relevant period, but remembered doing this particular one in March, because its format was the one in use at the time. He could not think of any reason why he had not previously mentioned that document. He thought he might have given it to Mr Thorburn in response to a request.
104. He subsequently went to see Mr Thorburn in company with Mr Clift in order to discuss it and the netting-off issue. He could not recall whether he had discussed netting-off with Mr Thorburn before then. No note had been kept of the discussions, but since then APRA had improved its documentation. Mr Philip had no recollection of Mr Thorburn asking him to investigate the three matters related to netting-off in para 223 of Mr Thorburn’s statement (Exhibit A19, tab 42). In particular, he did not think Mr Thorburn had asked him to look into the possibility that there was any historical justification or authority for the practice, as he had already been doing that.
105. He had not spoken to the applicant about netting-off before the June 2000 returns arrived. Nor had he observed it in the March 2000 returns in the course of the July 2000 credit visit. It did not come to his attention until he saw the Genisis analysis. He had noticed the negative numbers on the attachments to the March returns, but not in the context of overall solvency.
106. Mr Stevenson asked Mr Philip whether, when he spoke to the applicant about netting-off, he was still not certain about the position under s 30. He replied that he thought that there should not be netting-off for accounting reasons, and that had been discussed within APRA. But he was not certain about the position under s 30. Although he had been aware that the HIH group operated through divisions rather than corporate entities, he had not formed the view that C & G was a “banker” for the group, paying the expenses of the other corporations as loans.
107. He did think, however, that if two transactions occurred between the same two companies, it was permissible to report a single net figure. Asked if he thought that could be done consistently with s 30, he replied that he would have to check, that he thought that it would be excluded but that in an accounting sense it could be shown on a net basis. But he was not certain, and he had been uncertain at the relevant time. But if the pattern of transactions were more complex and involved more parties, netting-off would not be permissible.
108. He thought he had probably noticed the use of positive and negative figures in the December 1999 returns and in the March 2000 returns. The June 2000 returns had disclosed the practice in the attachments. But before sending his email of 16 October 2000 to the applicant, he had telephoned him. He had taken the steps referred to in para 31 of this statement to the Royal Commission (RP1 to Exhibit R2, Vol 1, pp1-6) but appeared to vacillate in his replies on whether he had spoken to the applicant before or after he took those steps. After some further questions it became apparent that he meant it was likely that he spoke to the applicant after the conversations within APRA referred to in para 31, but was not certain about it. He confirmed that he was not sure at that time whether the netting-off practice was wrong, apart from his belief, based on accounting knowledge, that it was not permissible to net transactions between several different parties.
109. It was then put to him that the ADP attachments (Exhibit RP3 to Exhibit R2, vol1, pp248ff) showed that transactions had been netted between different parties because there were different names. He was then asked how he knew that, for example, the transactions reported on p281 were between different parties. He replied that he did not know, but agreed that it implied the involvement of different entities. But when he spoke to the applicant he had not been aware that other insurance companies were also following the practice, and had no belief to that effect.
110. He was then asked whether, when he spoke to the applicant, he had not wanted to commit APRA to a position about s 30. He said it did not accord with his view of accounting standards and was thus not proper practice and was wrong. He had, however, been somewhat more circumspect in his emails. That, however, was not because he was unsure of APRA’s position but because, operating on a consultative basis with the regulated entity, he accorded the opportunity to show the existence of earlier approvals.
111. His email of 16 October 2000 (RP5 to exhibit R2, Vol 2, p810) had not referred to an earlier conversation and did not say that the practice was wrong, but that was because he was doing an analysis and asking questions about it. He was putting to the companies matters that needed to be resolved. He was comfortable with his interpretation of the law but simply wanted to put the matter to the regulated entity. He agreed, however, that before committing APRA to a particular position he would obtain the signature of a more senior person. He could not recall whether the applicant in conversation with him had asked him for such a letter, but could not deny that he had. He regarded the applicant as essentially careful and someone who took Mr Philip's concerns about netting-off seriously. He had been making efforts to improve disclosure.
112. Mr Philip agreed that he had used a polite tone in his email of 10 November 2000 (RP6 to exhibit R2, Vol 2, p814) because he understood that the applicant was very busy at that time and that their discussions about the June 2000 returns were being overtaken by the Allianz deal.
113. He had prepared the analysis of the FAI September 2000 returns (RP9 to exhibit R2, Vol 2, p820) as soon as he had received them, but it was only one of many urgent high priority tasks at that time. His email from home dated 20 January 2001 (RP10 to exhibit R2, Vol 2, p821) showed that he was making special efforts to complete the tasks relating to the September returns, but that was only because he wanted to understand the figures. It was not because he wanted to prepare for a discussion with Mr Thorburn on 22 January. He agreed that the attachments to the September 2000 returns contained disclosures about netting-off and said that the applicant was trying to improve HIH reporting.
114. He agreed that it might be correct to say no-one at APRA had ever subsequently raised the issue of netting-off with any officer of HIH group. There had been meetings with senior HIH managers in the January to March 2001 period, but netting-off had not been raised again.
115. Mr Philip agreed that Mr Thorburn’s letter of 15 February 2001 to HIH managing director Mr Wein (Exhibit A22) did not raise the issue of netting-off. He had seen the applicant’s letter to Ms Abbatantuono of 1 March 2001 at a meeting at the time but was not aware that it said nothing about netting-off (Exhibit A23).
Observations on the oral evidence
116. An important factual point relating to the netting-off issue concerned a telephone conversation in September or early October 2000 when Mr Philip telephoned the applicant in relation to that practice.
117. Mr Philip stated that the conversation was to the effect of paragraph 89 above. The applicant countered that it was to the effect of paragraph 32 above, adding that Mr Philip also undertook to send him a written ruling or opinion about netting-off.
118. Mr Philip kept no note of the conversation. He did not deny that the applicant had requested such a letter (transcript p209), but in his statement he indicated that he thought it unlikely (Exhibit R2, para 24). His oral evidence was less confident on that point. It is clear, however, that he did send the applicant a letter in relation to the letters of credit issue, which was considered more important at the time (Exhibit A19, tab 28).
119. Nor did Mr Philip deny that the applicant had asked if there were any guidelines, decisions or legal opinions in existence concerning netting-off and acknowledged that there were in fact none (transcript pp128, 223). But he was quite definite that he had not at the time known or believed that other companies besides the HIH group were netting-off their inter-company loans.
120. At the same time, he thought the practice could be permissible as between the same two companies in the group (transcript p203). The expert evidence of Mr RG Humphreys shared that view (Exhibit R4, para 7.35), although s 30(1)(d) of the Act draws no distinction of that nature between the two classes of case. Mr Philip did not know what proportion of the HIH group’s inter-company debts was accounted for by transactions netted off as between two companies within the group.
121. He thought that netting-off transactions as between more than two companies was not permitted, on the basis of his understanding of accounting standards (transcript p206), but stopped short of saying that he thought it was prohibited by s 30 (transcript p203). Nor would he categorically repeat in cross-examination the claim in his written statement that he had said to the applicant “well, it’s wrong and should not be done that way” (Exhibit R2, para 24). That was because he had thought that there could have been in existence approvals granted under s 30(1)(d)(i) (transcript pp206, 211). But he did not ask the applicant about any such approvals (transcript p211).
122. Nor does his email to the applicant dated 16 October 2000 (RP5 to exhibit R2 pp810, 812) state that the practice is wrong or refer to the telephone conversation. That could partly be explained by the fact that Mr Philip was normally careful about committing APRA to a view without the approval of a more senior officer (transcript p208). Even in cross-examination, Mr Philip was still somewhat unsure about how far netting-off is prohibited by s 30 (transcript pp190, 193-194).
123. Mr Philip's uncertainty in that regard at the time of the conversation may have done no more than reflect an institutional position. APRA’s inaction on the Martin Nosek memorandum of 27 March 2000 drawing to Mr Philip's attention the putatively incorrect netting of related body loans provides support for that view (Exhibit A19, tab 19; RP4 to exhibit R2, Vol 2, pp807-808).
124. In other respects, Mr Philip's recollection of material events was not flawless. He stated that he had not attended the 22 January 2001 meeting with Messrs Randolph Wein, Geoffrey Cohen and Dominic Fodera of HIH, but it seems clear that he was present (Exhibit A19, tab 42, paras 306-308).
125. Mr Philip thus seemed rather uncertain about the operation of s 30, he had difficulty in giving direct answers about the events in question and rested his disapproval of netting-off on accounting standards, not s 30. He remained of the view that netting-off is permissible as between the same two companies. Mr Stevenson pointed out that the witness’s evidence was consistent with that which he gave before the Royal Commission, at a time when netting-off was not seen as a controversial issue. That is true, but our reservations remain and are not dissipated by APRA’s failure to call other witnesses who might have explained APRA’s inaction on netting-off at the relevant time.
126. The applicant’s evidence was clearer and more direct. He resisted the temptation to make easy claims that could not be contradicted, such as about having the interests of HIH policyholders at the forefront of his mind. He made a number of candid admissions against interest, such as volunteering his view that he lacked the risk management expertise needed for a senior manager in an insurance company (transcript p97). The respondent submitted that his raising of the netting-off issue with Fred Lo without having received the letter from Mr Philip that he had requested undermined his claim that he had asked for such a letter. We disagree. His action could simply mean that he hoped to receive a letter that would strengthen his position, but considered the issue important enough to raise with Lo in any event. To that extent his conduct is to his credit.
127. It is unsurprising that the applicant’s recollection of the conversation is clearer than Mr Philip's. Simple information asymmetry could be a factor; Mr Philip was responsible for 33 other regulated entities, whereas the applicant was dealing with only one regulator. As the representative for these purposes of a regulated entity, the applicant had more at stake than Mr Philip did and therefore more reason to recall what had been said. Again, Mr Philip was more in a position to delegate responsibility than the applicant was, and did in fact do so. The issue of netting-off in the context of general solvency did not significantly preoccupy him, or APRA, at the time.
128. In relation to the issue of FITB, the respondent elected not to pursue a number of contentions. Its final position, Mr Stevenson said, was set out in paragraph 31 of the respondent’s written submissions:
…
Mr Abela was seeking to provide Andersen with a justification that the virtual certainty test had been satisfied when, on his own evidence, he was not qualified to do so.
…
129. The basis for that proposition was set out in paragraph 82 of the respondent’s statement of facts and contentions, which argued that examination of the language of the applicant’s 17 October 2000 memoranda (Exhibit R4, vol1, tabs H, I and J), the context in which they were prepared, and their timing, revealed that they were not merely “ideas” as the applicant had claimed, but the justification that HIH was prepared to give Andersen for including FITB as an asset of $228,000,000 in the 30 June 2000 accounts.
130. A large part of the foundation for that proposition was that the applicant’s evidence before the tribunal contradicted his testimony before the Royal Commission. This was the relevant passage (transcript pp11521-11522):
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Line 43
Question:Another aspect of that process was ascertaining the level of certainty of the recovery of those benefits in the future?
Answer:No, that's not part – in my experience of the tax provision review process.
Question:It is not part of the process at all?
Answer:No, in my experience.
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Line 52
Question:It is a separate issue in which you involved yourself in the accounts for 1999 and 2000”?
Answer:Well, I think I acknowledged that there was no such analysis at June ’99 and what analysis there was in June 2000 was identified in those memoranda.
Question:You say that’s the limit of your involvement in that issue?
Answer:Absolutely.
…
131. The respondent’s position was that by those answers the applicant was admitting that he had himself carried out the virtual certainty analysis and was not simply suggesting ideas as to how Andersen should proceed in relation to calculating FITB. By claiming that he was merely suggesting ideas, the applicant had contradicted his evidence before the Royal Commission.
132. If one reads the Royal Commission cross-examination transcript in context, however, it is not so clear. The applicant plainly replied in the quoted passage that ascertaining the level of certainty of recovery was not part of the tax provision review process, which was his role. He affirmed that position a little later (transcript p11522).
133. Further, the question at line 52 appears to be actually two questions in one, namely, (1) is ascertaining the level of certainty a separate issue?, and (2) did the applicant involve himself with that issue in the 1999 and 2000 accounts? The applicant’s reply was consequently a little confused, but can be read as meaning that while there was some reference to the level of certainty in the memoranda, calculating the certainty level was nevertheless not part of his function.
134. That is quite explicable. In his cross-examination before the tribunal, the applicant said that no-one in his department was qualified to carry out that analysis, and the only person within HIH who could do it was Dominic Fodera (transcript p125). The applicant’s unchallenged evidence was that Fodera had himself composed a number of paragraphs of the memoranda (transcript p126).
135. Further, Fodera signed the three memoranda, not merely by initialling or signing them as showing that he had sighted them, but as a principal signatory. It is therefore artificial to treat the 17 October 2000 memoranda as wholly the applicant’s work. To the extent that they contain any comments on the certainty of recovery, they are more likely to have been authored by Fodera than by the applicant.
136. In addition, the evidence of Mr JR Buttle of Arthur Andersen before the Royal Commission was that while the applicant’s memoranda had commented on the question whether there would be sufficient taxable income, they had done so “in a rather narrow fashion” and the applicant was not really “taking on the responsibility of him saying, ‘well, the business is going well. We’re likely to make profits’. He was more about techniques to refresh tax losses or specifically recoup them, where the situation was rather complex” (transcript p17137). Other work had been done by others at HIH (transcript p17138) – although his reply also was not free from ambiguity.
137. We are satisfied that the applicant’s evidence before the tribunal, material parts of which were not challenged, is reliable and that it did not conflict with his evidence before the Royal Commission. It therefore follows that his role in relation to FITB was confined to suggesting possible approaches available consistently with tax law and did not involve taking any responsibility for evaluating the certainty of recovery.
Respondent’s submissions
138. In its written submissions the respondent referred to the meaning of “fit” in relation to an office as defined in Hughes & Vale Pty Ltd v New South Wales (1955) 93 CLR 127 at 156, and also to Re Burroughs and Australian Prudential Regulation Authority [2007] AATA 1960 in which Deputy President Wright had this to say:
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41.The Prudential Standard GPS 520 (Exhibit R4) is largely concerned with policy issues to be implemented by insurers intending to appoint senior staff but it is plain enough from para 18 that to be fit and proper for such responsibility a person "must possess the competence, character, diligence, honesty, integrity and judgement to perform properly the duties of the responsible person position". The phrase "fit and proper" has been discussed in several decided cases but despite a common thread there is no definitive statement governing the interpretation of that phrase.
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139. Wright DP also outlined the history of “fit and proper standard” in Prudential Standard GPS 520 (at paras 47 to 50).
140. In relation to netting-off, the applicant had known and understood that the practice contravenes s 30(1)(d) and was aware that Mr Philip was, at the very least, “not a fan” of netting-off and agreed that Mr Philip's view was congruent with the Act. He was sufficiently concerned about Mr Philip's observations that he approached Fred Lo. Mr Philip’s claim that he told the applicant that the practice was “wrong and should not be done that way” was given in his statement dated 31 October 2002 at a time when he had no reason to believe it was controversial.
141. The applicant had been aware that netting-off was occurring in circumstances where HIH solvency was taking a disturbingly downward trend and was concerned that one company might actually be insolvent. After examining the returns back to June 1999, he had realised that netting-off had not been approved by APRA and that those returns did not reveal any netting-off. Consequently, APRA's silence in the face of those returns said nothing about its attitude to the practice. He thought Lo’s assurance that APRA’s administration of the Act had been consistent with Lo’s view that the practice did not infringe s 30 was unsubstantiated and that Lo was not “on the right track” in relation to the matter.
142. Nevertheless, he did not confront either Fodera or Lo to argue that the practice should stop and agreed in retrospect that he should have “pushed harder” on the matter. By refusing to sign the checklists, he was merely acting to protect his own position. His proposed solution, lodging returns with the wrong figure at line 84 and adding an explanatory attachment would still have led to statutory solvency being miscalculated.
143. His argument that he lacked the years of experience and the knowledge possessed by others about how the provisions were administered was contradicted by the fact that he knew the effect of s 30 and that there was no evidence that APRA had condoned the practice. He failed to consider the interests of policyholders and indeed had told the Royal Commission that he was not sure if he had any interest in such policy issues at that time. He said at the hearing that he was more concerned about getting the returns correct and had concerned himself only with matters of detail.
144. Although he claimed that he was waiting for a letter from Mr Philip before raising the matter with management, he nevertheless did discuss it with Mr Lo without receiving such a letter. In any event Mr Philip probably did not undertake to supply a letter of the kind described by the applicant.
145. Only when pressed in cross-examination had the applicant agreed that he should have confronted Fodera about the practice and generally pushed harder, and had never expressed any concern about the interests of policyholders or the public interest generally.
146. In relation to future income tax benefits, the applicant was reluctant to accept that he was involved in giving an opinion on compliance with the virtual certainty test or that he understood that Arthur Andersen was asking him for justification for the booking of the FITB asset. Nor was he willing to accept that Mr Buttle was asking for a memorandum supporting the view that HIH was able to recoup its Australian, UK and US tax losses.
147. The respondent submitted that the applicant knew no-one in his department qualified to analyse the virtual certainty question and knew that no other justificatory work was being prepared within his department. He did not know of any other justification being offered and said that if anyone else was providing it, it would be Fodera.
148. A fair reading of the three 17 October 2000 memoranda showed that the applicant was providing much more than “ideas” or mere “notes”. He was seeking to provide Arthur Andersen with a justification that the virtual certainty test had been satisfied when, on his own evidence, he was not qualified to do so. That conduct was symptomatic of his lack of fitness to be a senior manager.
149. In oral argument Mr Stevenson developed the points made in the written submissions and acknowledged that the applicant was not acting as a senior manager of an insurance entity in 2000 and had made it clear he had no intention of becoming one.
150. The case was a subtle one because it involved no criminal behaviour on the applicant’s part. He had not created the netting policy, but the big picture is that when major companies adopt improper practices, they depend on others to implement them. Middle managers such as the applicant should protest or refuse to co-operate, and if they did so, such policies might not be put into effect. The applicant lacked vision as to the significance of his role and therefore lacked the qualities of competence, character and judgment required by GPS 520.
151. The applicant is an intelligent and well-thought of, multi-skilled professional, as was apparent from his PwC appraisal (Exhibit A20) and the respondent did not challenge his probity or integrity. It had simply not occurred to him that the interests of the public or of policyholders would be affected by his actions. The respondent accepted, however, that the Royal Commission made no finding that the applicant's conduct had actually affected policyholder interests.
152. He has never claimed that when he raised his objections he was ordered to do as he was told, thereby raising a defence of the kind advanced (unsuccessfully) at the Nuremberg war crimes trials. He had claimed that as a father of a young dependent family, it was not practicable for him to resign from HIH, but until pressed he did not say that he would act differently in material respects.
153. While Mr Philip had kept no file notes about his telephone conversation with the applicant, there was no reason for Mr Philip to give incorrect evidence to the Royal Commission. The applicant knew that netting-off was wrong and that Lo’s explanation was also wrong. Nevertheless he failed to confront any senior manager about it but now conceded that he should have pressed the matter more vigorously. He went no further than refusing to sign the checklist, and that was revealing about his state of mind.
154. The respondent did not deny that the applicant had improved HIH’s reporting as regards netting-off between the March and June returns, but he had nevertheless entered a wrong figure for line item 84, simply attaching a schedule indicating the true figure.
155. The heart of the criticism was that he failed to consider for one moment that the interests of policyholders were vitally affected by the returns that used netting-off. It was not necessary for the tribunal to resolve the question whether the applicant had asked Mr Philip for a letter, which in any event Mr Philip did not deny, but RP6 (to exhibit R2, Vol 2, p814)showed that it was unlikely that he had asked. His 29 November 2000 letter to Mr Philip (RP7 to exhibit R2, Vol 2, p815) would be rather odd if he were still awaiting a written statement. But in any event he had raised the matter at the executive level without receiving such a letter.
156. The issue was the applicant's fitness as at the date of the tribunal’s decision of the present application.
157. His current attitudes as revealed in his evidence showed insufficient appreciation of the public interest issues involved. He knew that Fodera had asked him to contravene the Act and that Lo had misled him about APRA’s alleged condonation of the practice. Although the respondent did not suggest that he should have resigned, he acknowledged that he should have spoken up. The steps he took were all procedural, and aimed at protecting his own position. His only concern was with his own reputation. He states that he does not wish to be a senior insurance manager but claims to be a fit and proper person to hold such an office, although he acknowledges that he lacks the professional experience and qualifications to hold such an office. He therefore lacked the necessary capacity and capability.
158. The respondent acknowledged that his involvement in the FITB issue could not in itself suffice to ground a finding that he was not fit and proper, but he was evasive about significant matters and sought to deny his involvement in the virtual certainty analysis. He had contradicted his own evidence to the Royal Commission on this issue.
159. While the imposition of disciplinary penalties was significantly protective and did not involve a punitive element, the Full Court of the Federal Court had held in Kamha v Australian Prudential Regulation Authority [2005] FCAFC 248 at paras 73-74 that general deterrence was an appropriate consideration in such proceedings.
CONSIDERATION
160. We now consider the two specific reasons why, according to APRA, the applicant is not a fit and proper person to act in a senior position in a general insurance business.
161. The first is based on his “conduct in relation to HIH’s practice of ‘netting off’ of inter-company balances”. The second is based on his “conduct in relation to HIH’s accounting treatment of its future income taxation benefits (‘FITB’)”. APRA asserts that his conduct in relation to each matter “demonstrates that he failed to show the judgment, probity and competence to adequately perform the functions of a director or senior manager of a general insurer within the meaning of sub-section 24(1)(a) of the Act”.
Netting-off
162. The practice that is described as “netting off” manifests itself in two quite distinct ways. The first is where company A has made loans to a related company, B, and B has similarly made loans to A. If the balance (x) payable to A under the first arrangement exceeds the balance (y) payable to B under the second arrangement, the balances may be “netted off” by the disclosure of only one net amount by each of A and B. A would disclose a net asset, receivable from B, of an amount equal to x-y, while B would disclose a net liability, payable to A, of the same amount. We refer to this particular netting-off practice, where amounts are payable by each of two companies to the other, as the “first netting-off practice”.
163. The second practice is somewhat more complicated. Here, company A has made loans to various related companies, B, C and D. In turn, other related companies, E and F, have made loans to A. Assume the amounts payable to A by B, C and D are, respectively, b, c and d. (Those amounts themselves could be net amounts arrived at by applying the first netting-off practice.) Assume also that the amounts payable by A to E and F are, respectively, e and f. (Again, those amounts could be arrived at by applying the first netting-off practice.) What we will describe as the "second netting-off practice" would result in A’s disclosure of its total related company loan amount as an amount equal to b+c+d-e-f.
164. In relation to the first netting-off practice, there is no specific evidence to the effect that the HIH companies engaged in that practice as one of the elements of calculating the disclosure it would make at line item 84 of the quarterly APRA returns. But even if they did engage in that practice, the evidence of the only APRA witness, Mr Philip, was to the effect that although he was not certain, he thought that this practice in itself was permissible (paragraph 107 above).
165. So when it is said that the HIH companies had been engaging in the practice of "netting off" for several years, and some criticism is levelled at the applicant for his conduct in relation to it, that must be a reference to the second netting-off practice. It is therefore appropriate to examine what the HIH companies were doing in relation to this second netting-off practice for the quarters ended March 2000, June 2000 and September 2000. For each of those quarters, the HIH group lodged three APRA returns. The reporting entities were HIH Casualty & General Insurance Limited (C&G), CIC Insurance Limited (CIC) and FAI General Insurance Company Limited (FAI).
166. C&G reported in the following way:
(a)For March 2000, it disclosed an amount of $252.4 million at line item 84 of its return under the heading “Inside Australia” and an amount of $19.7 million under the heading "Outside Australia". (It mistakenly entered both amounts in the "Other" column, rather than the "Related trusts and bodies corporate" column – but it seems to have been accepted that this was a clerical error.) It also included a separate attachment to the return which explained that the first amount was made up of two elements – a loan to FAI in the amount of $159.2 million, and "Other Intercompany Loans" amounting to $93.2 million. There was a further entry showing simply “Outside Australia – Intercompany Loans” of $19.7 million;
(b)For June 2000, it disclosed two amounts at line item 84 of its return – one for $153.0 million under the heading "Inside Australia", and one for $14.0 million under the heading "Outside Australia". It also included a separate attachment, in somewhat more detail than that for March 2000, showing a loan to FAI of $171.7 million, a loan to “HIH W Overseas” of $38 million, a smaller loan of $313,000 to another related entity, and four separate amounts, each of them in parentheses to represent negative amounts and (with one exception) labelled as either "Interco Loan” or "Loans Unsecured – Current”. The exception was not labelled at all. Those four separate amounts add up to $43.0 million. At the bottom of the attachment is a “Total” of $167.0 million, which is equal to the sum of the two entries at line item 84 of the return;
(c)For September 2000, it once again made the clerical error of entering figures in the "Other" column rather than the "Related trusts and bodies corporate" column. This time the amounts disclosed were $63.2 million for "Inside Australia" and $15.7 million for "Outside Australia". There were two attachments, both of them in a similar format to the one for June 2000. The attachment for “Inside Australia” had only four entries. One was for $187.8 million, representing "Interco Loan – FAI Insurances”, and the other three, all in parentheses, were labelled "Loans Unsecured – Current” for $118.5 million, "Interco Loan – Other” for $5.2 million, and "Accrued Interest for intercompany loans" for $840,000. At the bottom of the attachment is a “Total” of $63.2 million, which agrees with the amount disclosed in the return. The second attachment also had four entries, two positive and two in parentheses. The positive entries were “Interco Loan – HIH W Overseas” for $38 million and “Interco Loan – Labuan” for $313,000. The entries in parentheses were “Loans Unsecured – Current” for $22.5 million and “Interco Loan – HIH Ins Holdings (NZ)” for $93,000. The attachment shows a “Total” of $15.7 million, which, again, agrees with the amount disclosed in the return.
167. FAI reported in a broadly similar way, as follows:
(a)For March 2000, it disclosed an amount of $291.3 million at line item 84. There was an attachment which had 38 named entities and an entry labelled “Other”; opposite each of those was a figure, either positive or negative, evidently representing an amount owed either to or by FAI. Nineteen of the amounts were positive and twenty were negative. At the bottom of the attachment was an amount representing the sum of all the positive and negative amounts, although it was not labelled as such. That amount was $291.3 million, the same as the figure disclosed in the return;
(b)For June 2000, the relevant amount disclosed at line item 84 was $337.1 million. There was a very detailed attachment. The first section of the attachment was headed “Section 30 Approvals”, and contained eight positive amounts and one in parentheses. Next to each amount was a named entity. The total of the positive and negative amounts was shown as $280.3 million. There followed a section headed “Inadmissables” (sic). This section contained 37 entries – 36 named entities and a line labelled “Other” – with amounts opposite each of them. The amounts were either positive or shown in parentheses. The total of all the amounts was shown as $56.8 million. An overall total of both sections of the attachment was shown as $337.1 million – the amount disclosed in the return;
(c)For September 2000, the relevant amount at line item 84 was $432.5 million. An attachment in a similar form to the one for June 2000 showed a “Section 30 Approvals” total of $285.5 million, made up of eight positive entries and one in parentheses. The “Inadmissables” (sic) total of $147.0 million, the sum of 16 positive amounts and 19 in parentheses, took the total for both sections of the attachment to $432.5 million – the amount disclosed in the return.
168. CIC reported as follows:
(a)For March 2000, the amount disclosed at line item 84 of the return was $30.1 million. There were several attachments, but none relating to item 84;
(b)For June 2000, line item 84 was left blank, indicating there were no loans to related bodies;
(c)For September 2000, the item 84 amount was $3.9 million. An attachment showed a loan to C&G of $33.4 million and a liability to FAI of $28.2 million. There was an entry called “Interco Loan – Other”, shown in parentheses, in the amount of $1.3 million. The “Total” was shown as $3.9 million – the amount disclosed in the return.
169. It will be seen that, with some few exceptions, the returns when read together with the attachments constitute a full disclosure to APRA that the companies were engaging in the second netting-off practice in reporting a net amount at line item 84 of the return. But with the use of a calculator, the gross amount could be discovered by a diligent regulator – in each case, in less than a minute.
170. The exceptions are the C&G return for March 2000 (where the attachment contained no negative amounts – but perhaps there were none), and the CIC returns for March 2000 and June 2000. This last-mentioned return, however, disclosed a “nil” amount at item 84 and so can be disregarded.
171. For practical purposes, then, each of the HIH reporting entities was making a full disclosure from at least the June 2000 quarterly return onwards. It should be emphasised that this was only the second return cycle in which the applicant was involved by way of pre-lodgement review, and the HIH entities had been reporting with less than full disclosure “for a very long time” (Lo, para 32 supra).
172. Viewed against that background, APRA’s criticism of the applicant on this point seems weak indeed. What the applicant was able to achieve was full disclosure of the related party loan position – and the only shortcoming was that the gross amounts were not actually inserted in the particular fields on the return. To persist with a complaint against the applicant on that basis is to prefer form over substance. The complaint seems to be concerned more with the fact that APRA could not rely on the computerised Genisis system to identify any possible statutory insolvency, but had to use human intervention, manual checking and the exercise of professional judgment in the analysis of the information provided. We do not think it uncharitable to note that human intervention and professional judgment may be the very activities and attributes that the public expects of its regulators.
173. APRA argues that the applicant could and should have done more. It says that he should have confronted Fodera, should have pushed harder, should have insisted that the netting-off practice cease. In a perfect world that may be so, but the world of HIH was anything but perfect. The applicant examined the law and formed a view as to its meaning; he discussed his interpretation with both Lo and Fodera; he put his position on record by declining to sign off the checklist. But he had no power to force his superiors to take the position he was advocating. Indeed, we regard it as a significant achievement that he was able to enforce the filing of attachments to the returns so as to disclose the true position. In light of the notorious fact that Fodera and Lo were among the coterie of HIH executives who engaged in criminal activity in the lead-up to the collapse of HIH, it is hard to imagine what the applicant could reasonably be expected to have achieved beyond what he did achieve. We consider that APRA’s criticism of the applicant with regard to his conduct in relation to netting-off is without merit.
The FITB issue
174. In relation to the FITB question, we note that it is common ground that the applicant's behaviour in relation to FITB, even if it could be established that it was as the respondent alleged, would not of itself provide a sufficient basis for the applicant's disqualification.
175. At paragraphs 126 to 131 of these reasons we have dealt with the evidence the applicant gave on this issue, and our impressions in relation to that evidence. Little more needs to be said, but it is appropriate that we make some specific findings of fact.
176. First, we find that the 17 October 2000 memoranda were not wholly the applicant’s work, but that responsibility for them is shared with Fodera.
177. Second, we find that Andersen did not regard the memoranda as providing a final determination, or even a preliminary opinion, on the "virtual certainty" test. The Andersen audit partner had noted in a memorandum dated 24 August 2000 (NT1, Tab 9), in relation to FITB:
Currently awaiting final tax schedules from the client in order to assess the location and recoverability of the booked tax losses. Will seek a recoverability schedule/timetable to be presented at the audit committee and endorsed by the directors.
The reference there to “recoverability” seems to be more a reference to their quantum, and to the period over which the tax losses would be recovered, than to the certainty, or virtual certainty, of their recoverability.
178. Third, we find that the applicant did not purport to provide an opinion on the “virtual certainty” test. The language used in the memoranda cannot reasonably be taken to amount to a representation that the recoupment of the tax benefit was "virtually certain". The memoranda variously refer to assumptions, expectations, estimates and the "possibility of recouping".
179. Fourth, we find that the memoranda could not, or at least should not, have provided the foundation for the directors’ representation to the auditors (NT1, Tab 22, note 15) that “[t]he directors are virtually certain that all future income tax benefits relating to tax losses included in the financial report will be recovered in a period of not more than 5 years".
180. In summary, it is our opinion that none of the behaviour of the applicant in relation to the FITB issue warrants the criticism levelled at him by the respondent. Thus the two sub-issues are answered in the negative.
181. There is one final matter that we need to deal with. It concerns the appropriateness of disqualifying a person who never was, and who says he never will be, a senior manager of an insurance company.
182. The case in favour of disqualification rests on those provisions in Prudential Standard GPS 520 dealing with the criteria for determining fitness and propriety to hold a responsible person position. The most relevant of those criteria is set out in what is now paragraph 22(a), namely whether it would be prudent to conclude that:
… the person possesses the competence, character, diligence, honesty, integrity and judgement to perform properly the duties of the responsible person position;
…
183. On several occasions in these proceedings Mr Abela has indicated that he does not consider himself qualified (and therefore, it might be argued, he lacks the “competence”) to perform the role of senior manager in an insurance company. However, he also points out that during his time at HIH he did not perform such a role, and he further asserts that he has no intention of performing such a role in the future. Of those last two propositions, APRA accepts the first and appears also to accept the second.
184. Nevertheless, APRA says that what is important about this case is the protection of policyholders and that the appropriate way to assure that protection is to disqualify Mr Abela. It is Mr Abela's cooperation with, or at least lack of protest against, the actions of his superiors that call into question his fitness and propriety to perform the duties – and so, even if he intends not to take a position as a responsible person in the future, disqualification is appropriate.
185. We do not agree. In circumstances where we have found that the two complaints about Mr Abela's behaviour are not made out, there is no reason for Mr Abela to continue to bear the stigma of disqualification. In any event, if Mr Abela ever sought to take a position as a responsible person in the future, there is a clear obligation on the employing entity to determine whether he has the attributes specified in paragraph 22(a) of the Prudential Standard. That, in our view, provides sufficient protection for policyholders.
186. The issue raised in this application is thus answered in the negative and the decision under review is set aside.
I certify that the 186 preceding paragraphs are a true copy of the reasons for the decision herein of Professor GD Walker, Deputy President and Mr SE Frost, Member
Signed: ........................[sgd]..................................................
Renee Wallace, AssociateDate/s of Hearing: 19, 20, 21 and 22 May 2008
Date of Decision: 29 July 2008
Solicitor for the Applicant: Addisons Lawyers
Counsel for the Applicant: Messrs J Hilton SC and M Izzo
Solicitor for the Respondent: Sparke Helmore
Counsel for the Respondent: Mr J Stevenson and Ms V Whittaker
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