O’Sullivan and Australian Securities & Investments Commission
[2022] AATA 153
•27 January 2022
O’Sullivan and Australian Securities & Investments Commission [2022] AATA 153 (27 January 2022)
Division:TAXATION AND COMMERCIAL
File Number(s): 2015/0837 & 0838
Re:Michael O’Sullivan
APPLICANT
AndAustralian Securities & Investments Commission
RESPONDENT
Decision
Tribunal:Mr P W Taylor SC, Senior Member
Date:27 January 2022
Place:Sydney
ASIC’s 16 February 2015 Ban decision under Corp Act s 920A is affirmed
ASIC’s 16 February 2015 Disqualification decision under Corp Act s 206F(1)(a) is set aside. In substitution for that decision, the Tribunal is satisfied that Mr O’Sullivan’s disqualification is justified, and decides that Mr O’Sullivan is disqualified from managing any corporation for a period (approximating two years and nine months) ending on 20 September 2024..
........................................SGD............................
Mr P W Taylor SC, Senior Member
Catchwords
CORPORATIONS – misleading financial product disclosure – banning order under s 920A – lack of care and diligence as a director – disqualification decision under s 206F – ban order decision affirmed – disqualification period reduced
Legislation
Administrative Appeals Tribunal Act 1975
Corporations Act 2001
Cases
ASIC v Australian Property Custodian Holdings Limited (Receivers and Managers appointed) (in liquidation) (Controllers appointed) (No 3) [2013] FCA 1342
ASIC v Cassimatis (No. 8) [2016] FCA 1023
ASIC v Drake (No. 2) [2016] FCA 1552
ASIC v Healey [2011] FCA 717
ASIC vRich (2009) 75 ACSR 1
ASIC v Adler [2002] NSWSC 483
ASIC v Vizard [2005] FCA 1037
ASC v Kippe (1996) 137 ALR 423
Australian Securities and Investments Commission v Forge [2007] NSWSC 1489
Australian Securities and Investments Commission (ASIC) v Mariner Corp [2015] FCA 589
Australian Securities and Investments Commission v McCormack [2017] FCA 672
Australian Executor Trustees Ltd v Provident Capital Ltd [2012] FCA 728
Boucher v ASC (1996) 71 FCR 122
Culley v ASIC [2010] FCAFC 43
Donald v ASIC [2000] FCA 1142
Doyle v ASIC [2005] HCA 78
Guss v ASIC [2006] AATA 401
Murdaca v ASIC (2009) FCAFC 92
Musumeci v ASIC [2009] AATA 524
Oreb v ASIC (No 2) [2017] FCAFC 49
O’Sullivan v ASIC [2017] AATA 644
O’Sullivan v ASIC [2018] FCA 228
R v Byrnes [1995] HCA 1
Re Hayes v ASIC [2006] AATA 1506
Re HIH Insurance Ltd (in prov liq);ASIC v Adler (2002) 42 ACSR 80
Seymour and Australian Securities and Investments Commission [2017] AATA 2581
Sweeney and Australian Securities and Investments Commission [2017] AATA 2182
Quinlivan v ASIC [2010] AATA 113
Vines v ASIC (2007) 73 NSWLR 451
Visnic v ASIC (2007) 231 CLR 381
Secondary Materials
Financial Sector Reform (Hayne Royal Commission Response—Stronger Regulators (2019 Measures)) Act 2020
REASONS FOR DECISION
Mr P W Taylor SC, Senior Member
Mr O’Sullivan was the driving force in the establishment, of Provident Capital Limited (“PCL”). He was PCL’s managing director throughout the period from its May 1998 incorporation to its 24 October 2012 liquidation. He was the “key person” identified in the Australian Financial Services licence granted to PCL on 14 February 2003.[1] In April 2005, when a related company Cashflow Finance Solutions Pty Ltd (“Cashflow”)[2] was incorporated, he became a director of that company, and was still a director at the time of Cashflow’s 28 May 2013 liquidation.
[1]PCL was a wholly owned subsidiary of Provident Asset Management Pty Ltd (PCL Asset Management). PCL Asset Management held its PCL shares in trust for the O’Sullivan Trust and the Provident Trust. Mr O’Sullivan and members of his family were the trust beneficiaries.
[2]PCL and Cashflow were related corporations because PCL Asset Management held all of the shares in PCL, and 51% of the shares in Cashflow:- see Corp Act ss 9, 46 & 50.
PCL’s main business was that of a money lender, primarily on the security of first mortgage loans. Until about July 2007, PCL’s funding for that aspect of its business came exclusively from the issue of public debentures. The debenture funding provided what PCL called its “Fixed Term Investment” (“FTI”) portfolio.) After August 2007 PCL also had bank financed funding:- see paragraph 62 below. In about August 2009, PCL launched a managed investment scheme that also operated a first mortgage fund.[3]
[3]Between February and April 2012, Mr O’Sullivan (with PCL’s other directors) incorporated Provident Funds Management Australia Ltd, another wholly owned subsidiary of PCL Asset Management, lodged an Australian Financial Services licence application for the new company, and sought to implement an arrangement under which Provident Funds Management Australia Ltd would act as the “responsible entity” for the managed investment schemes, and contract to have PCL carry out the actual management activities of the schemes. As a result of a voluntary de-registration application, the company was deregistered in March 2013.
Until mid September 2007 Cashflow’s name and status had been Provident Inventory Finance Limited (‘“PIFL”). Both of its names, particularly its incorporation name, indicated the nature of its business - as a provider of short term inventory finance for small and medium sized enterprises. Cashflow funded its lending operations partly under loan arrangements with PCL and partly under a “receivables” agreement with third parties:- see paragraph 332 below.
ASIC’s views of aspects of Mr O’Sullivan’s conduct in relation to PCL, and the circumstances of his involvement in the 2010 release of a guarantee he had given to support Cashflow, ultimately resulted in the two 16 February 2015 decisions that are the subject of these review proceedings. The two decisions, which originally took effect at the time of their 17 February 2015 service, were:-
(a)the (financial services) Ban decision:- an order, under the Corporations Act 2001 (“Corp Act”) ss 920A & 920B, banning Mr O’Sullivan from providing financial services, for a period of seven years. The order was based on findings that the contents of PCL’s various required reports and disclosure documents related to a “financial product”, had been misleading, contravened a financial services law and enlivened the banning power:- see Corp Act ss 728, 761A, 764A(1)(a), 920A(1)(e), 1041H(1). (An outline of the findings underlying the Ban decision is set out later in these reasons:- see paragraph 11 below.)
(b)the (company management) Disqualification decision:- an order, under Corp Act s 206F(1)(a), disqualifying Mr O’Sullivan from managing corporations, for a period of five years. The threshold basis for this order was the combination of (i) the liquidation of PCL and Cashflow, (ii) Mr O’Sullivan’s status as a director of each company, and (iii) the considerable asset deficiency reported by the respective liquidators.[4] That threshold having been crossed, ASIC considered Mr O’Sullivan had contravened his Corp Act s 180 obligation of reasonable care and diligenceas to the Cashflow guarantee release, and over a sustained period in his management of PCL’s largest loan. (An expanded outline of the reasons for the decision appears later in these reasons:- see paragraph 25 below.)
[4]PCL’s liquidator’s 18 December 2012 report under Corp Act s 533, disclosed an estimated zero return to unsecured creditors. A subsequent report in October 2013 estimated a $77.7m net asset deficiency.
Cashflow’s liquidator’s 14 March 2014 supplementary report included a “book value” net asset deficiency of about $5.6m. ASIC’s decision proceeded on the basis that Cashflow had a net asset deficiency of $2.46m.
On 23 February 2015 Mr O’Sullivan lodged applications for review of both ASIC decisions. On 30 March 2015 the Tribunal made an order under s41(2) of the Administrative Appeals Tribunal Act 1975 staying the further operation of the Disqualification decision. That stay order has remained in force and has an unexpired term only marginally less than the full five year disqualification period. On the other hand, at the time of the review hearing in March 2020, the unexpired term of the seven year Ban decision was just under two years.
The history of the review proceedings
The more than five year period between Mr O’Sullivan’s 23 February 2015 review application and the March 2020 hearing is not directly relevant to the matters to be determined. It merits a brief explanation nevertheless. That explanation provides background to the way the parties approached the review hearing.
Mr O’Sullivan’s review applications were the subject of Tribunal hearings in July, August and November 2015. There was a further procedural hearing in July 2016. Subsequently, the Tribunal’s 2 May 2017 decision affirmed ASIC’s Ban decision, but varied the Disqualification decision. The varied Disqualification decision conditionally permitted Mr O’Sullivan to manage three family companies:- see O’Sullivan v ASIC [2017] AATA 644.
Mr O’Sullivan successfully appealed to the Federal Court of Australia. In early March 2018 the Federal Court judgment set aside the Tribunal’s orders and remitted his review applications to the Tribunal:- see O’Sullivan v ASIC [2018] FCA 228 at [3]-[4], [39].
Three of Mr O’Sullivan’s PCL co-directors[5] had also been the subject of adverse ASIC decisions, and had made their own review applications to the Tribunal. One of those co-directors (Mr Bersten) had been the subject of the subject of 5 year Ban and Disqualification decisions by ASIC. A second co-director had been the subject of a two year Ban decision. The Tribunal’s November 2017 decision affirmed that ban:- see Sweeney and Australian Securities Investment Commission [2017] AATA 2182. A third co-director, who had also been a director of Cashflow, had been the subject of a three year Ban decision, and a three year Disqualification decision. In another November 2017 decision, the Tribunal affirmed the ban decision relating to that director, but set aside the Disqualification decision:- see Seymour and Australian Securities Investments Commission [2017] AATA 2581.
[5]Details of PCL’s directors are outlined in the section of these reasons dealing with PCL’s directors, officers and auditors:- see paragraphs 58 & 59 below.
In the preparation and conduct of the remitted review proceedings, the parties made strenuous efforts to agree upon an efficient way of presenting the enormous volume of relevant material in a manageable and comprehensible manner. Those efforts relevantly culminated in agreement (i) to tender the transcript of Mr O’Sullivan’s evidence at the earlier 2015 review hearing, ((ii) to limit the subject matter of any further cross examination of Mr O’Sullivan and, (iii) to rely on the contents of various, substantially agreed, summarising documents, whose contents I describe later in these reasons:- see paragraph 34 below.
Basis for the ban decision
ASIC’s 16 February 2015 banning order was based on findings that Mr O’Sullivan’s conduct, as a director of PCL and, more particularly, in relation to the company’s disclosures about a loan it had made to a project specific development corporation named Burleigh Views Pty Ltd (“Burleigh Views”), constituted both a personal failure to comply with a financial services law and involvement with PCL’s corresponding failure. Those failures provided the threshold authority for ASIC’s ban decision:- see Corp Act s 920A(1)(e)&(g).
PCL had first advanced funds to Burleigh Views pursuant to a March 2000, $4m 12 month mortgage loan agreement, for the purpose of funding the $1m purchase, and the $3m, two stage, 36 residential unit development, of a property at Burleigh Heads. Material to the present matter, by May 2008 (following various earlier defaults and renewal or variation of the original loan agreement) Burleigh Views had not completed the first stage of the development and had failed to repay the loan in accordance with the terms of the most recently negotiated (May 2007) conditional renewal terms. As a result of that default, in about July 2008 PCL took possession of the property as mortgagee. Burleigh Views went into liquidation in August 2008. At that time the outstanding loan debt approximated $13.5m and not even the Stage 1 construction of the development had been completed. In August 2009 the Gold Coast Council informed PCL that the still incomplete development no longer had a relevant approval. Subsequently, the development remained uncompleted but, as at March 2020, there was a prospect of development approval being obtained.
For a substantial part of the period from 2000 to 2008 the Burleigh Views loan had been PCL’s largest. It accounted for about 7% of PCL’s total loans, and a significantly larger proportion of its FTI portfolio loans. By the time of Burleigh Views August 2008 liquidation the loan balance had increased to about $13.81m. By about December 2009 it made up about 10% of the value of PCL’s total loan portfolio, and by no later than June 2011, it made up about 20% of PCL’s FTI loan portfolio:- see Schedule 4A to these Reasons - “PCL Loan Portfolio – Benchmark 5 Disclosures etc”. At both of those times interest accrued on the loan accounted for a very substantial proportion of PCL’s reported net profit before tax:- see Schedule 1-3A - Burleigh Views Loan - accrued interest & reported NPBT.
When PCL itself went into liquidation on 24 October 2012 the Burleigh Views loan balance had increased (as a result of fees, expenses and unpaid interest) to about $22m. (Material events detailing the history of the Burleigh Views loan, and events involved in PCL’s management of it, are summarised later in these reasons:- see paragraphs 67 to 124 below.)
Between October 2008 and March 2012 PCL published fifteen Quarterly Reports (see paragraph 163 below) and seven complementary half yearly Benchmark Reports (see paragraph 167 below). The Quarterly Reports were (typically) two page documents containing the compliance disclosures required by Corp Act s 283BF. Mr O’Sullivan signed each of the Quarterly reports. The Benchmark Reports were seven or eight page documents (required by ASIC’s “Regulatory Guide 69 – Debentures and notes: Improving disclosure for retail investors”) (“Reg 69”) that accompanied the corresponding Quarterly Report for March and September. They addressed the extent of PCL’s compliance with eight “benchmarks” set out in Reg 69 Section C. The PCL directors formally approved all of the Quarterly and Benchmark Reports - either at a PCL Board meeting, in a circular resolution, or in an email acknowledgment.
In its February 2015 decision reasons ASIC considered the Quarterly Reports PCL had provided to ASIC and AETL (see paragraph 60 below) were misleading or deceptive. This was because they did not disclose the following matters relating to the Burleigh Views loan:-
(a)that it had been in default since August 2008
(b)that PCL had taken possession of the property as mortgagee, and that Burleigh Views was itself in liquidation
(c)that the loan default had the capacity to materially prejudice the interests of PCL’s debenture holders
(d)that all of the valuations PCL commissioned of the Burleigh Views property (from 2004 until May 2012) addressed its value “as if” the development was complete, whereas the development was incomplete and no longer had a current development approval for its completion. (The nature and effect of the various valuations and appraisals of the Burleigh Views property are described later in these reasons:- see paragraphs 130 to 136 below.)
ASIC considered the Benchmark Reports were misleading or deceptive, because they did not disclose the fact that Burleigh Views had gone into liquidation in August 2008, and failed to comply with the specific requirements of the Reg 69 Benchmark 7. That benchmark particularly related to the valuation basis of development and construction loans, and loans where the security property accounted for more than 5% of the reporting entity’s assets. (The required Benchmark contents are summarised later in these reasons:- see paragraph 140 below.)
Overall ASIC considered Mr O’Sullivan knew (i) from May 2008 onwards, that the Burleigh Views loan was in arrears, (ii) that PCL had taken possession of the property by about July 2008, (iii) that Burleigh Views had gone into liquidation and, (iv) by April 2010, that the Burleigh Heads property did not then have the valid consents necessary to complete the development, and whose existence had been assumed in the property valuations. On that basis ASIC found that Mr O’Sullivan had engaged in misleading and deceptive conduct (within the scope of Corp Act s 1041H) in relation to his approval of:-
(a)PCL’s 15 Quarterly Reports from October 2008 to March 2012
(b)the seven Benchmark Reports PCL published between October 2008 and September 2011.
ASIC also considered that Mr O’Suillivan had approved each of 36 monthly “Trust Arrears Reports” that PCL provided to AETL between about October 2008 and December 2011. None of those reports had disclosed either Burleigh Views August 2008 liquidation or the default status of the Burleigh Views loans, and ASIC considered that Mr O’Sullivan had not otherwise informed AETL of those matters. ASIC considered those combined circumstances established that Mr O’Sullivan’s conduct towards AETL had been misleading and deceptive, and also constituted a contravention of Corp Act s 1041H.
Next the ASIC decision reasons addressed the Information Booklets PCL had published in January and March 2012:- see paragraphs 187 & 191 below. Although each of those Information Booklets included a table of loan arrears (specifically of the FTI loan portfolio) those tables had not included the Burleigh Views loan arrears. That omission ASIC characterised as misleading or deceptive and, because Mr O’Sullivan had approved the issue of both Information Booklets, ASIC considered he had, in these two respects, again contravened a financial services law.
Finally, ASIC’s decision reasons addressed the PCL 22 December 2010 Prospectus (“Prospectus No 13”):- see paragraph 154 below. It had been approved by the PCL directors and issued under Mr O’Sullivan’s hand. Prospectus No 13 contained a statement that PCL was not engaged in property development, reported a September 2010 “as if complete” valuation ($26,680,000 exc GST) of the Burleigh Views property and indicated a corresponding 65.7% LVR. Prospectus No 13 did not, however contain information about Burleigh Views loan default, PCL’s 2008 entry into possession as mortgagee, or the August 2008 liquidation. Neither did it disclose the (pre 2010) lapse of the development consent for the property. ASIC found that, as a combined result of its positive contents and omissions, Prospectus No 13 both contained misleading statements and did not contain sufficient accurate information to permit an informed decision about PCL’s financial position (specifically the risk that the Burleigh Views loan would not be repaid). Consequently in offering debentures under the Prospectus, PCL had contravened a “financial services law” (specifically Corp Act s 728) and Mr O’Sullivan, because of his role in PCL and responsibility for the Prospectus contents, and been knowingly involved in PCL’s contravention.
Mr O’Sullivan’s concessions relating to the Ban decision
In his previous affidavit evidence Mr O’Sullivan had detailed the processes involved in the preparation of PCL’s various disclosure documents. (I discuss the process later in these reasons:- see paragraphs 197 to 202 below.) Relying on that information he had asserted having made all reasonable enquiries, and having held a reasonably based belief that none of the documents was misleading, either by statement or omission. However, in the present proceedings Mr O’Sullivan explicitly conceded a responsibility for the preponderance of the impugned disclosures, and the consequent availability of a Ban decision. Part of that concession derived from the contents of a September 2019 affidavit where Mr O’Sullivan set out concessions he regarded himself as having made during the course of his cross examination in the 2015 Tribunal proceedings. For the purposes of the present proceedings they can be sufficiently interpreted and summarised as having been to the following effect:-
(a)Burleigh Views itself never paid interest on its loan from PCL. Its interest payment default was typically accounted for in loan variations, or accruals, including “capitalised” unpaid interest, that were treated as additions to the loan principal
(b)from September or October 2008, until at least the end of 2011, the Burleigh Views loan should have been (but was not) included in the various loan arrears and loan default information in PCL’s Benchmark Reports, and its 2010 Prospectus No 13. Neither was it included in the loan arrears information in PCL’s January and March 2012 Information Booklets
(c)PCL’s financial controller generated the monthly loan arrears reports for AETL from PCL’s “NTBS” loan management system, and Mr O’Sullivan checked them before they were provided to the PCL Board
(d)as PCL’s managing director and chief executive officer, Mr O’Sullivan had a responsibility to correct anything in a PCL Prospectus that he knew dealt inaccurately with the status and circumstances of the Burleigh Views loan
(e)(throughout the principally relevant period, from 2007 to 2012) Mr O’Sullivan had known the contemporaneous status of the various valuations of the Burleigh Views property, including whether or not they were exclusive of GST, and had a “broad awareness” of the loan to valuation ratio (“LVR”) of the Burleigh Views loan
(f)(at least after the legal advice it received in April 2010) PCL should have disclosed the lapse of the development authority for the Burleigh Views property in Provident's disclosure documents.
In the same affidavit, and in outline submissions lodged on 2 October 2019, Mr O’Sullivan accepted that PCL’s September 2008 to March 2012 loan disclosures, in the various monthly Trustee Arrears Reports, the Quarterly Reports, Benchmark Reports, Prospectus No 13 and PCL’s 2012 Information Booklets, had been inadequate. The concession addressed 28 matters ASIC had highlighted in its “Issues 2, 3 and 4” (see paragraph 47(b) below) and acknowledged the following matters
(a)the failure to disclose the fact of the Burleigh Views loan default status, the loan arrears, the capitalisation of interest, PCL’s entry into possession, and control of the property, and the fact of Burleigh Views liquidation
(b)the failure to include the Burleigh Views loan in the disclosed loan arrears totals
(c)the failure to disclose (from April 2010 onwards) the lapsing of the (previous) development approval, and the risk that no renewed development approval would be obtained
(d)the failure to disclose that the Burleigh Views loan’s LVR (loan to valuation ratio) did not take into account either the absence of a current development approval or the required completion costs of the proposed development
(e)the failure to disclose that the Burleigh Views property valuations were inclusive of GST
(f)the erroneous claim (in the October 2008, April and October 2009 Benchmark Reports) that the development was nearing completion
(g)the failure to disclose in PCL’s (December 2010) Prospectus No 13 the risk of a significant shortfall on the Burleigh Views loan
(h)the mis-statement (in PCL’s April and October 2011 Benchmark Reports) that the recovery of the Burleigh Views loan capital and interest was “reasonably certain”
(i)the erroneous claim, in the Information Booklets, that PCL anticipated completion of the development construction in 2012, when no Development Approval had been obtained.
In the light of these concessions, Mr O’Sullivan’s submissions accepted that the Quarterly Reports did not comply with the disclosure requirements (relating to debenture compliance and material prejudice to security interests) in Corp Act s 283BF(4). Mr O’Sullivan also accepted that had he had contravened the misleading and deceptive conduct prohibition in Corp Act s 1041H(1) in relation to the inadequate disclosures in monthly loan arrears reports to AETL, the Quarterly Reports, the Benchmark Reports, Prospectus No 13 and the Information Booklets. That acceptance carried with it an acknowledgement of the appropriateness of a Ban decision being made under Corp Act ss 920A &, 920B. Mr O’Sullivan nevertheless disputed the seven year length of the ban period imposed. In that dispute he specifically challenged the appropriate response to ASIC’s “Issues 2(c) & 4(e)” - that (i) after May 2007, PCL had failed to disclose that it had not obtained its own “as is” valuations, and (ii) PCL had inaccurately represented (in Prospectus No 13) that it was not engaged in property development.[6]
[6] I address those disputes later in these reasons:- see paragraphs 278 to 283 below.
Basis for the disqualification decision
The circumstances of Mr O’Sullivan’s status as a director of both PCL and Cashflow, where those companies had gone into liquidation with asset deficiencies reported by their liquidators, conditionally enlivened ASIC’s statutory discretion in Corp Act s 206F(1) to disqualify Mr O’Sullivan from managing any corporation, for a period of up to five years. The exercise of that discretionary power is contingent on satisfaction that the particular director’s disqualification is “justified”. That satisfaction must be arrived at after regard to any relationship between the liquidated corporations, and may take into account the director’s conduct in relation to the management or property of any corporation:- Corp Act s 206F(2)(a)&(b). The nature and extent of any relationship between the asset deficient corporations may inform, and does not preclude, a determination that disqualification is appropriate: - Guss v ASIC [2006] AATA 401. (In its 16 February 2015 reasons ASIC accepted that PCL and Cashflow were related corporations, found that they operated separate enterprises, and considered that their corporate relationship did not inhibit satisfaction that disqualification was “justified”.)
Although PCL and Cashflow operated separate businesses, between 2005 and 2007 Cashflow had entered into various transactions under which it obtained funding from PCL:- see paragraph 332 below. It also obtained funding under a 30 June 2006 factoring agreement (“RASA”) the terms of which included an indemnity from Cashflow, and a limited guarantee by each of PCL, Mr O’Sullivan and Mr Nolan (another Cashflow director):- see also paragraph 332(b)below.
In February 2010 the RASA creditor (then an entity called “BBSFF”) had demanded a $700,000 payment from Cashflow. On 29 April 2010 BBSF made similar demands on PCL, Mr O’Sullivan and Mr Nolan, as guarantors. Five months later, pursuant to three separate Deeds entered into on 3 September 2010, PCL paid BBSFF $0.775m. One Deed operated to novate the RASA to PCL, and release PCL from its RASA obligations, in consideration of the $775,000 payment. In the two other Deeds, BBSF separately released each of Mr O’Sullivan and Mr Nolan from their respective RASA guarantee obligations, without their having provided any consideration for the release. The 16 February 2015 ASIC reasons concluded that PCL had required, and Mr O’Sullivan had personally caused, BBSF’s execution of the Deeds of Release. The reasons further concluded that Mr O’Sullivan had participated in this transaction and neither obtained independent advice that his guarantee had no value, nor provided any consideration to PCL for the release of his guarantee. The reasons concluded that Mr O’Sullivan’s conduct involved a failure to exercise reasonable care and diligence as a director, and contravened Corp Act s 180.
Apart from the circumstances surrounding Mr O’Sullivan’s 3 September 2010 release from the Cashflow guarantee, the 16 February 2015 reasons contained no specific findings about, and no criticism of, Mr O’Sullivan’s conduct in relation to Cashflow. In fact, the majority of the matters addressed in those reasons concerned Mr O’Sullivan’s conduct in relation to PCL. In that respect they focussed on essentially the same factual background as that canvassed in the Ban decision reasons. But, in two respects, they extended beyond the specific misleading and deceptive conduct findings that founded the Ban decision.
The first of those extended misleading conduct findings related to PCL’s December 2010 Prospectus No 13, and its disclosure inadequacies relating to the management of the Burleigh Views loan. ASIC characterised Mr O’Sullivan’s conduct relating to those inadequacies (and implicitly the similar inadequacies in each of the Quarterly Reports, Benchmark Reports, and Arrears Reports to AETL) as a failure to act with the due care and diligence required by Corp Act 180(1).
The second of the extended misleading conduct findings related to the contents of PCL’s disclosure of its status as a creditor of Cashflow, in the post June 2010 Quarterly Reports and Benchmark Reports. Up to October 2010 all of the Quarterly Reports had disclosed the fact and extent of PCL’s own direct funding assistance to Cashflow:- see paragraph 332(a) below. In addition, the Benchmark Reports had also disclosed PCL’s guarantee of Cashflow’s RASA liability:- see paragraph 332(b) below. But under a 3 September 2010 Novation Deed, PCL had acquired all of Cashflow’s RASA debt:- see paragraphs 335(l) & 335(m) below. Thereafter, PCL’s Quarterly Reports had adhered to their previous format and content in relation to Cashflow’s indebtedness, and made no reference to the fact or consequences of the September 2010 Novation. The Benchmark Report of October 2010, reported the fact that PCL’s guarantee had been released. The Benchmark Report of April 2011 reported (without any specific detail) the fact of PCL’s acquisition of Cashflow’s RASA debt. Against this factual background, the 16 February 2015 reasons found that Mr O’Sullivan had engaged in misleading conduct, in relation to each of the, post September 2010, Reports, and had contravened Corp Act s 1041H. The findings were variously expressed, but their substance was that non-disclosure of the combined facts of (i) the 3 September 2010 Novation and, (ii) the voluntary release of PCL’s co-guarantors (one of whom was Mr O’Sullivan) had the capacity to mislead AETL to believe that PCL had acted in an entirely rational way, and had not assumed any additional risk “as a result of the release of the guarantee”.
In addition to those disclosure related findings, and despite Mr O’Sullivan’s apparent subjective confidence in the recoverability of the loan (and the apparent approval of that strategy by his PCL co-directors) ASIC considered that he had failed to act with the due care and diligence required by Corp Act 180(1) in relation to the management of the Burleigh Views loan. That failure was considered to have occurred in the following respects:-
(a)authorising the May 2007 refinancing of the Burleigh Views loan without (i) formal documentation having been prepared, (ii) obtaining an updated valuation or, (iii) conducting any proper assessment of PCL’s best interests;
(b)after Burleigh Views August 2008 liquidation, failing to obtain appropriate legal and external advice, or conduct a mortgagee sale of the Burleigh Views property, pursue the loan guarantors or “otherwise follow the procedures” in PCL’s Manual / Credit Policy.
(c)instructing the ongoing capitalisation of the Burleigh Views loan in February 2009.
A further matter addressed in the 16 February 2015 reasons concerned the third variation of the Burleigh Views loan agreement, pursuant to a 24 April 2004 Deed. Clause 1 of the Schedule to the Deed identified the $8.89m loan principal, and listed its 19 separate components. One of them was a $3m amount described as “construction costs to be advanced by progressive payments as specified in clause 3(e) of the 21 March 2000 loan agreement. (That clause permitted progressive monthly drawdowns supported by the certification of completed work by an approved quantity surveyor.) Eight days before the 24 April Deed, Mr O’Sullivan had written to Mr P Zarro (then Burleigh Views sole director and a co-guarantor of the Burleigh Views loan) and Mr Sukic (a former director of City Pacific Developments Pty Ltd “City Pacific”) conveying “agreement in principle” to assist Burleigh Views in providing $900,000 to City Pacific to pay $4.5m payment to PCL to discharge its mortgage over lots in the “Gold Coast Financial Centre” and permit the sale of those lots to Mr Sukic (for $3.6m). An amount of $900,000 was drawn down on the Burleigh Views loan on 24 June 2004, and on the same day City Pacific paid $4.33m to PCL and obtained a discharge of its mortgage. The ASIC reasons concluded that this $900,000 drawdown transaction had no commercial rationale for PCL, but clearly operated to the benefit of City Pacific Pty Ltd. Mr O’Sullivan had been a director and shareholder of City Pacific, as had Mr Sukic. Mr Sukic had also been a PCL director, and was a personal acquaintance of Mr O’Sullivan. The ASIC reasons considered that this transaction operated only for the benefit of City Pacific and had involved Mr O’Sullivan improperly using his position as a PCL director to benefit City Pacific. Conduct of that kind was a contravention of Corp Act s 182(1):- see further paragraphs 303 to 330 below.
The reasons accepted that Mr O’Sullivan was a director of various other companies, and that no criticism had been made of his conduct in relation to any of them. Nevertheless, the ASIC decision concluded that disqualification was justified, essentially because Mr O’Sullivan’s conduct was considered to have been amongst “the worst cases”. The ASIC decision also considered Mr O’Sullivan lacked insight in the seriousness of his conduct, specifically in relation to the June 2004 City Pacific drawdown, and the September 2010 release of the Cashflow guarantee.
Matters agreed between the parties
I referred earlier to the history of the review application and the parties agreement about the conduct of the remitted view proceedings:- see paragraph 10 above. In the following paragraphs I detail the various documents on which the parties substantially agreed, and proffered for the purpose of facilitating the determination of the review proceedings.
The First Statement of Agreed Facts (“SOAF:1”):- This document was one of two “agreed” documents tendered at the previous review hearing. It contains a 109 paragraph statement of facts concerning matters requiring consideration in the review. Those matters include:-
(a)PCL:- PCL’s material corporate details and history:- SOAF:1 ¶1 to 12. Those matters are summarised later in these reasons:- see paragraphs 50 to 57 below.
(b)Burleigh Views:- The history of the Burleigh Views loan from 2000 to 2008 – including the 21 March 2000 $4m loan agreement, its variation in 2002, 2004 and 2007, Burleigh Views 21 August 2008 liquidation, and PCL’s possession and control of the property after 5 September 2008:- SOAF:1 ¶13 to 38. The history of the Burleigh Views loan is outlined later in these reasons:- see paragraph 67 below.
(c)Development Approval:- The history of the Burleigh Views loan from August 2009 to June 2012 – including the lapse of the Development Approval for the property, steps taken to attempt to obtain a new Development Approval, PCL’s first $2m loss provision for the loan in December 2011, and valuations of the property in 2011 and 2012:- SOAF:1 ¶39 to 58.
(d)PCL’s public Disclosure documents:- Details of PCL’s October 2008 to March 2012 Quarterly Reports, Benchmark Reports and Loan Arrears reports to AETL, and its December 2010 Prospectus and 2012 Information Booklets, and particularly the fact that the loan was typically not identified as a loan that was in arrears:- SOAF:1 ¶59 to 68
(e)PCL’s management reports:- Details of the typical content of the regular monthly reports to the PCL Board throughout the period from November 2008 to April 2012, including details of the format and content of “Top Ten Loans Reports” and “Loan Arrears Reports”, characterisation of the Burleigh Views loan as PCL’s largest, and the fact that it was never included in the “Loan Arrears Reports”:- SOAF:1 ¶69 to 72
(f)City Pacific Drawdown:- Details of PCL’s 4 September 2001 $4.070m loan to City Pacific, a June 2004 $0.9m drawdown on the PCL Burleigh Views loan and the circumstances in which Burleigh Views used the loan drawdown to assist City Pacific discharge its then (approximately) $4.5m loan balance debt to PCL:- SOAF:1 ¶74 to 79.
(g)Cashflow’s structure and background:- Details of Cashflow’s business (as a short term “inventory” financier), its corporate structure and method of funding, including a 21 September 2005 “Working Capital Facilty” and a March 2012 promissory note agreement, both provided by PCL, and a June 2006 Receivables Acquisition and Servicing Agreement: (“RASA”) that had been guaranteed by PCL and Mr O’Sullivan (the “Cashflow Guarantee”), was held by BBSF Securitisation Limited (“BBSFF”) as at February 2009, and was novated to PCL in September 2010:- SOAF:1 ¶80 to 90
(h)PCL’s novation of Cashflow’s RASA and release of the Cashflow guarantee:- Details of Cashflow’s November 2007 business loss insurance policy with Coface, the “breach of policy” proceedings Cashflow commenced against Coface in November 2009, BBSFF’s February and April 2010 demands on the Cashflow Guarantee, and the release of the Cashflow Guarantee (including the release of Mr O’Sullivan) in connection with PCL’s $0.775m payment to “BBSFF”:- SOAF:1 ¶91 to 107.
The Second Statement of Agreed Facts (“SOAF:2”):- This was the second of the two “agreed” documents tendered at the previous review hearing. In its opening paragraphs it records facts to the effect that
(a)PCL engaged its respective auditors, Walter Turnbull (in the period from 2008 to 2009) and HLB Mann Judd (in the period from 2010-2012) to conduct “audits or reviews” relating to its various
(i)Benchmark Reports – namely the October 2010 and October 2011 Benchmark Reports
(ii)Prospectus – namely Prospectus No 10 (2007), No 11 (2008), No 12 (2009) and No 13 (2010) (particularly in relation to the Benchmark Reports they contained)
(iii)Half year reports – 2008, 2009, 2010, 2011
(iv)Annual Reports – 2009, 2010, 2011
(b)the contents of PCL’s various Benchmark disclosures (in PCL’s Benchmark Reports, Prospectus and Information Booklets) had been derived from information in PCL’s audited annual and half year reports:- SOAF:2:- paragraphs 3 to 9.
The remaining 126 paragraphs of SOAF:2 set out more detailed statements outlined the communications between the auditors and PCL personnel, relating to those audit tasks, particularly where the communications or conduct related to the Burleigh Views loan. Those agreed matters had been derived from the contents of many hundreds of audit related documents that were exchanged between the parties in the months following a directions hearing in July 2016. Mr O’Sullivan sought to derive from the SOAF:2 contents the inference that PCL’s auditors were aware of all the material circumstances relating to the Burleigh Views loan, but nevertheless relevantly approved (or at least did not demur from) the contents of PCL’s disclosure documents. Mr O’Sullivan’s contentions are addressed later in these reasons:- see paragraph 218 below.
Propositions about the other PCL Director’s knowledge of the Burleigh View loan default:- Another submission Mr O’Sullivan made was that, at all material times the other PCL directors were well aware of the state of affairs relating to the Burleigh Views Loan. Mr O’Sullivan contended that the knowing acquiescence of the other directors in PCL’s management of, and disclosure conduct relating to, the loan was a relevant consideration in evaluating the significance of any adverse findings made in in relation to his personal conduct. In order to simplify the process of addressing Mr O’Sullivan’s submission the parties reached agreement on some 13 factual propositions relating to the knowledge of the other PCL directors. Those propositions are summarised later in these reasons:- see paragraph 215 below.
Consolidated Statement of the Parties Positions (“ConSTAT”):- This table was prepared for the purposes of the present review hearing and was lodged with the Tribunal on 16 December 2019. The first two ConSTAT columns set out the contents of ASIC’s 21 December 2018, 192 paragraph statement of the factual findings appropriate for the resolution of the proceedings. A third column in the table recorded Mr O’Sullivan’s responses to each ConSTAT item. The fourth column set out ASIC’s reply to those responses. (I have used the ConSTAT items and comments to point to the assertedly relevant information, identify material factual disputes, and guide the factual findings I have made.)
The PCL financial statement schedules:- These three schedules summarise PCL’s balance sheet and profit and loss statements, including aspects of its liabilities and cashflow in the financial years from 2007 to 2011, and in the half year to December 2011. ConSTAT item 17 indicated the parties agreement about the accuracy of the three schedules, which bear the following titles:-
(a)Schedule 1 –- PCL / Provident Profit & Loss / Balance Sheet - Summary
(b)Schedule 2 – PCL / Provident Financial Liabilities - Summary
(c)Schedule 3 – PCL / Provident Cashflow – Summary.
41.I have supplemented Schedules 1-3 with Schedule 1-3A – “Burleigh Views Loan - accrued interest & reported NPBT”. This Schedule tabulates the interest PCL accrued, in the Burleigh Views loan statement, from July 2006 to December 2011. The Schedule then compares the accrued interest with the total “Net Profit Before Tax” recorded in PCL’s financial statements, for each of the financial years from 2007 to 2011. The comparison shows that accrued interest on the Burleigh Views loan amounted to a substantial, and increasing proportion (from about 20% to over 100%) of PCL’s reported “NPBT”.
PCL’s reporting and disclosure documents (“Schedule 4”):- This schedule lists the date, and material content, of all of the monthly reports to the PCL Board, the PCL Quarterly and Benchmark Reports, and the various PCL Prospectus – from December 2006 to June 2012. ConSTAT item 109 indicated the parties agreement about the accuracy of the disclosure documents schedule.
I have supplemented Schedule 4 with Schedule 4A – “PCL Loan Portfolio – Benchmark 5 Disclosures – Loan numbers, values and arrears”. This tabulates PCL’s Benchmark 5 disclosures (see paragraph 171 below) relating to the value of its total loans, and loan arrears, from 30 June 2008 to 31 December 2011. The Schedule show that the Burleigh View loan was consistently more than 10% of PCL’s “FTI” loan portfolio, and more than 33% of the value of its total loan arrears.
Board approval of the PCL disclosure documents (Schedule 5”):- This Schedule outlines the fact, dates and manner of the PCL Board’s approval of all the contentious disclosure documents. ConSTAT item 109 again indicated the parties agreement about the accuracy of the contents of Schedule 5.
Burleigh Views property valuations (“Schedule 6”):- This schedule details the date and type of the various valuations and assessments of the value of the Burley Views property, together with relevant details of each assessment:- see paragraph 130 below. Whilst the parties agreed on the contents of Schedule 6, Mr O’Sullivan did not concede that the valuation documents it listed reflected the totality of the valuations that PCL did in fact obtain. I address, and reject, that proposition later in these reasons:- see paragraph 133 below.
The PCL Audit Committee attendances (“Schedule 7”):- This schedule details the dates of, and the attendances at, meetings of the PCL audit committee. In the course of the review hearing the parties indicated their agreement to the accuracy of this schedule.
The annotated Statement of Issues:- In December 2018 ASIC produced a statement of issues. By the time of the March 2020 the parties had provided a version of that document annotated with Mr O’Sullivan’s responses. Those responses substantially agreed with the formulated question, sometimes indicated agreement with underlying factual assertions or questions it contained, whilst disputing that any adverse conclusion could be drawn from them, and sometimes disputed or qualified the underlying factual assertions. Leaving aside those matters that were directly concerned with the content and terms of any ban or disqualification order, It is sufficient for present purposes to summarise the stated issues as requiring determination of the following matters:-
(a)Issues 1 & 5:- Contravention of Corp Act s 180(1). These two “issues” raised 10 aspects of PCL’s management of the Burleigh Views loan, including the content of the reporting to the PCL Board, and sought to characterise them as involving breaches of the statutory duty of due care and diligence.
(b)Issues 2, 3 & 4:- Contravention of Corp Act ss 283BF, 728 & 1041H. These three “issues” addressed the content of the various PCL disclosure documents. They identified 28 respects (broadly those summarised in paragraphs 15 & 19 to 21 above) in which the various documents were said to have involved contraventions of these Corp Act provisions.
(c)Issue 6:- The knowledge and conduct of other PCL personnel and PCL’s auditors. This “issue” posited that both PCL’s auditors and Mr O’Sullivan’s co-directors were aware of the material aspects of the Burleigh Views loan, and at least acquiesced in the impugned management and disclosure conduct relating to the loan. It posed the question of the extent to which that acquiescence operated to mitigate any adverse characterisation of Mr O’Sullivan’s personal conduct:- see paragraphs 203 to 267 below.
(d)Issue 7:- the circumstances of the September 2001 City Pacific drawdown. This “issue” enquired whether the June 2004 drawdown of $0.9m against the Burleigh Views loan principal involved Mr O’Sullivan improperly using his position, or failing to act with the requisite care and diligence:- see paragraphs 32 above & 303 to 330 below.
(e)Issues 8 & 9:- the circumstances of the release of the Mr O’Sullivan’s guarantee of Cashflow’s RASA obligations. Issue 9 raised a question whether Mr O’Sullivan should have considered that the guarantee had value. Issue 8 raised various related questions about the quality of Mr O’Sullivan’s conduct in participating in the September 2010 release of the guarantee, and in approving the contents of the disclosure documents relating to it:- see paragraphs 331 to 359 below.
(f)Issues 10 to 12:- determination of the Disqualification decision review. Issue 10 enquired about the accuracy and significance of regarding PCL and Cashflow as having carried on the same enterprise. Issues 11 and 12, posed questions about the appropriate length and extent of any disqualification decision.
(g)Issues 13 & 14:- determination of the Ban decision review. These Issues posed questions about the appropriate length of any ban decision.
Mr O’Sullivan’s various concessions about the inadequacy of aspects of the various PCL disclosure documents (see paragraphs 23 & 24 above) were accompanied (in his September 2019 affidavit) by cross references to the various matters particularised under “Issues 2, 3 and 4” of the Annotated Statement of Issues. As a result of that specificity, Mr O’Sullivan’s concession left in contest only two of the asserted disclosure deficiencies. They involved “Issue 2(c)” (PCL’s disavowal of involvement in property development) and “issue 4(e)” (non-disclosure of the absence of any “as is” valuation of the Burleigh Views property). (I later resolve the former of those issues in Mr O’Sullivan’s favour:- see paragraphs 278 to 283 below.)
PCL’s material corporate history
Although Mr O’Sullivan’s concessions acknowledged the accuracy of most of the factual matters underlying ASIC’s criticisms of PCL’s disclosures relating to the Burleigh Views loan, evaluating the significance of his personal conduct (particularly having regard to Issues 1 & 6) requires an understanding of PCL’s operations and of Mr O’Sullivan’s role.
Apart from matters directly relating to the Burleigh Views loan (see paragraphs 67 to 124 below) and those relating to Cashflow (see paragraph 335 below) the dates and events in PCL’s corporate history principally material to the present proceedings are briefly summarised in the following paragraphs:-
(a)December 2007, 2008, 2009 & 2010:- PCL issued a further five Prospectus “No’s 10 to 13, and a Supplementary Prospectus). The most presently material prospectus was Prospectus No 13. It was approved by the PCL Board on 17 December 2010, and released on 22 December 2010. The material contents of PCL’s Prospectus documents are outlined later in these reasons:- see further paragraph 143 to 162 below.
(b)22 December 2011:- ASIC wrote to PCL raising concerns about the adequacy of its financial disclosures, particularly in the light of the draft prospectus PCL had submitted to ASIC earlier that month. ASIC requested PCL to (i) undertake not to issue (or roll over) any further securities, and (ii) engage an independent expert to report on the company’s solvency. The particular matters ASIC cited as the reasons for its concern included (i) PCL’s uncertain prospects of recovering the Burleigh Views loan, having regard to projected development costs of $4m, (ii) the level of loan arrears and the adequacy of PCL’s provisioning and, (iii) the absence of current “as is” valuations for “distressed properties”.
(c)23 December 2011:- PCL responded to ASIC and indicated that it (i) had ceased accepting investments from new investors, (ii) had withdrawn its current (2010) Prospectus No 13, (iii) would not proceed to issue (the then draft) Prospectus No 14 and, (iv) would consult with ASIC about an information booklet to be issued to existing investors.
(d)January, March and April 2012:- PCL sequentially published three “Information Booklets” providing additional disclosure about its lending performance and financial circumstances. PCL had foreshadowed the 20 January 2012 Information Booklet in its 23 December 2011 response to ASIC. The third Information Booklet appears to have been prompted by AETL’s concerns about PCL’s (i) longstanding failure to include the Burleigh Views loan balance in its loan arrears reports and, (ii) inadequate response to an explanation request AETL had made after the publication of the March 2012 Information Booklet:- see paragraphs 125 & 126 below. The material contents of the three Information Booklets are outlined later in these reasons:- see paragraphs 186 to 196 below.
27 March 2012:- PPB Advisory provided both ASIC and AETL with the “Solvency review” AETL had commissioned in late February 2012. The review concluded that PCL was currently cash flow solvent, but faced the significant risk of an underlying asset deficiency. It estimated PCL had a potential $5.9m asset deficiency, and that 90% of all loans in PCL’s FTI Portfolio were non-performing.. The report recommended AETL commission a current “as is” valuation of the Burleigh Views property.
8 June 2012:- PPB Advisory provided an addendum to their 27 March 2012 Solvency Review. This addendum took into account valuation reports on three of PCL’s security properties, including the 8 May 2012 Savill’s Burleigh Views valuation (see paragraph 128 below). The report concluded that, once the new valuations were taken into account, PCL’s $6.08m net asset value as at 31 December 2011 was overstated. PCL would have to make provisions of $22.16m, resulting in a net asset deficiency approximating $16.08m. That deficiency could increase to $28.37m, if certain other loans were regarded as irrecoverable. The anticipated size of PCL’s asset deficiency meant that the claims of all debenture holders would not be met.
8 June 2012:- AETL commenced proceedings in the Federal Court of Australia to enforce the debenture holders’ securities. (AETL acted in reliance on Corp Act s 283HB(1), and contended that 90% of PCL’s loans were non-performing.)
3 July 2012:- Following the 29 June 2012 publication of its reasons for judgment, the Federal Court appointed receivers to PCL. (In those reasons Rares J found that PCL (i) was likely to have a net asset deficiency, including losses on the Burleigh Views loan and two other properties, and (ii) had no realistic prospect of raising funds to finance any asset shortfall. Rares J also found that the loan arrears disclosure in the 2012 Information Booklets had been confusing and incomplete:- Australian Executor Trustees Ltd v Provident Capital Ltd [2012] FCA 728 at [45]-[[57], [58], [62]-[64].) At that date PCL’s $256m total loans included approximately $150m in the FTI portfolio.
18 September 2012:- AETL appointed administrators to PCL.
24 October 2012:- PCL was put into liquidation. In their 30 October 2013 “Final Supplementary Report” PCL’s liquidators opined that PCL’s net asset deficiency approximated $77.746m. They identified five factors as contributors to PCL’s failure:- (i) default by a significant number of mortgage borrowers, (ii) poor loan recovery action by PCL, (iii) inadequate provisioning for credit losses, (iv) failure to obtain current valuations and, (v) (obviously implicit in the previous criticisms) poor management, and misconduct by PCL’s directors in relation to the Burleigh Views loan.
19 November 2019:- PCL’s receiver reported that the Burleigh Views loan was PCL’s only remaining loan asset. The Gold Coast City Council had recently issued draft development approval conditions, the effect of which was to permit the marketing and realisation of the property. The receiver anticipated the sale of the property would be completed in the first half of 2020. The total anticipated return to PCL’s debenture holders was 21 cents in the $.
PCL’s Board, executive officers & auditors
At the times relevant to the present proceedings, PCL directors, material senior executive personnel, and its auditors were as indicated in the following table.
Entity Status / Function Start End Directors O’Sullivan Chairman & Managing Director 29-May-98 28-Jan-14 Seymour non-Executive Director 29-May-98 17-Dec-13 Bersten Legal Counsel & Director 1-Jul-00 28-Jan-14 Sweeney non-Executive DIrector 20-Jul-08 7-Mar-14 Executives Fulker Chief operating officer pre Aug 08 28-Aug-12 Haq Company Secretary 25-Jul-07 3-Jul-12 Hornby Chief financial officer Oct-08 28-Aug-12 Kennedy Financial controller pre Oct 08 2012 Auditors Walter Turnbull auditors Jan-08 Jul-10 HLB Mann Judd auditors Jul-10 3-Jul-12
Until 1 July 2007, Mr O’Sullivan was PCL’s only executive director. Mr Bersten was a solicitor whose firm was a legal adviser to PCL. He first joined the PCL Board as a non-Executive director, and was a member of PCL’s Audit Compliance Committee. After 1 July 2007 Mr Bersten became a full time legal adviser to PCL and changed his status to that of an executive director. Mr Seymour was a chartered accountant with over 30 years experience in banking and finance. He was the Chairman of both PCL’s Audit Compliance Committee and its Remuneration committee. Mr Sweeney was the former Managing Director of a public company and also had many decades of experience in banking and finance. He was first engaged as a consultant adviser to PCL (in about mid 2008) and joined the PCL Board shortly afterwards. Towards the end of November 2008 he also became a member of PCL’s Audit committee, and replaced Mr Bersten on that committee. Mr Haq was both a Chartered Accountant and Chartered Secretary. He also had many decades of experience in those capacities.
PCL’s Debenture Trust Deed & Funding
PCL issued its Debentures under an 11 December 1998 Trust Deed (the “Fixed Term Investment” or “FTI” portfolio), and its various amendments (from 1999 to January 2011). I.O.O.F Australia Trustees (NSW) Ltd was the trustee under the Debenture Trust Deed. After 1998 the company underwent a number of name changes. During the period relevant to these proceedings it was named Australian Executors Trustees Limited (“AETL”).
The 1998 Trust Deed granted the trustee a first ranking floating charge over PCL’s assets. The charge crystallised in the event of any of eight specific contingencies. One of them was PCL’s unremedied failure to comply with its deed obligations. Relevant to the present matter, those obligations included:-
(a)clauses 2.3 & 2.17:- timely payment of interest to debenture holders
(b)clauses 5.1 & 5.2:- using the debenture funds principally for the purpose of providing finance facilities secured by registered first mortgage, on terms that otherwise complied with the Deed
(c)clause 5.2.1:- limiting mortgages to a maximum 10 year term and the loan amounts to specific proportions of the value of the mortgaged property (in the case of loans for construction or development purposes the maximum loan to value ratio (“LVR”) was 70% of the, appropriately certified, projected end value of the development
(d)clauses 6.0.3 to 6.0.9:- keeping proper accounts, and providing the trustee with both monthly reports (with various particulars, including interest paid, mortgage arrears and action taken to recover arrears) and also copies of any accounts and reports PCL lodged with ASIC
(e)clause 6.0.12:- giving the trustee prompt notice of (i) any default, or potential default, under the trust deed and (ii) any material adverse change in PCL’s financial circumstances, including its ability to comply with the trust deed obligations.
From early August 2007 PCL also had a $100m wholesale funding facility with Bendigo and Adelaide Bank (“ABB”). (As part of the arrangements with ABB, AETL released its security in relation to mortgages that were allocated to the ABB facility.) Thereafter PCL’s debenture funding declined from the June 2007 total (of about $208m) to $125m in June 2011, but its overall funding liabilities remained relatively stable (in the order of $210m). Over that period debenture funding typically provided about 60% to 70% of PCL’s total funding. (By the end of the 2011 financial year PCL’s wholesale funding liabilities approximated $90m, and thus about 40% of PCL’s total mortgage loans:- see Schedule 4A – PCL Loan portfolio etc.) .About 40% of PCL’s debenture funding was repayable within 12 months and was recognised as a current liability in PCL’s financial statements.
PCL’s credit and procedure policies
From at least June 2002 PCL had various, Board approved, policy and procedure documents (“CPP manuals”) setting out its lending and loan management practices. All the versions of the CPP manuals after March 2008 declared that they were “the only source of credit authority” within PCL, and that any departure from them required Board approval. The title and contents of the various CPP manuals indicate that they were primarily authored or amended by people other than Mr O’Sullivan, and were addressed to PCL’s management personnel. However, Mr O’Sullivan acknowledged (in his April 2015 affidavit) that the manuals were developed in consultation with him, and that he had a responsibility for monitoring compliance with their contents. The manuals themselves recorded that Mr O’Sullivan had the function of carrying out an annual review of the credit policy. Consistent with that function, the Board minutes periodically record Mr O’Sullivan tabling the reviewed CPP manual version at Board meetings.
There is therefore no reason to doubt that Mr O’Sullivan was very familiar with the substance of PCL’s obligations and practices in relation to the principal matters covered in the various CPP manuals – namely, loan valuation and valuation ratio (“LVR”) requirements, arrears reporting procedures and loan recovery practices. However, Mr O’Sullivan appears to have doubted the extent to which they were intended to apply to him. In his May 2015 affidavit he described the CPP manuals as merely non binding guidelines, and cited various parts (mainly from pre-March 2008 versions) of the manuals as giving him a personal authorisation to depart from them. However, after March 2008 none of those provisions really extended beyond an implicit discretion to depart from standard conditions and to waive charging the higher interest rate that would otherwise apply to default loans. There was certainly nothing in any of the post March 2008 versions of the CPP manuals to support Mr O’Sullivan’s claim (in his May 2017 affidavit) that he had a discretion to make “ad hoc exceptions” for particular transactions.
The relevant CPP manuals, and the period to which each applied, were as follows:-
(a)February 2007 to 30 March 2008:- Credit Policy and Procedure Manual Credit and Lending Department. This document imposed a maximum 70% LVR (based on a GST exclusive gross realisation valuation) for construction loans. It required valuations (based on an approved form of written instructions) by valuers included on an approved panel. A valuation for a construction loan was required to address both “as is” and “gross realisation” values. In addition, regard was to be had to a quantity surveyor’s report in assessing any construction loan. Construction loans were subject to limits of $15m (previously $9m) and 2 year terms, but interest capitalisation (within the LVR limit) was permissible. Apart from short (maximum three month) maturity date extensions that PCL could unilaterally grant (at the higher interest rate applicable to late payments), any extension after the original loan term was to be treated as a new loan, to which all the ordinary loan approval procedures were to be applied. Section 10 of the Manual addressed the management of loan arrears. It required the generation of a weekly report for all loans that had fallen into arrears, a monthly report of all loans that were at least one month in arrears, and a “non-accrual report” for all loans that were more than 4 months in arrears.
(b)31 March 2008 to 8 September 2009:- Credit Policy and Procedure Manual Credit and Lending Department. This 65 page manual was similar to the previous CPP manual, and contained essentially the same provisions relating to construction loans, valuations, loan extension procedures, and the management, reporting and non-accrual of loan arrears. However, some of the more specific provisions (relating to loan limits and terms) appear to have been removed from the manual and included in a complementary “product guide”.
(c)9 September 2009 to 29 November 2009:- This version of the CPP manual had a different format, and was somewhat shorter, and less detailed, than its predecessors. This was partly because some provisions, and specifically those dealing with loan arrears and their reporting, had been moved to an associated document. Section 3 of the manual contained essentially the same provisions about valuation requirements, and loan extensions, as those contained in the previous versions of the manual, except that where a loan was being extended (pursuant to a provision in the original loan agreement) there was a potential requirement to obtain a new valuation, if the “current” valuation was more than 12 months old. Appendix 5 set out PCL’s standard valuation instructions, and stipulated the required valuation contents – photographs, comparable sales, land only value, and details of any development approval (dates of issue and expiry, substantial commencement and apparent compliance). Appendix 2 set out the relevant LVR and loan limits for various categories of loan. Complementing that requirement, clause 3.27 of the manual itself provided that the LVR for a construction loan was to be calculated based on the “gross realisable value” of the property, but construction loan valuations were also required to address the “as is” value of the property. Interest for the anticipated term of the loan was to be included in the approved loan principal, and accord with the LVR limit.
(d)Appendix 2 to the CPP manual did not impose any term or monetary limits for construction and development purpose loans. However. Appendix 1 listed a number of PCL product guides, including one for construction and development loans. The 15 September 2009 version of that guide restricted such loans to a maximum 65% LVR, $5m loan amount and an 18 month term. The specific additional requirements included “as is” and “on-completion” valuations, “cost to complete” determination by a quantity surveyor, confirmation of saleability within six months of construction completion, and provision of supporting documentation (including relevant approvals).
(e)30 November 2009 to July 2010:- This version of the CPP manual was similar to its immediate predecessor. Section 3 of the manual contained essentially the same provisions about valuation requirements, and loan extensions. One difference (in clause 3.19) was that where a loan was being extended (pursuant to a provision in the original loan agreement) there was an explicit requirement to obtain a new valuation, if the “current” valuation was more than two years old. Clause 3.27 (dealing with construction loans) contained substantially the same provisions about construction loan valuation, and the inclusion of interest for the loan term as part of the loan principal, as its predecessor provision. Appendix 2 of the manual again set out the relevant LVR and loan limits for various categories of loan (the latter limits did not include construction loans). Appendix 2 again stated a 65% LVR limit on construction loans. Appendix 5 set out PCL’s standard valuation instructions. They were substantially the same as those in previous versions.
(f)August 2010 to 31 January 2011:- The August 2010 manual followed the same format as its immediate predecessors. Section 3 contained essentially the same provisions about valuation requirements, and loan extensions, as those contained in the previous versions of the manual. One change was a limited discretion to waive the two year valuation currency limit for loan extensions. Another change was that the provisions previously contained in clause 3.27 (dealing with valuations and interest in relation to construction loans) were no longer contained in the manual itself. The manual continued (in Appendix 2) to adopt a 65% LVR criterion for construction loans, which was less than the permissible 70% LVR limit in the debenture trust deed. The manual imposed general limits of $1.5m per loan and $3m per borrower, but no specific limits for construction and development loans. However Appendix 1 indicated the existence of a separate “product guide” for construction and development loans. The August 2010 version of that guide continued with the 65% LVR, $5m loan amount and 18 month term, limits for such loans (as well as continuing the valuation and other requirements in the previous version of the “product guide”).
(g)1 February 2011 to January 2012:- This version of the manual retained substantially the same provisions as its predecessor in relation to loan extensions and valuation practices. However, the previous two year limit on the currency of valuations where a loan extension was being sought, was waivable – if the extension did not exceed 12 months, the loan had been satisfactorily conducted, and the LVR was considered sufficiently low to justify dispensing with the requirement for a new valuation. (This CPP manual, its predecessor, or the “product guide” appears to have picked up the conditional requirement for annual valuation of construction and development properties loans, that was introduced by the June 2010 changes to Regulatory Guide 69:- see paragraphs 140(d) to 140(g) below.)
The more important aspects of the CPP manual requirements are summarised (very broadly, and without specific regard to the precise periods of the currency of each requirement) in the following subparagraphs.
(a)Extensions:- Extensions after a loan’s initial term were treated as the making of a new advance. As such they were (until September 2009) subject to the current loan policy requirements - including current valuation. After September 2009 there were incrementally increased, but conditional, permissive discretions to accept valuations that were more than two years old, where the loan had been conducted satisfactorily.
(b)Interest capitalisation:- From at least February 2007 interest capitalisation (within the required LVR) was permissible for construction and development loans. Following the introduction of the “product guide” in September 2009, interest for the term of construction loans was required to be treated as part of the loan principal. Once the loan term had expired, any unpaid interest should necessarily have been regarded as in arrears. The PCL Prospectus and Benchmark Report documents, in addressing loan arrears, appear to have included interest, where PCL considered that its recovery was “reasonably certain”:- see paragraph 174 below.
(c)Loan to value ratios:- Loans were subject to specific “LVR” restrictions, which varied according to the asset class and location. Loans made for construction and development purposes were (until September 2009) subject to a 70% LVR, relating to the projected gross realisation value of the development. That LVR was required to take into account any interest during the loan term. After September 2009 (and perhaps until Prospectus No 13 in December 2010:- see paragraph 160 below) the LVR for construction and development loans appears to have been 65%.
(d)Loan limits:- As at February 2007 individual loan limits varied from $5m to $15m depending on the type of loan. Loans for development and construction purposes were limited to a maximum $15m and two year term. From about September 2009 the CPP “product guide” for construction loans indicated a $5m monetary limit and an 18 month term limit.
(e)Loan arrears reporting:- Up until the September 2009 version the CPP manual required each default loan (ie., any loan where a timely payment was outstanding) to be included in weekly and monthly management arrears reports. Where the loan default was more than 90 days, the loan was to be included in a monthly “Past Due” report, and included in the Board papers. (After September 2009 the loan arrears category appears to have been extended to include loans that were less than 90 days in arrears.) Where loan interest was more than four months in arrears, or the recovery of interest was “unlikely or reasonably unlikely”, interest was not to be accrued, unless the managing director considered doing so was appropriate. The Board papers were required to include a specific report on default loans that had been placed on a “non-accrual” basis.
(f)Valuations:- Any new loan was subject to prior current independent valuation by an approved valuer. As at February 2007 any loan for development or construction purposes was required to have both “as is” and “on completion” values. PCL’s relevant lending manager (or Mr O’Sullivan) was required to review any valuation and certify its compliance with a “checklist” of requirements - including the LVR and other aspects of the property details. The requirement for both “as is” and “on completion” valuations for construction or development loans was evident in the valuation “checklists” and was carried through to the August 2010 CPP manual. The “product guide” for construction loans required both “as is” and “on completion” valuations. In addition, all of the PCL prospectus from February 2008 to December 2010, and the 2012 Information Booklets, in their comments on Benchmark 7, indicated that PCL required both “as is” and “as if complete” valuations for construction or development loans.
Burleigh Views loan history
The Burleigh Views development was the subject of an 11 March 1998 “Town Planning Consent Permit” for the two stage construction of 36 townhouses. Under the terms of the relevant Queensland legislation the planning permit would automatically lapse within four years (ie., by March 2002) unless either the dwellings had begun to be used, or the permit period had been extended.
Following the initial $4m loan agreement of March 2000 (see paragraph 12 above) and various later variations which increased the agreed loan principal to $5.165m, the extended loan term expired (without repayment) at the end of March 2003. By the latter part of 2003 Burleigh Views had done some earthworks, but had otherwise made little progress towards completion of the development. Mr O’Sullivan said he accepted December 2003 advice from building surveyors that, because of the earthworks, work on the approved development would be taken to have substantially commenced, and the actual construction work could continue under the previously granted approval. In December 2003, after having served formal default notices with a view to exercising its mortgagee power of sale, PCL had obtained a further valuation of the property. That valuation, which explicitly assumed the existence of a valid approval (despite attaching a copy of the 1998 Council approval that set out the four year “use commencement” validity limit) gave a (GST inclusive) gross realisation amount of $17.2m “on completion” of the proposed development. (There was an unexplained construction cost estimate of $5.126m, and an “as is” value of $5.9m.) Relying on that valuation, in April 2004 PCL entered into a deed of variation with Burleigh Views (and related arrangements involving City Pacific:- see paragraphs 303 to 330 below). The 2004 loan variation Deed (i) recognised the $4.05m outstanding Burleigh Views loan balance, (ii) indicated a civil works cost of $0.79m, (iii) contemplated a $3m construction cost and, (iv) provided for further advances of $4.8m (resulting in a loan principal of about $8.89m). The loan agreement provided for interest payable monthly in arrears, gave a conditional permission for interest to be capitalised (up to a maximum of $0.375m), and required repayment by 30 November 2004.
August 2004 to April 2007:- Construction work started on the first of the townhouses in August 2004. The 30 November 2004 date passed without repayment, and the loan balance increased partly as a of further advances and partly as a result of the capitalisation of accrued interest. By August 2005 the interest bearing balance of the loan had increased (from $4.375m to $9.655m), and the total loan balance approximated $10.3m. In November 2005 PCL demanded repayment and served formal notice of its intention to exercise its mortgagee’s power of sale. But Burleigh Views responded to this with a proposal to complete Stage 1 of the development, and remained in possession. In early 2006 there was a period of disruption attributable to landslip remediation work undertaken by the local Council. In April 2006, at a time when Burleigh Views sale of the property was being canvassed (and encouraged by PCL), PCL began to include the loan in its monthly arrears report, and recorded the expected imminent sale of the property. Mr O’Sullivan said, in his April 2015 affidavit that PCL also then stopped accruing interest on the Burleigh View loan. The accuracy of this statement is however, questionable. On the one hand, in the material submitted to the PCL Board, the loan continued to be recorded in the arrears reports, and in an additional list of loans it was described as having interest “accrual stopped”, until the May 2007 refinancing. However, the Burleigh Views loan statement continued to list monthly “Interest Accrual” items, and add them to the loan balance (although not to the interest bearing balance of the loan):- see the Table in paragraph 394 below). In August 2006, after months of unsuccessful attempts by Burleigh Views to achieve a sale of the property, PCL entered into possession, and notified Burleigh Views of its intention to sell the property. In December 2006, Burleigh Views’ accountants advised ASIC that the company had ceased trading, and was, with PCL’s assistance, attempting to sell the property for $11.35m. The accountant’s letter indicated that the sale was anticipated to satisfy PCL’s mortgage debt, but not amounts due to unsecured creditors, and thus effectively acknowledged that Burleigh Views was insolvent. The letter also attributed to Mr O’Sullivan PCL’s commitment, if the proposed sale could not be achieved, to fund Burleigh Views completion of the development.
The proposition in the accountant’s letter that the proposed $11.35m sale would have satisfied PCL’s debt is one of questionable accuracy. (The PCL Loan Statement records had disclosed an outstanding balance of $11.43m as at 31 July 2006. By 31 October 2006 the PCL Loan Statement the recorded loan balance approximated $11.7m. That was also the amount included in the Loan Arrears reports to the PCL Board:- see the Table in paragraph 394 below.) However, the other proposition in the accountant’s letter, that Mr O’Sullivan had indicated PCL would fund the completion of the development was accurate. In his April 2015 affidavit Mr O’Sullivan set out his view that, because Burleigh Views had not been able to achieve a sale of the property, the next best option was for PCL to finance the completion of the development. Although no decision to that effect was formally recorded in the PCL Board minutes, Mr O’Sullivan asserted, in general terms, that he had discussed the status of the loan, and the proposed construction completion financing, with the other PCL directors.
In the following months, Mr O’Sullivan received independent advice confirming the likely completion of the balance of the Stage 1 works by mid May 2007. Burleigh Views provided an estimate that the construction of Stage 2 of the development could be completed within 10 months. PCL also received an apparently relevant Council certification of inspection of aspects of the existing works, and their corresponding compliance with approved plans.
May to September 2007:- PCL’s Board Report as at 31 April 2007 continued to record the Burleigh Views loan as being in arrears. The Loan Arrears report stated a $9.7m loan principal, and accrued interest of $2.754m, with a projected completion valuation of $17.2m and an “LVR” of 57%. (Properly interpreted, the Loan Arrears report actually indicated a total outstanding loan debt approximating $12.5m, and a corresponding LVR of 72.74%:- see paragraph 394 below.)
In May 2007, apparently in the anticipation that all the Stage 1 works would be completed by the end of May 2007, PCL submitted a written offer, which Burleigh Views accepted on 4 May 2007, to refinance the loan for an additional 12 month term. PCL’s 2 May 2007 offer letter, signed by Mr O’Sullivan wrote, contained the following elements:- (i) an asserted current debt of $11.5m (ie., $0.8m less than the balance indicated in the Loan Arrears report), (ii) additional Stage 1 & 2 construction costs totalling $4.75m, (iii) an overall loan limit (the lesser of $13.5m and 70% of the “on completion”, GST exclusive, property valuation), contingent upon sales of Stage 1 units (totalling $10.8m) during the Stage 2 construction, and subject to a further limit of $13.15m during Stage 1, (iv) a Quantity Surveyor’s certification, satisfactory to PCL, of the cost for the completion of the development, and subsequent management of all construction costs drawdowns and, (vii) initial payment of a $100,000 loan application fee, as well as, (viii) interest (at a rate of 16.5%, reducible to 10.5% for prompt payment), to be paid monthly in arrears, or capitalised (up to the $13.5m loan limit) if Burleigh Views otherwise complied with the loan terms, and PCL was satisfied with the progress of the development.
Both the valuation and quantity surveyor’s report contemplated by the refinancing agreement were to be arranged by PCL. The quantity surveyor’s estimate / report was a pre-condition to any funding of both Stage 1 and Stage 2 development works. The valuation was a requirement that related only to funding of the Stage 2 works. The valuation was to be on both an “as is” and “on completion” basis, and was required to confirm that the property would be readily saleable within six months after construction had been completed.
Mr O’Sullivan acknowledged (in his April 2015 affidavit) that on 15 May 2007 he authorised the PCL’s effective recognition of the refinancing arrangement as having been implemented from 15 May 2007. Mr O’Sullivan gave that authorisation without (i) any discussion or approval recorded in the PCL Board minutes, (ii) payment of the $100,000 loan application fee (the amount was added to the loan balance), (iii) the Quantity Surveyor’s certification contemplated by the loan offer, (iv) obtaining any further valuation of the property and, (v) formal documentation of the terms of the refinancing agreement. (No formal documentation existed at that date and, despite an interchange of document drafts between PCL and Burleigh Views solicitors over several months between June and September 2007, no executed contractual documentation was put into evidence.) The authorisation / instruction record Mr O’Sullivan attached to his April 2015 affidavit, stated the loan principal was $13.5m, and referred to the $17.222m December 2003 valuation as the relevant supporting valuation. Obviously based on that valuation, Mr O’Sullivan’s instruction document noted that the LVR was 78.4%.[7] These details in the instruction record contrasted with the 70% LVR condition stipulated in PCL’s 2 May 2007 offer letter. (Compliance with that condition would have limited the total loan debt to $12.055m, an amount that was already less than the $12.5m debt stated in the Loan Arrears report as at 30 April 2007:- see paragraph 394 below.)
[7]It is appropriate to note that the actual loan balance recorded in PCL’s statement records as at 15 May 1007 was $12.314m. With the projected building costs of $4.75m, unless substantial Stage 1 unit sales occurred during the completion of construction, the projected debt was likely to approximate PCL’s then most recent valuation.
In July 2007 Burleigh Views received a marketing proposal, which contemplated an advertising campaign and an auction sale of the property in mid September 2007. In August 2007, Burleigh Views seems to have negotiated with a Mr Duncan / D K R Developments Pty Ltd for a profit sharing arrangement to complete the development. Those negotiations appear to have prompted the interests associated with Mr Duncan obtaining a 4 September 2007 valuation from Colliers International Consultancy and Valuation Pty Ltd (“Colliers”).
At the end of October 2007 PCL’s solicitors reported to Mr O’Sullivan that Burleigh Views had not returned the formal refinancing agreement that had been circulated, apparently in September 2007. As a consequence of the absence of formal documentation, PCL had not provided the funding necessary to progress the project, and it had “ground to a halt”.
December 2007 to May 2008:- It is not clear whether the contemplated marketing activities went ahead, but Burleigh Views certainly did not sell the property in December 2007. By early 2008 PCL was itself contemplating the sale of the property. That is evident from a brief 19 February 2008 email Mr O’Sullivan received from a mortgage originator. The email sought to elicit PCL’s interest in pursuing a $13.2m sale of the site. The proposed sale was conditional on completion of the Stage 1 construction.
By some time in early 2008 PCL (and Mr O’Sullivan in particular) had received, or was at least aware of the contents of, the 4 September 2007 Colliers valuation. That is apparent from the content of the 29 February 2008 Supplementary Prospectus (which Mr O’Sullivan signed) that PCL had issued in response to ASIC’s issue of Regulatory Guide 69 (and following ASIC’s dissatisfaction with the contents of PCL’s Prospectus No 10):- see paragraphs 145 & 199 below. In the section of the prospectus dealing with the Benchmark 7 valuation criterion, PCL addressed the Burleigh Views loan (although without referring to it by name) in the following terms.
The Company has made only one loan where the loan accounts for more than 5% of the total value of the Company’s loan portfolio. The loan amount is $12,026,966 based on an initial valuation made as at 23 December 2003 for construction funding purposes and which assessed the “as if complete” value at $17,222,000; the work is nearing completion, and the borrower has supplied a valuation report dated September 2007 assessing the “as if complete” value at $26,000,000 (exclusive of GST). The security property is located on the Gold Coast in Queensland.
Objectively construed, that Supplementary Prospectus statement suggested that PCL had not obtained the updated valuation contemplated by the May 2007 refinancing agreement (and required by the then current CPP manual:- see paragraph 65(a) above). It also indicated that PCL had not obtained its own valuation since December 2003, but implicitly considered the 2007 Colliers valuation as supporting some continued reliance on the $17.2m 2003 valuation. However, Mr O’Sullivan would have readily appreciated that the $12.026m amount had been the recorded loan balance as at 30 June 2007, and reflected an LVR of 69.8% based on the 2003 (GST inclusive) valuation. He would also have appreciated that the corresponding LVR (based on the $15.656 GST inclusive “feasibility study” sales proceeds contemplated in the 2003 valuation) was 76.8%. Finally he would have undoubtedly known that the actual loan balance at the end of February 2008 approximated $13.058m. That reflected a 75% LVR against the $17.2m (GST inclusive) valuation and an LVR of 83.4% against the $15.656 (GST exclusive) projected gross sales proceeds.
The September 2007 Colliers valuation had assumed the existence of a valid development approval, completion of Stage 1 construction between November 2007 and January 2008, commencement of Stage 2 construction in January 2008, Stage 1 sales during the Stage 2 construction process, and completion of Stage 2 by April 2009. Based on that timing, and the prevailing market outlook, it gave four valuation amounts. They were:- “as if complete” Gross Realisations on both GST inclusive ($27.35m) and GST exclusive ($26.09m) bases, and “as is”, GST exclusive “market” ($13.5m) and “investment” ($14.2m) values. Those formally stated valuation conclusions did not specifically differentiate between Stage 1 and Stage 2 of the development, but the valuation gave a $125,710 market value for the Stage 2 unit sites. From that value one could arithmetically divide the $13.5m “as is” market value into separate components of $11.237m for Stage 1 and $2.262m for Stage 2. Apart from those ultimate valuation opinions, the report details included some important additional parameters. Feasibility details set out in the report, particularly in relation to the derivation of the “as is” valuation opinions, indicated (i) selling costs of $1.103m, (ii) construction costs of $6.116m and, (iii) other fees and holding costs approximating $0.66m.
Knowledge of the Colliers $13.5m “as is” valuation opinion (and of the then current loan balance) likely accounts for PCL’s apparent decision not to follow up either the February 2008 enquiry or a subsequent $12m expression of interest that Mr O’Sullivan received in April 2008. The 17 April 2008 email letter attributed to Mr O’Sullivan a desire to achieve a sale price of $13.5m, consistent with the Colliers valuation amount. That desire may also have been contributed to by other information Mr O’Sullivan received at about the same time. That consisted of a 2008 marketing proposal he had from Brisbane based commercial real estate agents (Ray White). The proposal contemplated the advertising of the property from 16 May 2008 (apparently the day after the loan fell due for repayment under the May 2007 re-financing agreement) and a mid June 2008 closing date for offers to purchase the property. The Ray White marketing proposal gave an indicative sale price range of $11.88m to $13.98m for the property as a whole, and separate ranges for Stage 1 ($9.9m to $11.7m) and Stage 2 ($1.98m to $2.25m). Those indications were qualified by the disclaimer of being a statement of preliminary opinion (that explicitly assumed the currency of development approval), and a strong recommendation that PCL obtain a formal valuation. Together with an (undoubted) understanding that the loan balance was likely to approximate the $13.5m loan limit by the projected June sale date, this marketing proposal appears to have encouraged Mr O’Sullivan to the view that PCL’s best option was to continue to fund the development to the point where the units in the first stage of the development could be sold. In any event, although the $12m 17 April 2008 expression of interest was consistent with the lower end of the marketing range suggested by Ray White, Mr O’Sullivan said (and there was no evidence to the contrary) that the 17 April 2008 enquiry, despite his attemptsl to follow it up, never developed to the stage of being a firm interest in purchasing the property.
In the exercise of the necessarily impressionistic assessment of “justification” for any disqualification period, and despite the disavowal of any scale calibrated by reference to some “worst case”, some measure of proportionality and consistency is desirable. Those desiderata draw attention to the outcome of ASIC’s concerns about Mr O’Sullivan’s co-directors of PCL, one of whom (Mr Seymour) ultimately escaped any period of disqualification, and another of whom (Mr Bersten) apparently incurred a five year disqualification period:- see paragraph 9 above. However, the difference in those two outcomes, given the findings I have made, that all the PCL directors had a general awareness of the circumstances and reporting of the Burleigh Views loan, tends to demonstrate the difficulty involved in the concept of consistency in the exercise of the disqualification power. The difficulty arises from the permissible width of the relevant considerations, and the necessity to address the circumstances, abilities and the apparent resolve of the particular person. The unavoidable singularity of at least some aspects of each individual’s personal circumstances and qualities, suggests that “consistency” lies more in the process of assessment, by taking all relevant considerations into account, than in mere comparison of the actual disqualification periods that have been determined.
In the present matter the egregious default involved in Mr O’Sullivan’s interest accrual and loan arrears report decisions relating to the Burleigh View loan compel the imposition of a period of disqualification. They were completely unjustified decisions, and they appear to have had the corrosive effect to which I have referred:- see paragraphs 255 & 472 above. In my view the public interest requires an unambiguous sanction, essentially as an element of general deterrence. Such a sanction is required for essentially four reasons (i) Mr O’Sullivan’s role as the ultimate executive authority within PCL, and his personal responsibility for the impugned decisions, (ii) the egregious default the decisions involved, (iii) their likely causal contribution to the inadequate / misleading public disclosures that PCL made and, (iv) the appearance that, Mr O’Sullivan’s personal / family interests significantly benefited from the interest accrual decision.[41]
[41]I refer here to the objective appearance that PCL Asset Management received a total of $8.45m in dividends in the financial years from 2007 to June 2010. In the same period, PCL accrued $7.362m in interest on the Burleigh Views loan. In each of the 2009 and 2010 financial years, the Burleigh Views loan interest accrual appears to have made up more than half of PCL’s reported net profit before tax:- see Schedule 1-3A. Although, PCL Asset Management held PCL (an unquantified amount of) debentures, and may be regarded as having suffered a significant loss as a result of PCL’s collapse, that circumstance should be regarded simply as an aspect of the risk inherent in the investment. It does not operate to offset the apparent significance of the benefits suggested by the dividend payments, particularly in each of the 2009 and 2010 financial years.
On the other hand, and despite ASIC’s criticisms of Mr O’Sullivan’s lack of insight into the full extent of the deficiencies his conduct involved (principally in relation to the matters that reasonable care indicated should have influenced what I have called his “deferral” decision) I am not satisfied that any additional element of personal deterrence is required. Mr O’Sullivan’s conduct, particularly in relation to the interest accrual decisions and loan arrears reporting involved egregious errors. However, I am inclined to think that the ultimate adverse impact of those errors flowed most directly from the disclosure deficiencies. In relation to those deficiencies, although I have accepted the reality of Mr O’Sullivan’s tardily proffered acknowledgements (see paragraphs 297 to 300 above) I have affirmed ASIC’s 7 year Ban decision. That is a significant public censure of Mr O’Sullivan’s conduct. Furthermore, although the Ban decision is not specifically directed at Mr O’Sullivan’s underlying management decisions, it is in reality influenced by those decisions – given my rejection of the contention that Mr O’Sullivan’s personal responsibility for the disclosure inadequacies was mitigated by the acquiescence of PCL’s other directors and its auditors:- see paragraphs 253 to 257 above. And insofar as Mr O’Sullivan’s management conduct and decisions justify an additional sanction (which I am satisfied they do) I am also inclined to think that the long drawn out process involved in the determination of Mr O’Sullivan’s review application, with the cost, stress and delay it has involved, has already provided a significant sanction, by laying bare the nature of his errors, and their consequences, particularly their personal consequences for Mr O’Sullivan since ASIC’s 2015 Disqualification decision. Finally, the underlying reality is that Mr O’Sullivan’s management errors occurred in the context of a very unusual set of circumstances, were conspicuously aberrant against the background of his corporate management history, and were in no sense motivated by personal dishonesty.
It is now almost a decade since PCL’s liquidation, and seven years since ASIC’s Disqualification decision. Mr O’Sullivan will serve a 7 year Ban decision period. A Disqualification decision is warranted by the unambiguous adverse findings I have made. No significant disqualification period has in fact operated, but the fact of the decision, and its unresolved status over a period of years, is likely to have had a meaningful (though unquantified) adverse impact on Mr O’Sullivan and his family. That impact will be reinforced by my findings, and by my view (on the basis of the currently available information) that no disqualification exemption should apply to Mr O’Sullivan’s current directorships. The combination of the considerations I have outlined (in this paragraph, and the immediately preceding paragraphs) leads to my view that a disqualification period of less than five years is both justified and appropriate. The ban period should broadly reflect the during which Mr O’Sullivan’s conduct adversely affected PCL’s disclosures. It should also recognise both the significant sanction of the Ban decision, take into account my view that the objective of personal deterrence is sufficiently served by that decision, by the time cost and stress involved in the resolution of the present proceedings, by the reality that the disqualification period will operate for a substantial period after the impugned conduct and after expiry of the Ban period, and by the absence of leave in relation to Mr O’Sullivan’s current directorships. The period in which Mr O’Sullivan’s management conduct adversely affected PCL’s disclosures can be viewed in several different ways – namely (i) the whole period after the conditional May 2007 refinancing agreement, (ii) the October 2008 to March 2012 period covered by the impugned Quarterly Reports, (iii) the period from December 2008 to December 2011 during which PCL’s Prospectus were open and, (iv) the period from August 2009 to December 2011 during which, despite awareness of the lapse of the Burleigh Views development approval, PCL continued to solicit debenture funding on the basis of its various Prospectus documents. The views I have expressed about the May 2007 refinancing agreement disincline me to regard that date as the appropriate starting point. The other alternative dates result in periods ranging from about 3.5 years to 2 years, and each of those periods has an element of justification, depending upon the view one takes of (i) the objective fact (and hence the discoverablilty) of the lapse of the Burleigh Views DA and, (ii) when PCL was in fact first aware of that lapse. Taking that potential range of views into account, together with the other matters I have outlined, the appropriate disqualification period is at the approximate mid point ie., two years and nine months. Such a period of disqualification, which will take effect towards the end of the Ban period, and years after the impugned conduct, suffices to serve the underlying protective and deterrent purposes of the disqualification period power in Corp Act s 206F(1).
Conclusion on the disqualification period
In the light of the considerations I have addressed, the preferable decision is that a disqualification period is justified, but should now be limited to a prospective period approximating two years and nine months. That period should operate from the date of service of the notice required by Corp Act s 206F(3)&(4) and end on Friday 20 September 2024.
I certify that the preceding four hundred and seventy-nine (479) paragraphs are a true copy of the reasons for the decision herein of Senior Member Peter Taylor
........................... .......SGD....................................
Associate
Dated: 27 January 2022
Date(s) of hearing: 9 March 2020 - 13 March 2020 Counsel for the Applicant:
Ms Vanessa Whittaker and Mr Matthew Sherman
Solicitors for the Applicant:
Quinn Emanual Urquhart & Sullivan
Counsel for the Respondent:
Ms Kristina Stern SC
Solicitors for the Respondent:
Australian Government Solicitor
List of Schedules
Schedule 1 –- PCL / Provident Profit & Loss / Balance Sheet - Summary
`````````````see paragraphs 40, 191, 278
Schedule 2 – PCL / Provident Financial Liabilities - Summary
`````````````see paragraph 40
Schedule 3 – PCL / Provident Cashflow – Summary.
`````````````see paragraphs 40, 143, 444
Schedule 1-3A – Burleigh Views Loan - accrued interest & reported NPBT
`````````````see paragraphs 13, 41, 295, 428
Schedule 4 - PCL’s reporting and disclosure documents
`````````````see paragraphs 42, 95, 101, 103, 133, 150, 153, 205, 383
Schedule 4A – PCL Loan Portfolio – Benchmark 5 Disclosures – Loan numbers, values and arrears
`````````````see paragraphs 13, 43, 62, 173, 194, 428
Schedule 5 - Board approval of the PCL disclosure documents
`````````````see paragraphs 44, 165, 167, 186, 214
Schedule 6 - Burleigh Views property valuations
`````````````see paragraphs 45, 117, 131 to 137, 429
Schedule 7 - The PCL Audit Committee attendances
`````````````see paragraphs 46, 105, 204
Schedule 8 - History and status of O'Sullivan directorships
`````````````see paragraph 441
Schedules
Schedule 1-3A:- Burleigh Views Loan - accrued interest & reported NPBT Reasons:- paragraphs 13, 41 & 428 2007 2008 2009 2010 2011 2012 interest accrual 81,928 103,794 116,516 130,333 152,131 173,344 " 81,839 108,180 120,415 135,850 159,120 180,698 " 79,399 109,159 123,166 137,066 161,738 182,417 " 81,945 106,756 120,288 133,843 158,348 178,188 " 79,304 111,301 125,426 139,510 165,221 185,946 " 82,953 109,929 122,530 136,233 161,867 181,619 " 82,955 114,042 127,708 142,481 168,948 " 74,933 115,422 128,864 143,753 170,502 " 82,995 108,939 117,458 132,135 155,537 " 37,860 117,426 131,091 149,077 173,793 " 106,283 115,084 128,010 146,720 169,821 " 119,950 133,483 154,152 177,360 Totals (per year) 872,393 1,339,981 1,494,955 1,681,153 1,974,386 1,082,211 Total (2007 to 2011) 7,362,867 Net Proft Before Tax Total 4,799,758 4,281,318 2,213,784 2,808,955 1,658,656 BV interest % 18.18% 31.30% 67.53% 59.85% 119.04% Dividends paid (pa) 2,250,000 2,250,000 1,450,000 2,500,000 0 Total Dividends 8,450,000 Note:- In the half year to 31 December 2011 PCL's financial statements recorded a $14.9m provision for impaired loans, and an operating loss of $12.98m - see Schedule 1
Schedule 4A:- PCL Loan Portfolio - Benchmark 5 Disclosures - Loan numbers, values and arrears Note 1:- The loan value stated is the loan principal Note 2:- Shaded entries are calculated values derived from information in the relevant report Reasons:- paragraphs 13, 173, 194 & 428 Report Period Total Loans Arrears Loans (as rep'td - (exc BV Loan) Burleigh Views Loan Arrears Loans FTI No Value % of loans % of loans % (inc BV Loan) - as calculated $m $m % (value) (principal) No's Value $m No's Value FTI $m % (value) 30-Jun-08 192.82 130.80 67.84 36 52.82 21.7 27.4 13.50 0.6 7 10.32% 66.32 34.39% 31-Dec-08 219.28 119.14 54.33 36 65.02 18.0 29.6 14.32 0.5 6.5 12.02% 79.34 36.18% 30-Jun-09 206.22 116.54 56.51 41 62.76 23.2 32.6 15.10 0.6 7.8 12.96% 77.86 37.76% 31-Dec-09 172.90 37 64.91 24 37.5 15.98 0.6 9.2 not stated 80.89 46.78% 30-Jun-10 178.30 44 88.71 27.85 49.75 17.52 0.6 9.8 not stated 106.23 59.58% 31-Dec-10 189.30 49 111.29 29.70 58.79 18.95 0.6 10 not stated 130.23 68.80% 30-Jun-11 188.30 55 96.90 36.18 51.46 20.09 0.7 11 not stated 116.98 62.13% 30 Jun 2011 {Inf Bk v1} 188.30 95.90 50.93 55 96.90 36.2 51.5 20.09 0.66 10.67 20.94% 116.98 62.13% 30 Dec 2011 {Inf Bk v2} 176.60 96.90 54.87 48 85.76 34.77 48.55 19.24 1.82 10.89 19.85% 105.00 59.45% Burleigh Views loan added to Arrears Loans 30 Dec 2011 {Inf Bk v3} 176.60 96.90 54.87 49 108.00 35.51 59.44 19.24 1.82 10.89 19.85% 108.00 61.15%
Schedule 7 - PCL - Audit and Compliance Committee Meetings, duration, minutes, and attendances Reasons - paragraph 46, 105, 204, 215, 220, 223, 238, 243, 336(f). Date Start Finish Duration Pages Attendances Description hrs.min n 25-Jun-08 12.14 13.1 3 Bersten Seymour Haq Fulker other review of NTBS - external audit 6-Aug-08 9.03 10.15 1.12 2 Bersten Seymour Sweeney Haq Fulker audit rep AASB7 compliance - FY 2008 audit update 27-Aug-08 9.25 11.00 1.35 2 Bersten Seymour Sweeney Haq Fulker other AASB7 compliance 3-Sep-08 14.36 17.12 2.36 2 Bersten Seymour Sweeney Haq Fulker other FY 2008 financial report 13-Nov-08 9.05 10.30 1.25 3 Bersten Seymour Sweeney Haq Hornby Fulker 3 Oct 2008 audit management letter - loan arrears list being prepared 17-Dec-08 9.40 10.37 0.57 3 Seymour Sweeney Haq Hornby Fulker loan arrears report - reviewed and proposed additional info 4-Feb-09 11.09 12.48 1.39 2 Seymour Sweeney Haq Hornby Dec 2008 arrears - concerns about val'n amounts - 1/2 year report 1-Apr-09 9.30 11.05 1.35 3 Seymour Sweeney Haq Hornby Fulker March 2009 audit management letter - review default loan currency 23-Jun-09 12.01 13.02 1.01 3 Seymour Sweeney Haq Hornby Fulker Formal response to October management letter 9-Sep-09 14.06 16.12 2.06 3 Bersten Seymour Sweeney Haq Hornby Fulker FY 2009 report - auditors final report on loan arrears reporting 28-Sep-09 8.10 8.31 0.21 2 Seymour Sweeney Haq Hornby FY 2009 financial report 10-Nov-09 3.05 4.33 1.28 3 Seymour Sweeney Haq Hornby other Review of arrears loan reporting - audit report 29-Nov-09 minutes not located 04-Mar-10 10.00 11.45 1.45 Seymour Sweeney Hornby Fulker Kennedy December 2009 1/2 year financial report - approval 11-Mar-10 12.48 12.53 0.05 1 O'Sullivan Bersten Seymour Sweeney Haq December 2009 1/2 year financial report - approval 16-Jun-10 9.06 10.22 1.16 4 Bersten Seymour Sweeney Haq Hornby Gerber et al Auditors half-year report 01-Sep-10 11.04 1.05 2.01 3 Bersten Seymour Sweeney Haq Hornby Fulker Gerber et al Draft FY 2010 report - update on Cashflow 15-Sep-10 9.32 11.35 2.03 4 Bersten Seymour Sweeney Haq Hornby Fulker others audit rep Rev'd FY 2010 report - B Views loan discussed in detail - reporting improvements 24-Nov-10 9.30 10.30 1.00 3 Seymour Sweeney Hornby other first monthly internal audit - $25,000 materiality 16-Feb-11 11.33 1.04 1.31 3 Seymour Sweeney Haq Hornby Gerber et al Draft FY 2010 1/2 year report 07-Mar-11 10.05 11.45 1.40 3 Seymour Sweeney Haq Hornby others audit rep Draft FY 2010 1/2 year report - proposed in depth loan file compliance review 22-Jun-11 11.55 12.46 0.51 2 Seymour Sweeney Haq Hornby others Audit reports - no significant issues 3-Aug-11 9.51 11.03 1.14 2 Seymour Sweeney Haq Hornby Draft FY 2011 financial reports 9-Sep-11 9.10 11.13 2.03 2 Seymour Sweeney Haq Hornby audit rep FY 2011 financial reports 14-Dec-11 9.12 10.40 1.28 2 Seymour Sweeney Haq Hornby Gerber et al Compliance report 12-Mar-12 14.04 15.55 1.51 3 Seymour Sweeney Haq Hornby audit rep Draft December 2011 1/2 year report - provisions detailed 16-May-12 12.08 14.10 2.02 2 Seymour Sweeney Haq Hornby Gerber Internal audit report
Schedule 8 - History and status of O'Sullivan directorships Reasons:- paragraph 441 Count MOS directorships - dates and status Comment Total Category Start End Director / Corp'n status Current Directorships 1 1 Provident Asset Management Pty Ltd 29-Oct-92 Current 1 of 2 2 2 PCL Holdings Pty Ltd 9-Feb-02 Current 1 of 2 3 3 Bernard Sean Holdings Pty Ltd 18-Dec-03 Current 1 of 4 4 4 Portcullis Capital Pty Ltd 7-Sep-12 Current sole PCL related corporate entities - ceased directorships 5 1 Provident Capital Pty Ltd 16-May-94 26-Feb-97 Ceased Deregistered 6 2 Provident Access Pty Ltd 24-May-05 19-Dec-12 Ceased Deregistered 7 3 Provident Lending Services Pty Ltd 12-May-10 19-Dec-12 Ceased Deregistered 8 4 Provident Mortgage Solutions Pty Ltd 10-Feb-95 19-Dec-12 Ceased Deregistered 9 5 Provident Wealth Management Pty Ltd 26-May-05 19-Dec-12 Ceased Deregistered 10 6 Provident Funds Management Australia Ltd 3-Feb-12 18-Mar-13 Ceased Deregistered 11 7 Cashflow Finance Solutions Pty Ltd 20-Apr-05 28-Jan-14 Ceased Deregistered 12 8 Provident Capital Pty Ltd 25-May-98 28-Jan-14 Ceased External Adm'n Other ceased directorships - deregistered corporations 13 1 The Dunbars Financial Management Group Pty Ltd 15-Jun-91 17-Jun-91 Ceased Deregistered 14 2 City Pacific Developments Pty Ltd 28-Jun-96 13-Jul-99 Ceased Deregistered 15 3 Hinterland Architectural Services Pty Ltd 21-May-96 1-Nov-01 Ceased Deregistered 16 4 Ozbiz Capital Pty Ltd 18-Dec-02 30-Dec-04 Ceased Deregistered 17 5 11 003 981 780 Pty Ltd 20-Jun-90 9-Oct-05 Ceased Deregistered 18 6 Connecticut Financial Services Group Pty Ltd 30-Nov-06 19-Aug-09 Ceased Deregistered 19 7 MG Capital Partners Pty Ltd 8-May-08 9-Jul-14 Ceased Deregistered Former directorships - currently registered corporations 20 1 Dale Virtue Pty Ltd 18-Mar-94 10-Feb-97 Former Registered 21 2 Postjet Pty Ltd 26-Oct-92 10-Feb-97 Former Registered 22 3 Corporate Capital Group Pty Ltd 30-Nov-06 26-May-08 Former Registered 23 4 Amira Holdings Pty Ltd 3-Mar-08 16-Feb-15 Former Registered
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