Australian Securities and Investments Commission v Godfrey
[2017] FCA 1569
•22 December 2017
FEDERAL COURT OF AUSTRALIA
Australian Securities and Investments Commission v Godfrey [2017] FCA 1569
File number: VID 690 of 2017 Judge: MOSHINSKY J Date of judgment: 22 December 2017 Catchwords: CORPORATIONS – financial reporting – obligation of director under s 344(1) of Corporations Act 2001 (Cth) to take all reasonable steps to comply with, or to secure compliance with, Pt 2M.3 – where director failed to take all reasonable steps to ensure that financial reports complied with the requirements of Pt 2M.3 – where director admitted contravening s 344(1) – where parties prepared agreed statement of facts and jointly proposed declarations and orders that the director be disqualified from managing corporations for five years and pay a pecuniary penalty of $25,000 – whether proposed orders appropriate – proposed orders made Legislation: Corporations Act 2001 (Cth), ss 111AC, 111AI, 206C, 206E, 206G, 283AA, 292-323DA, 344, 1317DA, 1317E, 1317G, 1317J Cases cited: Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405
Australian Competition and Consumer Commission v High Adventure Pty Ltd [2006] ATPR 42-091; [2005] FCAFC 247
Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595
Australian Securities and Investments Commission v Healey (2011) 196 FCR 291
Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 430
Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640
Australian Securities and Investments Commission v John Barrie Loiterton & Ors [2004] NSWSC 172
Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57
Australian Securities and Investments Commission v White (2006) 58 ACSR 261
Australian Securities Commission v Fairlie (1993) 11 ACLC 669
Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482
Elliott v Australian Securities and Investments Commission (2004) 10 VR 369
NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285
Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80
Rich v Australian Securities and Investments Commission (2004) 220 CLR 129
Trade Practices Commission v Allied Mills Industries Pty Ltd (No 5) (1981) 60 FLR 38; 37 ALR 256
Date of hearing: 3 August 2017 Date of last submissions: 16 August 2017 Registry: Victoria Division: General Division National Practice Area: Commercial and Corporations Sub-area: Corporations and Corporate Insolvency Category: Catchwords Number of paragraphs: 73 Counsel for the Plaintiff: Mr N Hopkins QC with Mr RD Strong and Mr TJD Chalke Solicitor for the Plaintiff: Australian Securities and Investments Commission Counsel for the Defendant: Mr R Peters Solicitor for the Defendant: King & Wood Mallesons ORDERS
VID 690 of 2017 BETWEEN: AUSTRALIAN SECURITIES AND INVESTMENTS COMMISSION
Plaintiff
AND: PATRICK JOHN GODFREY
Defendant
JUDGE:
MOSHINSKY J
DATE OF ORDER:
22 DECEMBER 2017
THE COURT DECLARES THAT:
1.The defendant, Patrick John Godfrey (Mr Godfrey), contravened s 344(1) of the Corporations Act 2001 (Cth) (the Act) in relation to Banksia Securities Limited (BSL), in that, being a director of BSL, by the conduct described in paragraph 2 below, he failed to take all reasonable steps to secure compliance by BSL with:
(a)sections 296 and 297 of the Act in relation to the annual financial report for the year ended 30 June 2011 (the BSL 2011 financial report) (Contravention 1);
(b)sections 304 and 305 of the Act in relation to the half-year financial report for the half year ended 31 December 2011 (the BSL 2011-12 half-year financial report) (Contravention 2); and
(c)sections 296 and 297 of the Act in relation to the annual financial report for the year ended 30 June 2012 (the BSL 2012 financial report) (Contravention 3),
in that the provisioning for bad and doubtful debts was inadequate as set out in the table below:
Accounting period ended Bad and doubtful debt provisioning deficiency Shareholders’ capital (as mis-stated in the relevant balance sheet) Adjusted shareholders’ capital (accounting for provisioning deficiency) 30 June 2011 $4,322,517 $24,061,249 $19,738,732 31 December 2011 $4,280,540 $22,972,650 $18,692,110 30 June 2012 $4,755,046 $24,192,965 $19,437,919 2.Mr Godfrey:
(1)was, in respect of the accounting periods ended 30 June 2011 and 31 December 2011, the officer of BSL charged with primary responsibility for making recommendations to the other directors and the management of BSL as to the appropriate amount of provision for bad and doubtful debts;
(2)was, in respect of the accounts for the period ended 30 June 2012, a director of BSL and a signatory to those accounts;
(3)failed to have or obtain a sufficient understanding of the requirements of AASB 139 for the recognition of and assessment of impairment of financial assets, including mortgage investments;
(4)as a result of the failure set out in sub-paragraph (3) above, failed to ensure that BSL’s policies and practices with respect to:
(a) the identification of loans that ought to be assessed for impairment;
(b) the process of assessment of loans for impairment; and
(c)the process by which calculation of provisions for impairment were made,
were:
(d)consistent with the requirements of AASB 139;
(e)when applied, likely to result in the production of financial statements that:
(i) complied with AASB 139; and
(ii) showed a true and fair view,
and therefore:
(f)did not result in the mis-statements set out in paragraph 1 above;
(5)as a result of the failure set out in sub-paragraphs (3) and (4) above, failed to identify that BSL’s policies and procedures for determining impairment of mortgage investments were not appropriate to determine:
(a)the fair value, at the relevant times, of; and
(b)the appropriate level of impairment, at the relevant times, for,
four mortgage investments giving rise to the deficiencies listed in paragraph 1 above;
(6)as a result of the failures identified in sub-paragraphs (3), (4) and (5) above, failed to bring to the attention of the other directors and the management of BSL:
(a)the fair value, at the relevant times, of; and
(b)the appropriate level of impairment, at the relevant times, for,
four mortgage investments giving rise to the deficiencies listed in paragraph 1 above, and the consequences of those deficiencies to the balance sheets and profit and loss statements for the relevant periods.
3.The four loans in respect of which there was inadequate provision for bad and doubtful debts were as follows:
Loan Required Additional Provisions BSL 2011 financial report BSL 2011-12 half-year financial report BSL 2012 financial report Java Court $0 $451,918 $461,567 A Michelmore $1,359,725 $825,372 $822,325 Mirage Property $721,636 $738,463 $1,649,271 Southbeach Developments $2,241,156 $2,264,787 $1,821,883 Totals $4,322,517 $4,280,540 $4,755,046
THE COURT ORDERS THAT:
4.Mr Godfrey be disqualified from managing corporations for a period of five years from 4.30 pm on 1 February 2018.
5.Mr Godfrey pay to the Commonwealth a pecuniary penalty of $25,000.
6.There be no order as to costs.
7.There be liberty to apply.
Note: Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.
REASONS FOR JUDGMENT
MOSHINSKY J:
Introduction
The defendant, Patrick John Godfrey (Mr Godfrey), was, at the relevant times, a director of Banksia Securities Limited (BSL) and, until 5 July 2012, the managing director of BSL. Section 344(1) of the Corporations Act 2001 (Cth) (the Act) relevantly provides that a director of a company contravenes the section is he or she fails to take all reasonable steps to comply with, or to secure compliance with, Pt 2M.3. Part 2M.3 of the Act deals with financial reporting. In this proceeding, the plaintiff (ASIC) alleges that Mr Godfrey contravened s 344 by failing to take all reasonable steps to ensure that the following documents complied with Pt 2M.3:
(a)BSL’s financial report for the year ended 30 June 2011 (the BSL 2011 financial report);
(b)BSL’s half-year financial report for the half-year ended 31 December 2011 (the BSL 2011-12 half-year financial report); and
(c)BSL’s financial report for the year ended 30 June 2012 (the BSL 2012 financial report).
In its originating process, ASIC seeks: declarations of contravention under s 1317E of the Act; an order pursuant to s 1317G(1) that Mr Godfrey pay to the Commonwealth a pecuniary penalty of such amount as the Court considers appropriate; and an order pursuant to s 206C, or alternatively s 206E, that Mr Godfrey be disqualified from managing corporations for such period as the Court considers appropriate.
Mr Godfrey admits that he contravened s 344 of the Act. ASIC and Mr Godfrey have reached agreement on a statement of agreed facts (the SOAF), a copy of which is annexed to these reasons (save that footnotes have been omitted and an agreed correction to paragraph 299 has been incorporated). The parties have also reached agreement on proposed declarations and proposed orders. The proposed declarations are set out in a document headed “Agreed Declaration of Contravention” that is annexed to an affidavit of Mr Godfrey. The proposed orders, which relate to disqualification from managing corporations and a pecuniary penalty, are set out in ASIC’s outline of submissions. These orders are agreed to by Mr Godfrey in his outline of submissions, save that he makes a submission as to the form of the disqualification order (as discussed below).
The proposed declarations are in substance as follows:
1.The defendant, Patrick John Godfrey (Mr Godfrey), contravened s 344(1) of the Corporations Act 2001 (Cth) (the Act) in relation to Banksia Securities Limited (BSL), in that, being a director of BSL, by the conduct described in paragraph 2 below, he failed to take all reasonable steps to secure compliance by BSL with:
(a)sections 296 and 297 of the Act in relation to the annual financial report for the year ended 30 June 2011 (the BSL 2011 financial report) (Contravention 1);
(b)sections 304 and 305 of the Act in relation to the half-year financial report for the half year ended 31 December 2011 (the BSL 2011-12 half-year financial report) (Contravention 2); and
(c)sections 296 and 297 of the Act in relation to the annual financial report for the year ended 30 June 2012 (the BSL 2012 financial report) (Contravention 3),
in that the provisioning for bad and doubtful debts was inadequate as set out in the table below:
Accounting period ended Bad and doubtful debt provisioning deficiency Shareholders’ capital (as mis-stated in the relevant balance sheet) Adjusted shareholders’ capital (accounting for provisioning deficiency) 30 June 2011 $4,322,517 $24,061,249 $19,738,732 31 December 2011 $4,280,540 $22,972,650 $18,692,110 30 June 2012 $4,755,046 $24,192,965 $19,437,919 2.Mr Godfrey:
(1)was, in respect of the accounting periods ended 30 June 2011 and 31 December 2011, the officer of BSL charged with primary responsibility for making recommendations to the other directors and the management of BSL as to the appropriate amount of provision for bad and doubtful debts;
(2)was, in respect of the accounts for the period ended 30 June 2012, a director of BSL and a signatory to those accounts;
(3)failed to have or obtain a sufficient understanding of the requirements of AASB 139 for the recognition of and assessment of impairment of financial assets, including mortgage investments;
(4)as a result of the failure set out in sub-paragraph (3) above, failed to ensure that BSL’s policies and practices with respect to:
(a)the identification of loans that ought to be assessed for impairment;
(b)the process of assessment of loans for impairment; and
(c)the process by which calculation of provisions for impairment were made,
were:
(d) consistent with the requirements of AASB 139;
(e)when applied, likely to result in the production of financial statements that:
(i)complied with AASB 139; and
(ii)showed a true and fair view,
and therefore:
(f)did not result in the mis-statements set out in paragraph 1 above;
(5)as a result of the failure set out in sub-paragraphs (3) and (4) above, failed to identify that BSL’s policies and procedures for determining impairment of mortgage investments were not appropriate to determine:
(a)the fair value, at the relevant times, of; and
(b)the appropriate level of impairment, at the relevant times, for,
four mortgage investments giving rise to the deficiencies listed in paragraph 1 above;
(6)as a result of the failures identified in sub-paragraphs (3), (4) and (5) above, failed to bring to the attention of the other directors and the management of BSL:
(a)the fair value, at the relevant times, of; and
(b)the appropriate level of impairment, at the relevant times, for,
four mortgage investments giving rise to the deficiencies listed in paragraph 1 above, and the consequences of those deficiencies to the balance sheets and profit and loss statements for the relevant periods.
3.The four loans in respect of which there was inadequate provision for bad and doubtful debts were as follows:
Loan Required Additional Provisions BSL 2011 financial report BSL 2011-12 half-year financial report BSL 2012 financial report Java Court $0 $451,918 $461,567 A Michelmore $1,359,725 $825,372 $822,325 Mirage Property $721,636 $738,463 $1,649,271 Southbeach Developments $2,241,156 $2,264,787 $1,821,883 Totals $4,322,517 $4,280,540 $4,755,046
The proposed orders are to the effect that:
(a)Mr Godfrey be disqualified from managing corporations for a period of five years; and
(b)Mr Godfrey pay to the Commonwealth a pecuniary penalty of $25,000.
In his outline of submissions, Mr Godfrey seeks that the disqualification order be in the form:
The defendant, Patrick John Godfrey, is disqualified from managing corporations for a period of [period] from 4.30pm on [date].
It is explained that if, on ASIC’s application, the Court decides to make an under s 206C of the Act disqualifying Mr Godfrey from managing corporations, Mr Godfrey will immediately apply under s 206G(1) of the Act for leave to manage the corporate trustee of his and his wife’s self-managed superannuation fund, P&M Godfrey Holdings Pty Ltd. It is stated that Mr Godfrey’s application would relate only to that company and he would discontinue as a director of all other companies if so ordered by the Court. It is also stated that Mr Godfrey has confirmed that, at least for the duration of any disqualification order made by the Court on ASIC’s application, P&M Godfrey Holdings Pty Ltd would not perform any function or conduct any business other than as trustee of the superannuation fund and for the purposes of the fund.
The evidence before the Court at the hearing comprised:
(a)an affidavit of Brendan Caridi, a senior manager in ASIC’s Corporations & Corporate Governance Enforcement Team – the SOAF was annexed to this affidavit;
(b)a bundle of documents comprising the relevant financial reports; and
(c)an affidavit of Mr Godfrey.
At the hearing, the parties made oral submissions in support of the proposed declarations and orders. In the course of the hearing, I indicated that I had concerns as to the sufficiency of the proposed pecuniary penalty. I gave leave for the parties to file further material. Subsequently, Mr Godfrey filed an outline of further submissions. This included some additional facts which, it was indicated, were agreed between the parties.
For the reasons that follow, I consider there to be a proper basis for making the proposed declarations. I also consider there to be a proper basis to make a disqualification order to the effect that Mr Godfrey be disqualified from managing corporations for a period of five years. I will make this order in the form sought by Mr Godfrey, so as to enable an application to be brought to, in effect, carve out the corporate trustee of his and his wife’s superannuation fund. Notwithstanding my initial reservations, on the basis of the facts and matters set out in the SOAF and the additional matters contained in Mr Godfrey’s outline of further submissions, I consider the proposed penalty of $25,000 to be an appropriate penalty and will make an order to this effect. I will also make an order, as agreed between the parties, that there be no order as to costs.
Applicable principles
The applicable principles as regards the making of orders by agreement and as regards declarations were summarised by Gordon J in Australian Competition and Consumer Commission v Coles Supermarkets Australia Pty Ltd [2014] FCA 1405 at [70]-[79] as follows:
2.3.1 Orders sought by agreement
…
70The applicable principles are well established. First, there is a well-recognised public interest in the settlement of cases under the Act: NW Frozen Foods Pty Ltd v Australian Competition & Consumer Commission (1996) 71 FCR 285 at 291. Second, the orders proposed by agreement of the parties must be not contrary to the public interest and at least consistent with it: Australian Competition & Consumer Commission v Real Estate Institute of Western Australia Inc (1999) 161 ALR 79 at [18].
71Third, when deciding whether to make orders that are consented to by the parties, the Court must be satisfied that it has the power to make the orders proposed and that the orders are appropriate: Real Estate Institute at [17] and [20] and Australian Competition & Consumer Commission v Virgin Mobile Australia Pty Ltd (No 2) [2002] FCA 1548 at [1]. Parties cannot by consent confer power to make orders that the Court otherwise lacks the power to make: Thomson Australian Holdings Pty Ltd v Trade Practices Commission (1981) 148 CLR 150 at 163.
72Fourth, once the Court is satisfied that orders are within power and appropriate, it should exercise a degree of restraint when scrutinising the proposed settlement terms, particularly where both parties are legally represented and able to understand and evaluate the desirability of the settlement: Australian Competition & Consumer Commission v Woolworths (South Australia) Pty Ltd (Trading as Mac’s Liquor) [2003] FCA 530 at [21]; Australian Competition & Consumer Commission v Target Australia Pty Ltd [2001] FCA 1326 at [24]; Real Estate Institute at [20]–[21]; Australian Competition & Consumer Commission v Econovite Pty Ltd [2003] FCA 964 at [11] and [22] and Australian Competition & Consumer Commission v The Construction, Forestry, Mining and Energy Union [2007] FCA 1370 at [4].
73Finally, in deciding whether agreed orders conform with legal principle, the Court is entitled to treat the consent of Coles as an admission of all facts necessary or appropriate to the granting of the relief sought against it: Thomson Australian Holdings at 164.
2.3.2 Declarations
74The Court has a wide discretionary power to make declarations under s 21 of the Federal Court Act: Forster v Jododex Australia Pty Ltd (1972) 127 CLR 421 at 437–8; Ainsworth v Criminal Justice Commission (1992) 175 CLR 564 at 581–2 and Tobacco Institute of Australia Ltd v Australian Federation of Consumer Organisations Inc (No 2) (1993) 41 FCR 89 at 99.
75Where a declaration is sought with the consent of the parties, the Court’s discretion is not supplanted, but nor will the Court refuse to give effect to terms of settlement by refusing to make orders where they are within the Court’s jurisdiction and are otherwise unobjectionable: see, for example, Econovite at [11].
76However, before making declarations, three requirements should be satisfied:
(1) The question must be a real and not a hypothetical or theoretical one;
(2) The applicant must have a real interest in raising it; and
(3) There must be a proper contradictor:
Forster v Jododex at 437–8.
77In this proceeding, these requirements are satisfied. The proposed declarations relate to conduct that contravenes the ACL and the matters in issue have been identified and particularised by the parties with precision: Australian Competition & Consumer Commission v MSY Technology Pty Ltd (2012) 201 FCR 378 at [35]. The proposed declarations contain sufficient indication of how and why the relevant conduct is a contravention of the ACL: BMW Australia Ltd v Australian Competition & Consumer Commission [2004] FCAFC 167 at [35].
78It is in the public interest for the ACCC to seek to have the declarations made and for the declarations to be made (see the factors outlined in ACCC v CFMEU at [6]). There is a significant legal controversy in this case which is being resolved. The ACCC, as a public regulator under the ACL, has a genuine interest in seeking the declaratory relief and Coles is a proper contradictor because it has contravened the ACL and is the subject of the declarations. Coles has an interest in opposing the making of them: MSY Technology at [30]. No less importantly, the declarations sought are appropriate because they serve to record the Court’s disapproval of the contravening conduct, vindicate the ACCC’s claim that Coles contravened the ACL, assist the ACCC to carry out the duties conferred upon it by the Act (including the ACL) in relation to other similar conduct, inform the public of the harm arising from Coles’ contravening conduct and deter other corporations from contravening the ACL.
79Finally, the facts and admissions in Annexure 1 provide a sufficient factual foundation for the making of the declarations: s 191 of the Evidence Act; Australian Competition & Consumer Commission v Dataline.Net.Au Pty Ltd (2006) 236 ALR 665 at [57]–[59] endorsed by the Full Court in Australian Competition & Consumer Commission v Dataline.Net.Au Pty Ltd (2007) 161 FCR 513 at [92]; Hadgkiss v Aldin (No 2) [2007] FCA 2069 at [21]–[22]; Secretary, Department of Health & Ageing v Pagasa Australia Pty Ltd [2008] FCA 1545 at [77]–[79] and Ponzio v B & P Caelli Constructions Pty Ltd (2007) 158 FCR 543.
Disqualification from managing corporations is dealt with in, among other provisions, s 206C of the Act. Section 206C(1) relevantly provides that, on application by ASIC, the Court may disqualify a person from managing corporations for a period that the Court considers appropriate if: a declaration is made under s 1317E that the person has contravened a corporation/scheme civil penalty provision; and the Court is satisfied that the disqualification is justified. A contravention of s 344(1) is a “corporation/scheme civil penalty provision”: s 1317DA; s 1317E(1), table, item 5. In determining whether the disqualification is justified, the Court may have regard to: the person’s conduct in relation to the management, business or property of any corporation; and any other matters that the Court considers appropriate: s 206C(2).
The Court will generally have regard to the following categories of matters in considering whether a disqualification order is justified: the nature and seriousness of the contraventions; protection of the public; retribution and deterrence; and mitigating factors: Rich v Australian Securities and Investments Commission (2004) 220 CLR 129 (Rich) at [47]-[58] per McHugh J; Australian Securities and Investments Commission v White (2006) 58 ACSR 261 at [18] per Hargrave J. Personal and general deterrence are “central factors in determining whether an order for disqualification should be made and, if so, for what period”: Australian Securities and Investments Commission v Beekink (2007) 238 ALR 595 at [84]; see also Rich at [52]; Elliott v Australian Securities and Investments Commission (2004) 10 VR 369 at [137]. Consideration of general deterrence will be central, even in the event that the Court is satisfied that personal deterrence might have a lesser role to play: Australian Competition and Consumer Commission v High Adventure Pty Ltd [2006] ATPR 42-091; [2005] FCAFC 247 (in the context of pecuniary penalties), cited with approval in relation to disqualification orders in Australian Securities and Investments Commission v Lindberg (2012) 91 ACSR 640 at [87]; see also Australian Securities and Investments Commission v Healey (No 2) (2011) 196 FCR 291 at [123].
Section 1317G(1) of the Act provides that the Court may order a person to pay a pecuniary penalty of up to $200,000 if: a declaration of contravention by the person has been made under s 1317E; the contravention is of a corporation/scheme civil penalty provision; and the contravention (among other things) is serious. An application for a declaration of contravention and a pecuniary penalty order may be made by ASIC: s 1317J(1).
The principles applicable to the discretion to impose pecuniary penalties have been discussed in many cases. In the context of the imposition of penalties for breaches of the corporations law under s 1317G of the Act, I refer, in particular, to Re HIH Insurance Ltd (in prov liq) and HIH Casualty and General Insurance Ltd (in prov liq); Australian Securities and Investments Commission v Adler (2002) 42 ACSR 80 at [125]-[132] per Santow J.
In Commonwealth v Director, Fair Work Building Industry Inspectorate (2015) 258 CLR 482 (FWBII), the High Court held that, in the context of civil penalty provisions, it was open to the Court to receive submissions, including joint submissions, as to an appropriate penalty. French CJ, Kiefel, Bell, Nettle and Gordon JJ (with whom Keane J agreed) stated at [46] that there is “an important public policy involved in promoting predictability of outcome in civil penalty proceedings” and that “the practice of receiving and, if appropriate, accepting agreed penalty submissions increases the predictability of outcome for regulators and wrongdoers”. Their Honours stated that, as was recognised in Trade Practices Commission v Allied Mills Industries Pty Ltd (No 5) (1981) 60 FLR 38; 37 ALR 256 and determined in NW Frozen Foods Pty Ltd v Australian Competition and Consumer Commission (1996) 71 FCR 285 (NW Frozen Foods), “such predictability of outcome encourages corporations to acknowledge contraventions, which, in turn, assists in avoiding lengthy and complex litigation and thus tends to free the courts to deal with other matters and to free investigating officers to turn to other areas of investigation that await their attention”.
Their Honours stated, at [57], that in civil proceedings there is generally very considerable scope for the parties to agree on the facts and their consequences; and that there “is also very considerable scope for them to agree upon the appropriate remedy and for the court to be persuaded that it is an appropriate remedy”. In relation to civil penalty proceedings, their Honours stated at [58]:
Subject to the court being sufficiently persuaded of the accuracy of the parties’ agreement as to facts and consequences, and that the penalty which the parties propose is an appropriate remedy in the circumstances thus revealed, it is consistent with principle and, for the reasons identified in Allied Mills, highly desirable in practice for the court to accept the parties’ proposal and therefore impose the proposed penalty.
(Footnote omitted.)
Their Honours in FWBII also made observations, at [60]-[61], regarding submissions by a regulator in such a context.
It follows from the above that the questions to be determined in the present case include: first, whether the Court is sufficiently persuaded of the accuracy of the parties’ agreement as to facts and consequences; and secondly, whether the penalty that the parties propose is an appropriate remedy in the circumstances thus revealed.
In FWBII, French CJ, Kiefel, Bell, Nettle and Gordon JJ explained the purpose of a civil penalty as follows at [55]:
… whereas criminal penalties import notions of retribution and rehabilitation, the purpose of a civil penalty, as French J explained in Trade Practices Commission v CSR Ltd, is primarily if not wholly protective in promoting the public interest in compliance:
“Punishment for breaches of the criminal law traditionally involves three elements: deterrence, both general and individual, retribution and rehabilitation. Neither retribution nor rehabilitation, within the sense of the Old and New Testament moralities that imbue much of our criminal law, have any part to play in economic regulation of the kind contemplated by Pt IV [of the Trade Practices Act] … The principal, and I think probably the only, object of the penalties imposed by s 76 is to attempt to put a price on contravention that is sufficiently high to deter repetition by the contravenor and by others who might be tempted to contravene the Act.”
(Footnotes omitted.)
Application of principles in the present case
The contraventions of s 344
The facts and circumstances are set out in the SOAF, supplemented by the further agreed facts contained in Mr Godfrey’s outline of further submissions. It is not necessary to set out all these facts and circumstances in detail. Nevertheless, I set out some of the main aspects, and my conclusions as to the operation of the Act, based substantially on ASIC’s outline of submissions, with which Mr Godfrey agreed.
The parties submit, and I accept, that each of the steps that Mr Godfrey admits that he failed to take was a step that it was reasonable for him to take to ensure that BSL complied with its legislative obligations. Consideration of that proposition requires the Court to consider: first, what was required by BSL to comply with the requirements in Pt 2M.3 of the Act; and secondly, what steps Mr Godfrey reasonably ought to have taken to secure BSL’s compliance with those requirements: Australian Securities and Investments Commission v Healey (2011) 196 FCR 291 (Healey) at [150] per Middleton J.
Pt 2M.3 of the Act (comprising ss 292-323DA) concerns the preparation and content of financial reports. The requirements in the Part are obligations of the entities to which the Part applies: Healey at [126].
BSL raised money from members of the public by the issue of debentures. At all material times it was required by s 283AA of the Act to appoint a trustee to protect the interests of debenture holders.
By reason of that requirement, at all times during the period from 1 July 2010 until 25 October 2012 (the Relevant Period), BSL was a disclosing entity within the meaning of s 111AC of the Act (see s 111AI) and therefore required:
(a)to prepare a financial report for the financial years that ended on each of 30 June 2011 and 30 June 2012 (s 292(1)(a)); and
(b)to prepare a financial report for the half-year that ended on 31 December 2011 (s 302).
Sections 295 and 303 of the Act set out the requirements for the content of the financial reports that BSL was required to prepare.
In addition to those specific requirements, BSL was required to prepare its financial reports and half-year financial reports such that the financial reports, and the notes to those reports:
(a)complied with the requirements of the accounting standards published by the Australian Accounting Standards Board (the AASB) (ss 296(1), 304); and
(b)gave a true and fair view of BSL’s financial position and performance (ss 297, 305).
Each of those provisions, at all times during the Relevant Period, was contained in Pt 2M.3 of the Act.
At all relevant times, BSL’s business involved raising money from the public through the issue of debentures, and advancing the funds raised to third party borrowers for property investment and development (SOAF, [14]). Those loans were advanced either directly by BSL, or by Banksia Mortgages Limited (BML), a related party of BSL and the responsible entity for the Banksia Mortgage Fund (BMF).
Whether a loan was advanced by BSL or BML, loans were generally secured by: a loan agreement between BSL or BMF and the borrower; and a first ranking mortgage over real property.
As a result, at all times during the Relevant Period, BSL was required to recognise on its balance sheet the value of the loans advanced to third parties as a loan receivable (accounting standard AASB 101, entitled “Presentation of Financial Statements”, [54]). At all times during the Relevant Period, the preponderance of assets on the balance sheet of BSL were loans and receivables (referred to by BSL in its financial statements as “mortgage investments”).
Accounting standard AASB 139, entitled “Financial Instruments: Recognition and Measurement” (AASB 139), was the standard that BSL was required at all times to apply to determine:
(a)the value at which loans and receivables were recognised on its balance sheet; and
(b)whether it was required to make a provision for any loan receivable so recognised and, if so, the quantum of such a provision.
A comprehensive description of the content and requirements of AASB 139 that BSL was required to apply when determining those matters appears at [73]-[79] of the SOAF. In summary, BSL was required:
(a)at each reporting date:
(i)to assess whether there existed any objective evidence that any of the loans and receivables recognised on its balance sheet was impaired; and
(ii)if so, to determine the amount of any impairment loss;
(b)to recognise that an impairment loss had occurred if the impact of any identified loss event or events had an impact on the estimated future cash flows of the financial asset or group of financial assets that could be reliably estimated (AASB 139, [58]-[59]); and
(c)to measure the quantum of such an impairment loss, and recognise an impairment, as the difference between:
(i)the carrying amount of the loan receivable; and
(ii)the present value of estimated future cash flows, discounted at the loan receivable’s original effective interest rate (AASB 139, [63]).
The application guide to AASB 139 suggested that once an entity had identified objective evidence of impairment of a collateralised financial asset, the calculation of the present value of that asset reflected the cash flows that may result from foreclosure, less costs for obtaining and selling the collateral, whether or not foreclosure was probable (AASB 139, [AG84]).
By reason of the foregoing, at all times in the Relevant Period, in order to satisfy the requirements of ss 296(1) and 304, and therefore Pt 2M.3 of the Act, BSL was required to:
(a)apply the terms of AASB 139 to determine:
(i)whether a loan receivable recognised on its balance sheet was impaired; and
(ii)if so, the quantum of that impairment; and
(b)determine the quantum of any such impairment as the difference between:
(i)the carrying value of the loan; and
(ii)the estimate of the future cash flows that may result from the foreclosure of the collateral for that loan, less the costs for obtaining and selling that collateral,
appropriately discounted to account for the time it would take to realise the value of the collateral.
The next step in the analysis is to ascertain what steps a director of BSL ought reasonably to have taken to secure compliance by BSL with those requirements: Healey at [150].
The determination of the steps that a director ought reasonably to have taken to secure compliance with the requirements of Pt 2M.3 of the Act: is an objective one (Healey at [178]-[179]); and will depend on all the circumstances (Australian Securities Commission v Fairlie (1993) 11 ACLC 669 (Fairlie) at 681; Australian Securities and Investments Commission v John Barrie Loiterton & Ors [2004] NSWSC 172 at [45]).
In the present case, considerations that inform the steps that it was reasonable for a director to take to secure compliance with Pt 2M.3 include both the characteristics of BSL and those of Mr Godfrey’s role as a director of that company.
In relation to BSL, those characteristics include: the nature of BSL’s business, which was effectively that of a quasi-bank (SOAF, [14]); and the fact that, at all times during the Relevant Period, BSL’s main asset was its loan portfolio, which at the time of the appointment of receivers to BSL, totalled approximately $527 million.
In relation to Mr Godfrey’s role within BSL, those characteristics include: Mr Godfrey’s role as the managing director of BSL; his responsibility in the accounting periods that ended on 30 June 2011 and 31 December 2011 for recommending to the board of BSL the quantum of any impairment that should have been recognised for those loans that the Default Management Committee (the DMC) had classified as “non-performing”; the fact that Mr Godfrey, acting as a director of BSL, signed the declaration required for the purposes of s 295(1)(c) of the Act (in relation to BSL’s financial reports for the reporting periods ending on 30 June 2011 and 30 June 2012) and s 303(1)(c) (in relation to BSL’s financial report for the half-year reporting period ending on 31 December 2011).
The parties submit, and I accept, that those circumstances support the contention that each of the steps set out in paragraph 2 of the agreed declarations of contravention was a step that Mr Godfrey reasonably ought to have taken to secure BSL’s compliance with its obligations in Pt 2M.3 of the Act. Why these steps were reasonable, and how they would have secured compliance, requires consideration of how BSL in fact determined provisions for impairment of loan receivables, and why that process failed to comply with the requirements of AASB 139.
A description of the process that BSL employed to determine whether loan receivables were recognised on its balance sheet appears from [80] of the SOAF. In summary, the process employed by BSL to determine whether a loan was impaired, and if so the quantum of impairment, was as follows:
(a)The DMC, an executive committee of BSL, made a determination as to whether any loan that was:
(i)in arrears within its first 12 months;
(ii)in arrears over 30 days; or
(iii)subject to legal action,
should be classified as “non-performing”, which occurred when the committee formed the opinion that it was unlikely that further interest on the loan advanced would be recovered.
(b)Each quarter, Mr Godfrey prepared a report titled “non-performing loans and provisions” for consideration by the board of BSL, which contained, among other things, a description (in respect of each loan that the DMC had categorised as non-performing) of:
(i)the borrower;
(ii)the carrying value of the loan; and
(iii)a “notional provision” for the loan.
(c)At the time of the preparation of the financial reports and half-year financial reports of BSL, Mr Godfrey decided what would be the recommended “notional provision” for each loan that had been categorised as non-performing.
(d)In determining whether a provision should be recognised for a particular loan, Mr Godfrey used the criteria set out in the policy document used by the DMC to determine whether a loan should be categorised as non-performing, which included the following considerations:
(i)any valuation by a registered valuer or current municipal valuation, or any appraisal by a real estate agent, of the property that secured the loan;
(ii)market intelligence within the Banksia Financial Group;
(iii)recoverability of the loan from other persons such as guarantors, prior valuers, introducing brokers and accountants;
(iv)the economic assessment of the opportunity to hold the property and manage the risk over time, including any “economic case” for holding a particular security for a “longer term and manage the risk through a down cycle”; and
(v)the opportunity to further develop the property to enhance value.
(e)In addition to those considerations, in determining the quantum of the provision, Mr Godfrey may also have had regard to the following criteria:
(i)sales of any part of the secured property concerned;
(ii)the prospect of better recovery by means of further advances and development of the property secured;
(iii)market conditions;
(iv)progress in any legal proceedings concerning the loan;
(v)BSL’s historical performance of recoveries in respect of non-performing loans; and
(vi)views in regard to short-term and long-term strategies adopted for recovery of the debt.
By the application of that approach:
(a)the provisions for three loans recognised in the BSL 2011 financial report were $4,322,517 less than they ought to have been had BSL properly applied the requirements of AASB 139;
(b)the provisions for four loans recognised in the BSL 2011-12 half-year financial report were $4,280,540 less than they ought to have been had BSL properly applied the requirements of AASB 139; and
(c)the provisions for four loans recognised in the BSL 2012 financial report were $4,755,046 less than they ought to have been had BSL properly applied the requirements of AASB 139.
It should be noted that, in each of the three relevant accounting periods, it is the same four loans that were inadequately provided for (except for the June 2011 accounts, at which time Java Court was not inadequately provided for). Mr Godfrey submits in his outline of further submissions (and I accept) that the SOAF requires some clarification as follows:
(a)In respect of the first relevant accounts, being the BSL 2011 financial report, it is noted at [252](a) of the SOAF that, had the required additional provision of $4,322,517 been incorporated in the profit and loss account at that time, the reported profit of $3,541,533 would have been reported as a loss before tax of $1,217,764.
(b)In respect of the second relevant accounts, being the BSL 2011-12 half-year financial report, at [254] of the SOAF it is noted that the additional provision should have been $4,280,540.
(c)However, as the underprovided loans are the same loans at each reporting date, and the additional provision required for December 2011 was less than that required at June 2011, no additional provision at all would have been required in the December 2011 accounts if the provision had been made in June 2011.
(d)Similarly, had the additional provision been made in June 2011 or December 2011, the additional provision required in June 2012 would have been limited to $432,529 (being $4,755,046 less $4,322,517).
(e)In other words, the additionally required provisions listed in the table at paragraph 1 of the proposed declarations are not cumulative; there was a single failure to provide for bad and doubtful debts in an amount in the range of (approximately) $4.3 million to $4.7 million, which failure continued through the whole of the Relevant Period. Nevertheless, the occasion to make an adequate provision arose on three separate occasions.
In respect of the specific loans that are the subject of Section G of the SOAF, the process that Mr Godfrey and BSL employed to determine the provisions for impairment in the Relevant Period, and the factors taken into account when determining the quantum of the relevant provisions, did not comply with the requirements of AASB 139 because that process:
(a)allowed BSL, in assessing the estimated future cash flows from the security for a loan:
(i)to assume that the relevant security might, at an undefined future time, realise an amount that was more than its value at the time of the assessment as a result of: a future appreciation in its value; and/or development or other improvements to the property (beyond what may have been required to put the property in a saleable condition) that BSL might carry out to the property; and/or
(ii)to have regard to the possible recovery of compensation or damages from valuers, introducers or any parties other than the borrower and any guarantor; and
(b)by reason of the matters set out in paragraph (a):
(i)did not involve the assessment of the present value of the estimated future cash flows of the relevant loan receivables as the equivalent of the cash flows that may result from sale of the security held for that investment; and/or
(ii)included a measure of guidance used to determine the value of the security held for the relevant loans contingent on future events that should not have been taken into account.
It is established that it is part of the duty of a director to acquire a degree of financial literacy so as to equip him or her for the task of reviewing financial statements in discharge of the responsibility to monitor the progress of the company (Healey at [124]). The acquisition of the requisite degree of financial literacy is the first step that a director of BSL ought reasonably to have taken to secure compliance by the company with the requirements of Pt 2M.3.
The parties submit, and I accept, that for a company in the circumstances of BSL, the financial literacy required of directors to discharge their obligation to take all reasonable steps to ensure compliance by the company with the requirements of Pt 2M.3 of the Act extended to an awareness that:
(a)financial statements must incorporate proper provisions for impairment of loan receivables; and
(b)in circumstances where the collateral for a loan was effectively the only source of repayment, the provision for that loan must be equal to the difference between:
(i)the carrying value of the loan; and
(ii)the present value of the estimated future cash flows from the realisation of that collateral, discounted to account for the time that it would take to sell it.
Obtaining an understanding of these matters was, in the circumstances, a step that it was reasonable for Mr Godfrey to have taken to ensure BSL’s compliance with the requirements of Pt 2M.3 of the Act. But Mr Godfrey did not take this step (SOAF, [263]).
Moreover, in determining what steps Mr Godfrey ought reasonably to have taken to ensure BSL’s compliance with the requirements of Pt 2M.3, regard is to be had to the role that Mr Godfrey performed within BSL. In the Relevant Period, that role included determining proposed provisions for loans that the DMC had categorised as “non-performing”, and making recommendations to the board of BSL as to the appropriate provisions for those loans to be included in the financial reports of BSL.
The parties submit, and I accept, that these specific responsibilities placed upon Mr Godfrey a higher duty to inform himself of the matters set out in [47] above than if he were a non- executive director, or did not otherwise have those responsibilities.
Having failed to obtain an understanding of the matters described in [47] above, Mr Godfrey was unable to, and did not:
(a)ensure that BSL had in place a policy for the assessment of provisions of loan receivables that was consistent with the terms of AASB 139;
(b)identify that BSL’s policies and procedures for determining impairment of mortgage investments were not appropriate to ensure that proper provisions were recognised for loan receivables; and
(c)bring to the attention of the other directors or management of BSL the deficiencies in the four mortgage investments set out in Section G of the SOAF, and the consequences of those deficiencies to the balance sheet and profit and loss of BSL.
The parties submit, and I accept, that each of those failures represented a failure by Mr Godfrey to take a step that:
(a)would have been available to him had he obtained an understanding of the matters set out in [47] above; and
(b)would have avoided the misstatements that ultimately appeared in the financial reports prepared by BSL during the Relevant Period; and
by reason of the matters set out in paragraphs (a) and (b), was a step that he reasonably ought to have taken to ensure that BSL complied with its obligations in Pt 2M.3 of the Act.
None of the steps that I have found to be steps that Mr Godfrey ought reasonably to have taken to ensure compliance by BSL with the requirements in Pt 2M.3 of the Act was an obligation that could be abrogated by reliance on the management of BSL, its internal Audit and Corporate Governance Committee or its external auditors. It may be accepted that a director is entitled to rely on others to assist him or her in fulfilling a requirement (Healey at [240](b)). While that is the case, in this instance: Mr Godfrey took on the responsibility for the initial determination and recommendation of the quantum of provisions to the board of BSL; and in any event, in BSL’s circumstances, each of the steps set out in paragraph 2 of the agreed declarations of contravention were steps that its directors ought reasonably to have taken to ensure BSL complied with the requirements of Pt 2M.3, regardless of the role or contribution of the company’s auditors or management.
Declarations
In relation to the declarations proposed by the parties, Mr Godfrey has admitted that he contravened s 344 of the Act. I am satisfied that the steps identified by the parties, and described above, were steps that he ought reasonably to have taken to ensure BSL’s compliance with the requirements of Pt 2M.3 of the Act. Further, the three requirements for the making of declarations referred to by Gordon J in Coles are satisfied. The question that is being resolved by the declarations (namely, whether s 344 of the Act was contravened) is real and not a hypothetical or theoretical one. ASIC, as the public regulator under the Act, has a real interest in raising the question. And there is a proper contradictor, namely Mr Godfrey (albeit that he now consents to the declarations and orders).
In the circumstances, it is in the public interest for the proposed declarations to be made. A significant legal controversy is being resolved. The declarations are appropriate because they serve to record the Court’s disapproval of the conduct, vindicate ASIC’s claim that the relevant provision was contravened, assist ASIC in carrying out its regulatory duties in the future, inform the public of the relevant conduct, and deter others from engaging in such conduct.
There was some discussion during the hearing as to the number of contraventions involved, that is, whether the conduct of Mr Godfrey constituted one, or more, contraventions of s 344(1). In circumstances where the contravention involves a failure to take all reasonable steps, and essentially the same failure was involved in relation to each of the financial reports, the answer to this question is not straightforward. It is not necessary to resolve this question as, in my view, it would not affect the relief to be ordered in the present case. Whether the number of contraventions was one or (say) three (being one with respect to each financial report) would not affect the relief to be ordered, as the relief would in any event reflect the fact that the same underlying conduct was involved. I note that the form of the declarations proposed by the parties seems to proceed on the basis that there were three contraventions, one with respect to each financial report. This is indicated by the labels “Contravention 1”, “Contravention 2” and “Contravention 3” in sub-paragraphs (a), (b) and (c) of proposed paragraph 1. I am content to adopt this formulation.
Disqualification order
As noted above, the power to make a disqualification order under s 206C is relevantly enlivened if: the Court has made a declaration of contravention under s 1317E of the Act; and the Court is satisfied that the disqualification is justified. On the basis of the facts and matters set out above, I am satisfied that: a disqualification order is justified; and a disqualification of five years is an appropriate period of disqualification in all the circumstances. My reasons are as follows.
First, while the failure by Mr Godfrey to take all reasonable steps to ensure that BSL complied with the requirements in Pt 2M.3 of the Act resulted in significant misstatements in the financial reports prepared by BSL in the Relevant Period, ASIC does not suggest, and the SOAF does not support a finding, that Mr Godfrey acted dishonestly. Moreover, Mr Godfrey has cooperated with ASIC in its investigation. Nevertheless, Mr Godfrey’s responsibilities for the determination of provisions recognised by BSL, and the nature of BSL’s business, point to the magnitude of the contraventions.
Secondly, a disqualification of five years is appropriate to achieve the goal of general deterrence. As was the case in this instance, failures by directors of disclosing entities to take reasonable steps to ensure compliance with the requirements of Pt 2M.3 of the Act have the real potential to result in the publication to investors, and potential investors, of information regarding that entity that is misleading or deceptive.
Thirdly, Mr Godfrey has, until the admitted contraventions, led a corporate life free of blemish. Nevertheless, in contraventions of this kind, it is the nature of the contravention, not the character of the defendant, that should be the principal consideration in determining the ‘punishment’ to be imposed: Australian Securities and Investments Commission v Vizard (2005) 145 FCR 57 at [37]. Despite Mr Godfrey’s otherwise good character, the primary importance of general deterrence supports a significant period of disqualification.
Fourthly, the comfort derived by Mr Godfrey from the work of BSL’s auditors (SOAF, [289]) does not detract from the need for general deterrence. Mr Godfrey’s failure to gain an understanding of the matters set out in [47] above was a failure to take a step that, in the circumstances of BSL’s business, was a responsibility of a director. Directors in analogous circumstances ought not to consider it appropriate to avoid that responsibility by delegating it to external auditors.
In all the circumstances, the five year period of disqualification, to which Mr Godfrey has agreed, is appropriate. I am prepared to make this order in the form proposed by Mr Godfrey as described in [6]-[7] above.
Pecuniary penalty
The parties propose a pecuniary penalty of $25,000, in addition to the agreed period of disqualification.
The statutory preconditions to enliven the power of the Court to order that a defendant pay a pecuniary penalty are set out above. Those preconditions are satisfied in the present case as: the Court will have made a declaration of contravention under s 1317E; and it is common ground, and I find on the basis of the facts and matters set out above, that the contraventions were serious.
It is convenient to set out some additional facts agreed between the parties that are contained in Mr Godfrey’s outline of further submissions. During the course of the hearing, I raised a question about Mr Godfrey’s accounting qualifications. The parties have agreed the following additional facts in this regard:
(a)Mr Godfrey obtained by distance education a Diploma in Accountancy from the Commercial Education Society of Australia Inc on 10 February 1978; and
(b)Mr Godfrey holds no other qualification.
During the hearing, I enquired as to Mr Godfrey’s remuneration package from BSL. Mr Godfrey received a salary from Securities Holdco Limited (SHL) in relation to his work for the entire Banksia Group, which included BSL. The parties have agreed the following additional facts:
(a)In the year ended 30 June 2010, Mr Godfrey was paid $100,149 in salary and $37,986 in employer superannuation contribution by SHL, and had use of a Ford Fairlane company motor vehicle.
(b)In the year ended 30 June 2011, Mr Godfrey was paid $192,740 in salary and $35,953 in employer superannuation contribution by SHL, and had use of a Ford Fairlane company motor vehicle.
(c)In the year ended 30 June 2012, Mr Godfrey was paid $159,600 in salary and $32,635 in employer superannuation contribution by SHL, and had use of a Ford Fairlane company motor vehicle.
(d)Mr Godfrey received no further remuneration benefits as a director/manager of the Banksia Group.
(e)Mr Godfrey was personally and through other entities a shareholder of SHL. Following receivers and managers being appointed to BSL, those shares in SHL became worthless.
In the circumstances, and notwithstanding my initial reservations as to the sufficiency of the penalty, I consider the proposed pecuniary penalty to be an appropriate penalty. My reasons are as follows.
The principal purpose of a pecuniary penalty order is deterrence. In this case, for the reasons set out above in relation to the disqualification orders, the pecuniary penalty to which Mr Godfrey has consented is an appropriate order to achieve the purpose of general deterrence. The penalty is to be considered against the maximum penalty that the Court may order upon the statutory requirements of s 1317G(1) having been established. The maximum pecuniary penalty is $200,000 for each contravention. The amount of the proposed penalty is an appropriate amount taking into account the following considerations:
(a)the length of the disqualification period that I propose to order;
(b)that the contraventions by Mr Godfrey did not involve any element of dishonesty;
(c)that Mr Godfrey considered that he and BSL had appropriately applied the terms of AASB 139;
(d)that the losses occasioned to debenture holders, while significant, were relatively limited in that, to date, each debenture holder has been paid at least 80 cents for each dollar invested in a debenture;
(e)that Mr Godfrey has co-operated fully with ASIC’s investigation in relation to his possible contraventions of the Act (SOAF, [298]); and
(f)that there is no evidence that Mr Godfrey has engaged in any previous wrongdoing.
The proposed sanctions on Mr Godfrey must be viewed in totality when assessing adequacy. The elements are:
(a)declaration of contraventions;
(b)disqualification from managing corporations for a period of five years; and
(c)the pecuniary penalty.
As noted above, Mr Godfrey has fully co-operated with ASIC’s investigation. Further, rather than requiring ASIC (and hence the community) to incur the expense of a complex trial, involving (as is likely) competing expert opinions on the proper application of the accounting standards, Mr Godfrey admitted liability at a very early stage of the proceeding. Had it not been for Mr Godfrey’s full co-operation with ASIC’s investigation, and his early admission of liability in this proceeding, a substantially higher penalty would have been required.
It is also relevant that ASIC, the public regulator in relation to the Act, proposes this pecuniary penalty and submits that it is appropriate in all the circumstances.
Accordingly, I will make an order that Mr Godfrey pay a pecuniary penalty in the proposed amount of $25,000.
Conclusion
For the above reasons, I will make declarations and orders substantially in the form proposed by the parties.
I certify that the preceding seventy-three (73) numbered paragraphs are a true copy of the Reasons for Judgment herein of the Honourable Justice Moshinsky. Associate:
Dated: 22 December 2017
APPENDIX
AGREED STATEMENT OF FACTS
(Footnotes omitted.)
1.This Statement of Agreed Facts is made jointly by the Plaintiff, the Australian Securities and Investments Commission (ASIC), and the Defendant, Patrick John Godfrey (Mr Godfrey), in support of proposed orders to be provided to the Federal Court by the parties in relation to admitted contraventions of s 344 of the Corporations Act 2001 (Cth) (the Act) by Mr Godfrey. The admitted contraventions are set out in the accompanying Declaration of Contraventions.
A. Contents of this Statement
2.This statement sets out the following matters which have been agreed between ASIC and Mr Godfrey:
Section of this Statement
Subject matter
B
Role of ASIC
C, E.1, F
Factual background to the contraventions
D, E.2
Legal foundation for the contraventions
G
Detail of the specific contraventions – the Underprovided Mortgage Investments
H, I
Consequences of the contraventions
J, K
Matters going to seriousness and mitigation
B. ASIC
3.ASIC is the body corporate established by s 7 of the Australian Securities Commission Act 1989 (Cth) and continued in existence by s 261 of the Australian Securities and Investments Commission Act 2001 (Cth).
C. Banksia Financial Group and Banksia Securities Limited
C.1 Relevant Entities
4.At all times during the period from 1 July 2010 until 25 October 2012 (Relevant Period), BSL was an unlisted public company registered and taken to be registered under the provisions of the Act.
5.At all times during the Relevant Period, BSL was part of the Banksia Financial Group of companies (Banksia Financial Group). Securities Holdco Limited (SHL) was an unlisted public company with approximately 100 shareholders, and the parent entity in the Banksia Financial Group. BSL was a wholly owned subsidiary of SHL. SHL employed most of the staff in the Banksia Financial Group. SHL provided staff and services to the Banksia Financial Group.
6.The shareholders of SHL were, for the most part, the owners of the various businesses that amalgamated to form the Banksia Financial Group. The Banksia Financial Group’s operations were conducted from its offices in Kyabram in central Victoria.
7.Banksia Mortgage Fund (BMF) was a contributory mortgage scheme operated by the Banksia Financial Group and registered with ASIC.
8. Banksia Mortgages Limited (BML):
(a)was a wholly owned subsidiary of SHL and was part of the Banksia Financial Group;
(b)was the Banksia Financial Group’s lender and loan portfolio manager;
(c)managed investment schemes for retail clients;
(d)as the result of the matters in (c), was the responsible entity for BMF; and
(e)raised its funds for short term lending from BSL and for longer term lending from the investors in BMF.
9.Tony McGrath, Joseph Hayes, Matthew Caddy and Robert Kirman (Receivers) of McGrathNicol were appointed as Receivers to each of SHL, BSL and BML on 25 October 2012. On 24 June 2014, John Lindholm and Peter McCluskey of Ferrier Hodgson were appointed as liquidators of BSL, pursuant to an order of the Supreme Court of Victoria. On 30 September 2015, the liquidators were appointed as special purpose receivers of certain assets of BSL (Special Purpose Receivers), pursuant to an order of the Supreme Court of New South Wales.
C.2 Directors of the Banksia Financial Group
10.During the Relevant Period, the directors of each of the entities in the Banksia Financial Group, including BSL, were:
(a) Mr Godfrey;
(b)Peter Keating (Mr Keating), who was the chairman of the Banksia Financial Group;
(c)Nicholas Carr (Mr Carr);
(d)Geoffrey Skewes (Mr Skewes); and
(e)from 27 January 2011, Neil Mathison (Mr Mathison).
11.At all times during the Relevant Period, Wesley Santilla (Mr Santilla) was the Company Secretary of the entities in the Banksia Financial Group and BSL’s manager of corporate administration.
12.At all times during the Relevant Period until 5 July 2012, Mr Godfrey was the managing director of the Banksia Financial Group with a role equivalent to that of a chief executive officer. From that date, Mr Godfrey was no longer responsible for provision recommendations. Following his resignation as managing director, he continued to be employed as a consultant until 5 October 2012, on which date he resigned from that role. Following his resignation as a consultant, he continued as a non-executive director.
13.At all times during the Relevant Period, Warren Sinnott (Mr Sinnott), then a partner of Richmond Sinnott and Delahunty (RSD), was the auditor of the entities in the Banksia Financial Group.
C.3 Business of the Banksia Financial Group and BSL
14.The primary business of BSL involved raising money from the public through the issue of debentures, and advancing those funds to third party borrowers for property investment and development. BSL issued those debentures pursuant to approved registered prospectuses.
15.The Trust Company (Nominees) Limited (Trustee) held a first ranking security interest over all assets and undertakings of BSL for the interest of the BSL debenture holders.
16.BSL issued prospectuses for the issue of debentures pursuant to the requirements of the Act.
17.In addition, BSL invested a proportion of the funds raised from debenture holders with BMF.
18.When the Receivers were appointed, there were 16,115 debenture holders holding debentures totalling approximately $660,534,068 together with interest.
C.4 BSL and BMF Lending
19.Debenture funds raised by BSL were advanced to third party borrowers through BML and Permanent Custodians Limited (PCL). PCL was unrelated to SHL, BSL and BML.
20.BML managed the loans advanced to third party borrowers.
21.PCL held the relevant loans on trust for BML pursuant to a bare trust deed, and BML in turn held the loans on trust for BSL.
22.The majority of BSL’s and BMF’s loans originated through mortgage brokers.
23.Generally, BSL advanced loans to third party borrowers. Interest rates were set to provide adequate margin for operations.
24.Whether a loan was advanced by BSL, BMF or both, the loan was generally secured by:
(a) a loan agreement between BSL or BMF and the borrower; further
(b)a first ranking mortgage over real property that purported to reflect the appropriate loan to value ratio for the particular loan; and
(c)where appropriate, depending on the circumstances of the loan:
(i) other lesser ranking mortgages over real property;
(ii) registered charges; and
(iii) personal guarantees.
25. At the date of the Receivers’ appointment, BSL:
(a) had raised approximately $660 million from debenture holders;
(b)had advanced 956 loans to third party borrowers throughout Australia.
26.By reason of the matters in 25(a) and 25(b), BSL’s main assets were its loan portfolio, which totalled approximately $527 million in face value, together with cash held in BSL’s bank account.
27.Of BSL’s 956 loans, the summary of how they were made at the date of the Receivers’ appointment is as follows:
Lending
Number
Approximate Amount $ 000
Direct lending by BSL
779
480,953
Lending with or through BMF
172
41,625
Other lending involving BSL
5
4,703
C.5 BSL’s management structure in the Relevant Period
28.During the Relevant Period, resources were shared within the Banksia Financial Group. Each entity was managed separately but the lending practices of BSL and BMF operated co-operatively from a commercial perspective.
29.During the Relevant Period, meetings of the board of SHL and its subsidiaries (Board) were held concurrently as one meeting.
30.During the Relevant Period, various management and board committees existed in the Banksia Financial Group. Those management and board committees considered matters for all entities in the Banksia Financial Group.
31.During the Relevant Period, employees of the Banksia Financial Group performed the same function – for example, preparing financial statements – for all entities within the Banksia Financial Group.
32.The board committees included (among others):
(a) a Board Credit Committee; and
(b) an Audit and Corporate Governance Committee (A&CGC).
33.The management committees included (among others) the Default Management Committee (DMC). In July 2012, the Banksia Financial Group created a new management committee, the Impaired Assets Group. From that time, the DMC was merged with the Impaired Assets Group, and its name was changed to the Default and Impaired Assets Committee (DIAC). Mr Godfrey was never a member of the DIAC.
C.6 Board committee – Board Credit Committee
34.During the Relevant Period, the functions of the Board Credit Committee were predominantly to:
(a)decide whether loan applications to borrow more than $5,000,000 should be approved; and
(b)review the status of all loans in arrears where the risk of loss was greater than $500,000 against written recommendations from management about what action should be taken.
35.At all times during the Relevant Period, the members of the Board Credit Committee were Mr Godfrey and Mr Keating.
36.At all times in the Relevant Period, the Board Credit Committee met monthly prior to meetings of the Board. No minutes were kept of those meetings.
37.During the Relevant Period, prior to each Board meeting, the Board was provided with various papers by the Board Credit Committee and DMC. For each meeting the DMC provided a paper containing information about loans in arrears which showed, on a Banksia Financial Group basis, the number and value of loans which were “non-performing” and, separately, in respect of which legal action had been taken. As the occasion required, the Board Credit Committee provided detailed information regarding particular “non-performing” loans. Each quarter, the Board Credit Committee provided to the Board a list entitled “Non-performing loans and provisions”.
C.7 Board committee – Audit and Corporate Governance Committee
38.At all times in the Relevant Period, the A&CGC was chaired by Mike Hall (Hall), an accountant and, until the appointment of Mr Sinnott, the auditor of BSL. Mr Carr was the other member of the A&CGC. Mr Godfrey and Mr Santilla attended meetings of the A&CGC, but were not members of it.
39.Pursuant to its charter, during the Relevant Period, the A&CGC’s role included:
(a)overseeing accounting and financial matters affecting BSL and the Banksia Financial Group, including compliance with the relevant accounting standards;
(b)reviewing the adequacy of financial controls over financial reporting that would detect any financial irregularities;
(c)reviewing the half-yearly and yearly financial statements prior to their presentation to the Board and subsequent external release;
(d)reviewing all significant accounting policy changes and where appropriate recommending them to the Board;
(e)monitoring the working relationship, the effectiveness and independence of the audit function including an annual discussion with Mr Sinnott;
(f)reviewing the scope of the audit of BSL prior to completion of the audit;
(g)reviewing all reports from BSL’s auditor and report to the Board on such reports;
(h)reviewing the half-yearly and annual accounts with BSL’s auditor and report to the Board and subsequent external release as appropriate;
(i)providing an open communication channel between the auditor and the Board;
(j)reviewing, and in the case of the external audit, recommending to the Board, with respect to the appointment and replacement of BSL’s auditor;
(k)ensuring the Board was aware of any matter that might have a significant impact on the financial conditions or affairs of BSL that comes to its attention;
(l)monitoring and reporting to the Board on the framework, adequacy and security of internal control and accounting and management information systems, including security of information in the company's computer system;
(m)assessing the adequacy of the risk management strategies and processes adopted by management, and to make recommendations to the Board on any issues arising from such assessment;
(n)monitoring changes to the taxation regime and make appropriate recommendations to the Board;
(o)satisfying itself about the integrity and content of management control systems, including the review of policies and/or practices;
(p)reviewing and assess the adequacy of financial management reporting to the Board in terms of quantity, quality and timing of information necessary to enable the Board to understand and report internally and externally about the company's risks, operations and financial condition;
(q)monitoring developments and changes in the law relating to the responsibilities and liabilities of directors to ensure that the Board was meeting its obligations.
40. The A&CGC met quarterly and kept minutes of its meetings.
C.8 Management committee – Default Management Committee
41.The role of the DMC was to discuss loans, make decisions about what actions should be taken to recover the money owed to BSL or BMF (or both) and to monitor the progress of recovery actions and to make decisions about whether a loan should be classified as “non-performing”.
42.At all times in the Relevant Period prior to his retirement as the managing director of the Banksia Financial Group, Mr Godfrey was the chair of the DMC. The DMC otherwise consisted of senior loan management and default management personnel employed by the Banksia Financial Group, including:
(a) Trevor Goode (manager of Group Administration);
(b) Shane Templar (manager of Group Assets); and
(c)loan and administrative executives John Neale, Katrina Smith-Morvell, Alan Curnow, Peter McCluskey, Bob Arnold and Lucy Sorbello.
43.Prior to its change to the DIAC, the DMC met almost every week during the Relevant Period. Minutes were kept of the meetings of the DMC.
44. The responsibilities of the DMC included:
(a)determining whether a loan should be categorised as “non-performing”;
(b)developing strategies to deal with non-performing loans and larger loans in arrears;
(c)developing “work out” strategies with respect to non-performing loans including:
(i)approving legal actions for recovery to be commenced against borrowers and all necessary legal and commercial remedies in order to obtain recovery of debt owing; and
(ii)approving advances against the secured property (up to a limit of $500,000) to enhance the value of the secured property (for example through obtaining development plans) or to complete the construction or development of the secured loan.
45.In performing its role, the employees responsible for the loans informed the DMC of developments concerning each loan identified as “in arrears”. The information included matters such as:
(a)the value of the land which was security for the loan as stated in any sworn valuation;
(b)the value of the land which was secured by mortgage as advised by a relevant real estate agent;
(c)sales of any part of the land concerned;
(d)the prospect of better recovery by means of further advances and development of the property secured;
(e)market conditions (e.g. for farm land and climatic conditions which would materially affect value);
(f)recoverability of the loan from other persons such as guarantors, prior valuers, introducing broker and accountants;
(g)progress in any legal proceedings;
(h)BSL’s historic performance of recoveries in respect of non-performing loans;
(i)views in regard to the short term and long term strategies adopted for recovery of the debt.
46. For the DMC’s purposes, a loan was:
(a)regarded as “in arrears” if the borrower had not made a monthly payment;
(b)regarded as “in arrears in legal action” if the borrower had missed 2 monthly contractual payments, and legal action had been commenced against that borrower; and
(c)categorised as “non-performing” and the accrual of interest ceased if, in the opinion of the DMC, it was unlikely that further interest on the loan advanced would be recovered.
47.In the event that a loan was declared non-performing, no further interest was accrued on that loan in the books of BSL.
48.In performing its role, the DMC relied on information provided to it by management and employees of Banksia Financial Group, including Mr Godfrey.
C.9 Demise of BSL
49.BSL commenced operations on 1 July 1999 as a result of an amalgamation of debenture companies North Central Securities Limited of Kyabram, First Legal Securities Limited of Warrnambool and Geelong, and shortly thereafter with Hedon Investments Limited of Ballarat. North Central Securities Limited was the dominant party to the amalgamation. It commenced business in 1968 under the guise of Kyabram Housing Investments Pty Ltd operating under the control of a legal firm which had a long history of operating a Solicitor's Mortgage practice.
50.As BSL’s business expanded it established a branch network, initially throughout regional Victoria. During the Relevant Period BSL had a branch network of ten branches at Adelaide, Albury, Ballarat, Bendigo, Echuca, Geelong, Kyabram, Shepparton, Tatura and Warrnambool. The majority of moneys raised by BSL originated from its branch network with investors predominantly being locally based.
51.From around 2007, financial conditions led to the failure of a number of debenture issuers as well as to either the failure or freezing of investor funds held with virtually all the mortgage trusts and other non-APRA (Australian Prudential Regulation Authority) regulated entities. These conditions also led to the demise and closing of the operations of several overseas banking entities, and the forced amalgamation of some APRA regulated entities. During this period, BSL held strong liquidity and continued to trade with the expectation that market conditions would improve.
52.On 19 March 2009, SHL entered into a merger agreement with Statewide Secured Investments Limited (SSI). The merger was effected by SHL acquiring all the issued shares in SSI.
53.On 7 May 2012, the Banksia Financial Group appointed Warren Shaw (Mr Shaw) as its chief executive officer, replacing Mr Godfrey with effect from 5 July 2012.
54.On 7 June 2012, the Trustee wrote to Mr Godfrey (who at that stage was still the managing director of BSL) and requested that BSL provide a monthly report to the Trustee on the management of BSL’s “top 20 loans in arrears” (Closer Monitoring Regime).
55.On 5 July 2012, Mr Shaw assumed the role of chief executive officer of BSL, and Mr Godfrey stepped down from his position as managing director.
56.BSL provided reports to the Trustee pursuant to the Closer Monitoring Regime on 10 July and 10 August 2012.
57.In September 2012, BSL provided the Trustee with a draft prospectus to follow prospectus 18, which was due to expire on 17 November 2012. BSL requested the consent of the Trustee to be named in respect of what would have been prospectus 19.
58.On 25 October 2012, due to among other things, a lack of confidence in BSL’s loan book, the Trustee appointed the Receivers to the assets and undertaking of BSL.
D. Legal requirements concerning financial accounts and reports
D.1 Relevant sections of the Act
59. At all times during the Relevant Period, s 344 of the Act stated:
344.Contraventions of Part 2M.2 or 2M.3, or of certain provisions of Part 2M.4
(1)A director of a company … contravenes this section if they fail to take all reasonable steps to comply with, or to secure compliance with, Part 2M.2 or …
60. Parts 2M.2 and 2M.3 of the Act encompass ss 286-323C.
61.Sub-section 292(1)(b) of the Act required BSL to prepare a financial report and directors’ report for each of the financial years ended 30 June 2011 and 2012.
62.Section 295 of the Act required that the financial report contain financial statements, notes to them and the directors’ declaration about them and the notes. Section 295 relevantly provided:
Basic Content
(1) The financial report for a financial year consists of:
(a) The financial statements for the year; and
(b) The notes to the financial statements; and
(c)The directors’ declaration about the statements and notes.
Financial Statements
(2) The financial statements for the year are:
(a)… the financial statements in relation to the company … required by the accounting standards;
Notes to financial statements
(3) The notes to the financial statements are:
(a) disclosures required by the regulations; and
(b) notes required by the accounting standards; and(c)any other information necessary to give a true and fair view (see section 297).
Directors’ declaration
(4) The directors’ declaration is a declaration by the directors:
(a) …
(d)whether, in the directors’ opinion, the financial statements and notes are in accordance with this Act, including:
(i)section 296 (compliance with accounting standards); and
(ii)section 297 (true and fair view); and
(5) The declaration must:
(a)be made in accordance with a resolution of the directors; and
(b)specify the date on which the declaration is made; and
(c)be signed by a director.
63. Section 296 of the Act relevantly provided:
296. Compliance with accounting standards and regulations
(1)The financial report for a financial year must comply with the accounting standards.
64. Section 297 of the Act relevantly provided:
297. True and fair view
The financial statements and notes for a financial year must give a true and fair view of:(a)The financial position and performance of the company, registered scheme or disclosing entity; and
(b)If consolidated financial statements are required – the financial position and performance of the consolidated entity.
65. Section 298 of the Act relevantly provided:
298. Annual directors’ report
(1)The company … must prepare a directors’ report for each financial year.
…
(2) The report must:
(a)be made in accordance with a resolution of the directors; and
(b)specify the date on which the report is made; and
(c)be signed by a director.
66.Section 301 of the Act required BSL to obtain an auditor’s report about its financial report.
67.Section 302 of the Act required BSL to prepare a financial report and a directors’ report for the half-year ended 31 December 2012 and have the financial report audited or reviewed and obtain an auditor’s report. By the time of those accounts, the Receivers had been appointed.
68.Sections 303, 304 and 305 of the Act are the equivalent for half-year financial reports of ss 295, 296 and 297 for annual financial reports.
(c)BSL was required to make provision in the BSL 2011 financial report for impairment losses on the South Beach Loan of $2,241,000.
240.In the BSL 2011 financial report the carrying value of the South Beach Loan was $3,215,156, with no provision for impairment:
241.Mr Godfrey recommended that no provision be made in respect of the South Beach Loan. In making that recommendation, he considered the following matters:
(a)The South Beach Secured Property was a 14,386 square metre parcel land on the beach situated in a prime location of Yorkeys Knob. There was a council reserve parkland between it and the beach, and any development would have views over Trinity Bay from the first floor and above.
(b)During the Relevant Period, demand for development property, particularly in regional Australia, was extraordinarily subdued due to the financial state of many developers and the withdrawal of funding sources for new developments. Furthermore, it was well recognised that periods of non-existent demand for Queensland coastal development property are followed by a progressive resurgence and return to solid demand.
(c)An increase in the market value of the South Beach Secured Property if BSL held on until the market recovered.
BSL 2011-12 half-year financial report
242. As at 31 December 2011:
(a)there was objective evidence of impairment of the South Beach Loan as a result of one or more loss events within the meaning of paragraph 59 of AASB 139; and
(b)the estimated future cash flows that BSL could expect to receive from the sale of the South Beach Secured Property, less the expenses of sale, was $974,000;
(c)BSL was required to make provision in the BSL 2011-12 half-year financial report for impairment losses on the South Beach Loan of $2,264,787.
243.In the BSL 2011-12 half-year financial report the carrying value of the South Beach Loan was $3,238,787, with no provision for impairment:
244.Mr Godfrey recommended that no provision be made in respect of the South Beach Loan. In making that recommendation he considered the matters referred to in paragraph 241.
BSL 2012 financial report
245.Prior to completion of the BSL 2012 financial report the Cairns Regional Council valued the South Beach Secured Property at $1,500,000 as at 30 June 2011.
246.By reason of the facts set out in paragraphs 225 to 234, and 238, as at 30 June 2012:
(a)there was objective evidence of impairment of the South Beach Loan as a result of one or more loss events within the meaning of paragraph 59 of AASB 139;
(b)the estimated future cash flows that BSL could expect to receive from the sale of the South Beach Secured Property, less the expenses of sale, was $1,425,000;
(c)BSL was required to make provision in the BSL 2012 financial report for impairment losses on the South Beach Loan of $1,821,883.
247.In the BSL 2012 financial report the carrying value of the South Beach Loan was $3,215,156, with no provision for impairment:
248.In summary, the following additional provisioning was required in respect of the South Beach Loan for the relevant financial accounts of BSL:
Accounts Minimum required additional provision
($)June 2011 2,241,156 December 2011 2,264,787 June 2012 1,821,883 H.Effect on the BSL financial statements of Mr Godfrey’s failure to ensure that proper provisions for impairment were recognised against the Underprovided Mortgage Investments
249.As the consequence of the failures set out in Section G above, the financial reports of BSL prepared in the Relevant Period did not comply with the accounting standards, or contain a true and fair view of the financial position of BSL because:
(a)the quantum of the provision for impairment recognised against loans and receivables was less than it ought to have been; and
(b) as the result of (a):
i. the carrying value of loans and receivables;
ii. profit before tax; and
iii. total issued capital, reserves and retained earnings,
were each overstated by no less than the quantum of the provisions for impairment that ought to have been recognised against the Underprovided Mortgage Investments in each of the financial reports.
H.1 BSL 2011 financial report
250.The provision made by BSL in the BSL 2011 financial report for impairment of the five mortgage investments referred to in 2011 Table A was materially less than the provision that BSL was required by AASB 139 to make in respect of those mortgage investments, as set out in the following table (2011 Table B).
Loan No Borrower Name Provision Made
$Additional Provision Required $ MIC0017B/17C/19B Michelmore, AD & TR nil $1,359,725 MIR0012B Mirage Property
Group Pty Ltd373,000 721,636 SOU0045B South Beach Developments Pty Ltd nil 2,241,156 TOTAL: 4,322,517 251.By reason of the facts in 2011 Table B, in contravention of s 296(1) of the Act, the BSL 2011 financial report did not comply with AASB 139.
252. If the BSL 2011 financial report had complied with AASB 139:
(a)BSL would have reported a loss before tax of $1,217,764 as opposed to the profit before tax of $3,541,533 in fact reported;
(b)BSL would have reported total issued capital, reserves and retained earnings of as little as $21,035,487, as opposed to the amount in fact reported of $24,061,249.
253.By reason of the foregoing facts, in contravention of s 297 of the Act, the BSL 2011 financial report did not show a true and fair view of the financial position of BSL.
H.2 BSL 2011-12 half-year financial report
254.The provision made by BSL in the BSL 2011-12 half-year financial report for impairment of the six mortgage investments referred to in 2011-12 Table A was materially less than the provision that BSL was required by AASB 139 to make in respect of those mortgage investments, as set out in the following table (2011-12 Table B).
Loan No Borrower Name Provision Made
$Minimum Additional Provision Required $ JAV0001B Java Court Pty Ltd nil 451,918 MIC0017B/17C/19B Michelmore, AD & TR 605,453 825,372 MIR0012B Mirage Property
Group Pty Ltd369,000 738,463 SOU0045B South Beach Developments Pty Ltd nil 2,264,787 TOTAL: 4,280,540 255.By reason of the facts in 2011-12 Table B, in contravention of s 304 of the Act, the BSL 2011-12 half-year financial report did not comply with AASB 139.
256. If the BSL 2011-12 half-year financial report had complied with AASB 139:
(a)BSL would have reported a loss before tax of $4,767,700 as opposed to the loss before tax of $487.160 in fact reported;
(b)BSL would have reported total issued capital, reserves and retained earnings of as little as $18,692,109, as opposed to the amount in fact reported of $22,972,650.
257.By reason of the foregoing facts, in contravention of s 305 of the Act, the BSL 2011–12 half-year financial report did not show a true and fair view of the financial position of BSL.
H.3 BSL 2012 Financial Report
258.The provision made by BSL in the BSL 2012 financial report for impairment of the six mortgage investments referred to in 2012 Table A was materially less than the provision that BSL was required by AASB 139 to make in respect of those mortgage investments as set out in the following table (2012 Table B).
Loan No Borrower Name Provision made
$Additional Provision Required
$JAV0001B Java Court Pty Ltd nil 461,567 MIC0017B/17C/19B Michelmore, AD & TR 605,453 822,325 MIR0012B Mirage Property
Group Pty Ltd367,000 1,649,271 SOU0045B South Beach Developments Pty Ltd nil 1,821,883 TOTAL: 4,755,046 259.By reason of the facts in 2012 Table B, in contravention of s 296(1) of the Act, the BSL 2012 financial report did not comply with AASB 139.
260. If the BSL 2012 financial report had complied with AASB 139:
(a)BSL would have reported a loss before tax of $4,448,650 as opposed to the profit before tax of $306,395 in fact reported;
(b)BSL would have reported total issued capital, reserves and retained earnings of $20,864,433 as opposed to the amount in fact reported of $24,192,965.
261.By reason of the foregoing facts, in contravention of s 297 of the Act, the BSL 2012 financial report did not show a true and fair view of the financial position of BSL.
I. Breaches
262. At all times during the Relevant Period, Mr Godfrey considered that in:
(a)undertaking the process of determining provisions for impairment; and
(b)participating in resolutions of the directors of BSL to approve the financial statements prepared during the Relevant Period,
he applied a proper understanding of the AASB 139.
263.During the Relevant Period, Mr Godfrey did not understand that the proper application of AASB 139 required that he adopt the process set out at paragraphs 109 to 112 above. As a result, Mr Godfrey did not have, and failed to obtain, a proper understanding of the requirements of AASB 139 as it applied to the determination of:
(a)the value at which a loan or receivable was to be recognised on the balance sheet of BSL; and
(b)whether or not there was objective evidence that a loan or receivable was impaired; and, if so,
(c)the proper quantum of any provision for impairment;
264.Because that was the case, he failed during the Relevant Period to take all reasonable steps to secure compliance by BSL with the accounting standards, as set out in paragraph 113 above, in respect of the loans set out in Section G above.
265.By reason of those failures, Mr Godfrey breached s 344 of the Act in relation to the:
(a) BSL 2011 financial report;
(b) BSL 2011-12 half-year financial report; and
(c) BSL 2012 financial report.
J. Seriousness of Breaches
266.The following considerations reflect on the seriousness of the breaches by Mr Godfrey.
267. Mr Godfrey was:
(a)in respect of the accounting period ended 30 June 2011 and 31 December 2011, the managing director of the Banksia Financial Group and BSL and had primary responsibility for determining the appropriate provision for impairment of loans and receivables recognised on the balance sheet of BSL; and
(b) in respect of the accounts for the period ended 30 June 2012:
i.involved in the determination of the provisions for bad and doubtful debts in that he prepared a draft of proposed provisions for impairment before handing over his executive responsibilities to Mr Shaw;
ii.otherwise, a non-executive director of BSL and a signatory to those accounts.
268.The proper performance of the task of providing for bad and doubtful debts was of critical importance to BSL because:
(a)loans and receivables comprised by far the preponderance of BSL’s assets;
(b)BSL was thinly capitalised, having at all times in the Relevant Period a debt to equity ratio of at least 25:1 and a substantial change in the amount of impairment of mortgage investments was capable of having a significant impact on BSL’s solvency;
(c)the value and marketability of many of the properties securing mortgage investments by BSL and SSI was significantly adversely impacted by the global financial crisis which commenced in late 2008; and
(d)BSL was a significant borrower of money from the public, and it can be inferred that at least to some degree (directly or indirectly) investors in BSL’s debentures relied upon the accuracy of the financial accounts contained in its prospectuses.
269.The failures by Mr Godfrey resulted in an overstatement of the profit before tax, and the total issued capital reserves and retained earnings in each of the financial reports referred to in this statement.
270.Correcting for those mis-statements in issued capital, reserves and retained earnings, results in an increase in BSL’s debt to equity ratio in the:
(a) BSL 2011 financial report from 26.2 to 30.0;
(b) BSL 2011-12 half-year financial report from 27.5 to 34.1; and
(c) BSL 2012 financial report from 27.6 to 32.0.
271.At all times in the Relevant Period, the trustee of the debenture holders’ interest in BSL was the Trustee.
272.There were terms of the trust deed entered into between BSL and the Trustee to the effect that:
(a)BSL would not issue debentures if its total external liabilities (Total External Liabilities) would, by reason of the issue of those debentures, exceed 97% of its total tangible assets (Total Tangible Assets) (cl 8.01) (Capital Adequacy Ratio);
(b)Total Tangible Assets was to be calculated in accordance with generally accepted accounting principles and was not to include amounts, inter alia, of provision for depreciation and bad and doubtful debts (cl 8.02);
(c)Total External Liabilities were defined as the aggregate as disclosed in the last audited financial report of BSL of all secured and unsecured liabilities.
273.In or about September 2010, BSL changed its policy regarding the calculation of its Total Tangible Assets for the purposes of the trust deed to add back to the value of loans and receivables the value of impairment losses recognised on those assets.
274.On each of the reporting dates in the Relevant Period, BSL’s Capital Adequacy Ratio calculated in accordance with that decision was as follows:
Date Ratio Total Tangible Asset Total External Liabilities 30 June 2011 96.21% $655,925,363 $631,098,389 31 December 2011 96.31% $662,022,903 $637,597,810 30 June 2012 96.18% $693,307,972 $666,818,527 275.The calculation for the purposes of determining the Capital Adequacy Ratio on each of the reporting dates in the Relevant Period, prior to the decision in paragraph 273 to add back the value of impairment losses, and taking into account the assets and liabilities actually reported in the financial statements issued during the Relevant Period, would have resulted in the following Capital Adequacy Ratios:
Date Ratio Total Tangible Asset Total External Liabilities 30 June 2011 96.83% $651,779,363 $631,098,389 31 December 2011 97.03% $657,106,903 $637,597,810 30 June 2012 97.08% $686,852,972 $666,818,527 276.Taking account only of the Underprovided Mortgage Investments, and the consequential reduction in the value of the total tangible assets, the ratio reported in each of the financial statements issued during the Relevant Period ought to have been up to the following:
Date Ratio Total Tangible Asset Total External Liabilities 30 June 2011 97.47% $647,456,846 $631,098,389 31 December 2011 97.67% $652,826,363 $637,597,810 30 June 2012 97.76% $682,097,926 $666,818,527
277. At all times during the Relevant Period, BSL was required by:
(a)s 709 of the Act to prepare a prospectus for the offer of debentures;
(b)s 710 of the Act to include in the prospectus all information that investors and their professional advisors would reasonably require to make an informed assessment of the assets and liabilities, financial position and performance, profits and losses and prospects of BSL; and
(c)s 728 of the Act to refrain from offering securities under a prospectus if there is a misleading or deceptive statement in the prospectus.
278.On or about 17 October 2011, BSL issued prospectus number 18 for term and at call investments (2011 Prospectus).
279. The 2011 Prospectus:
(a) stated in the synopsis that at 30 June 2011:
i.the surplus of assets over liabilities of BSL was $24.06 million; and
ii.profit after income tax expenses was $1.86 million;
(b) stated that its equity ratio was 3.6%;
(c)stated in its explanation of the equity ratio that it has made provision in its accounts for impairment of receivables and impairment of loans and receivables which at 30 June 2011 was $4,146,000.
280.Those statements in the 2011 Prospectus were misleading or deceptive because the reduction in the value of the assets reported in the BSL 2011 financial report set out at paragraph 252 above meant that:
(a) at 30 June 2011:
i.the true surplus of assets over liabilities of BSL was $21.04 million;
ii.the true profit after income tax expense was a loss of $1.22 million; and
iii.the true equity ratio was 3.2%;
(b)BSL’s provision for impairment as at 30 June 2011 was inadequate and ought to have been an amount of $8,468,517.
281. The misleading or deceptive statements in the 2011 Prospectus:
(a)were based upon the BSL 2011 financial report;
(b)would not have been made but for Mr Godfrey’s failure to take all reasonable steps to secure compliance with parts 2M.2 and 2M.3 of the Act.
282. The 2011 Prospectus remained current until 25 October 2012.
283.Between 17 October 2011 and 25 October 2012, BSL borrowed an amount of about $40 million from the public pursuant to applications made under the 2011 Prospectus. A significant amount of this investment was rolled over from investments made with BML. It is not possible to say how many, if any, of those investments would have been made if the BSL 2011 financial report (as reflected in the 2011 Prospectus) was not misleading or deceptive in the manner outlined in paragraph above.
284.The persons who subscribed for debentures issued by BSL under the 2011 Prospectus have suffered losses that the Receivers and Managers appointed to BSL on 25 October 2012 assessed to be 17 cents in the dollar.
K. OTHER MATTERS
K.1 Losses Limited
285.To date each debenture holder has been paid at least 80 cents in each dollar invested in a debenture.
K.2 No Dishonesty
286.In respect of the provision for impairment, Mr Godfrey acted honestly throughout the Relevant Period in relation to his compliance with the Act and did not profit in any way from any understatement of impairment of BSL’s loans.
K.3 Failings by BSL’s Auditor
287.In January 2009 BSL engaged RSD as BSL’s independent audit firm for the year ending 30 June 2009, replacing Maxwell Brown and Mountjoy in accordance with BSL’s A&CGC and Board policies on auditor rotation and independence. RSD continued to act as BSL’s auditor thereafter.
288.RSD’s audit plans specifically noted that additional audit emphasis would be placed on provisioning, including a review of the provisioning process and assessment of the adequacy of provisions held in BSL.
289.RSD issued unqualified audit reports which expressly stated, amongst other things, “we are satisfied that there are no material errors in the provision for losses held based on the security position”. This provided significant comfort to the Board that their independent review of the financial statements prepared by management and the discussions in relation to provisioning at Board level were validated by independent professional auditors who had specifically reviewed the provisioning process and the adequacy of BSL’s provisions.
290. In its Audit Plans issued to BSL each year, RSD stated:
The current economic and environmental climate will result in us completing additional procedures in relation to the adequacy of the specific provision held.
We will assess the adequacy of the provision and the impact on customers’ ability to repay their loans given current Australian economic factors and the mix of the loan portfolio.
We will review the provisioning process to ensure that specific provisioning is conducted in accordance with regulatory requirements and specifically:
-processes to, on a timely basis, identify exposures where recovery is considered doubtful;
- valuation of security held; and
-impact of credit crisis, drought, water availability and other issues …
… we believe the audit risk profile for the Banksia Financial Group is ‘Moderate’. Our assessment notes that the Banksia Financial Group has strong systems and procedures in place, with staff having excellent experience and knowledge of the business.
291.As referred to above, Mr Sinnott, the lead auditor and principal of RSD, attended A&CGC meetings, during which discussions took place regarding “[l]oan parameters, valuations, impairment and arrears” and Banksia’s files were noted by Mr Sinnott as providing “sufficient explanation and a realistic assessment of provisions”. Mr Sinnott specifically informed the A&CGC that he had reviewed BSL’s provisions and non-performing loans. A&CGC members inquired of Mr Sinnott whether the financial reports complied with the accounting standards, which Mr Sinnott confirmed was the case. The ‘hold’ strategy was also discussed within the A&CGC when considering provisioning and arrears, while Mr Sinnott was present.
292.The independent chairs of the A&CGC (Ian Evans and subsequently Mike Hall), both of whom were professional auditors, were involved in reviewing the provisions that were applied by BSL. Mr Hall received a copy of all the Board financial papers relating to loan arrears and provisions. The Board took great comfort in Mr Hall’s leadership of the A&CGC, particularly given his knowledge of the business from his previous role as BSL’s auditor, and the audit process and requirements (including requirements under the accounting standards).
293.In considering the level of provisions when approving the financial statements, the A&CGC’s area of focus was directed to RSD’s consideration of the reasonableness of the recommendations of management and the robustness of BSL’s systems and processes, rather than canvassing once again the detailed discussions concerning recoverability and assumptions in respect of particular non-performing loans that had already been undertaken at Board level. Notwithstanding this, there were on occasion detailed discussions at A&CGC meetings on specific elements of loan arrears and/or provisions.
294.From the A&CGC’s point of view, it was important that the auditor was testing not only the procedures adopted by BSL’s management when considering provisioning, but also the actual level of the provisions being put forward. To that end, the A&CGC met with Mr Sinnott to consider each of RSD’s audit reports and discussed with him the specifics of the audit and, in particular, the processes he adopted. Mr Sinnott wrote to the A&CGC summarising RSD’s audit procedures, identifying a very thorough and comprehensive review of Banksia’s mortgage loans including specific confirmation that RSD had “[r]eviewed and assessed current provisions for doubtful debts held on loans”. RSD repeatedly confirmed that the audit process included not only a review of all loans under administration but a review of the specific recovery actions and assumptions and the agreed level of provision in respect of those loans.
295.Representatives of the A&CGC directly asked Mr Sinnott during an A&CGC meeting whether RSD undertook its own independent review of the level of provisioning in BSL. Mr Sinnott responded by confirming that this was the case and that RSD did not just adopt the position put by management. Mr Sinnott indicated that the audit had included a separate assessment of the files and a determination of the provisioning involved and its reasonableness.
296.During A&CGC meetings, members of the committee raised with Mr Sinnott the issue of whether BSL’s financial reports complied with applicable accounting standards, which Mr Sinnott confirmed they were compliant. The A&CGC also discussed with Mr Sinnott other work he had undertaken, including seeking confirmation that he had signed off on any relevant Trustee certificates as to capital adequacy under BSL’s Trust Deed. The A&CGC members also ensured that they met with Mr Sinnott in the absence of management representatives, so that there was an opportunity for any issues of concern to be raised by either Mr Sinnott or the committee members.
297.After investigation by ASIC, the performance of the audits of the financial statements in the Relevant Reports ultimately resulted in Mr Sinnott giving enforceable undertakings to ASIC under s 93AA of the ASIC Act, including an undertaking that for five years he not perform any duty or function which requires registration as an auditor under the Act.
K.4 Co-operation with ASIC
298.Mr Godfrey has cooperated fully with ASIC in its investigation in relation to his possible contravention of the Act.
K.5 Compensation to investors
299.The collapse of BSL has resulted in litigation in the Supreme Court of Victoria against, among many others, Mr Godfrey, as follows:
(a)Proceedings No. SCI 2012 7185 – class action on behalf of the persons who invested under a prospectus issued by BSL;
(b)Proceeding No. [SCI 2014 5875] – claim brought by BSL (under the control of the Special Purpose Liquidators).
300.On or about 12 April 2016, confidential terms of settlement were agreed between the plaintiffs in the above proceedings and some of the defendants, including Mr Godfrey, whereby those defendants agreed to (and since have done so) pay compensation to the plaintiffs and were released from all claims.
301.On 26 August 2016, the Honourable Justice Robson made orders whereby, in effect, the Court:
(a)approved of the settlement, for the purposes of the rules governing class actions; and
(b)authorised the Special Purpose Liquidators to proceed with the settlement.
23 June 2017
3
36
1