VOLUME SIX
THE MANAGEMENT OF CREDIT: CASE STUDIES

 

 

CHAPTER 10
CASE STUDY IN CREDIT MANAGEMENT:
CELTAINER LIMITED

 

 

TABLE OF CONTENTS

10.1 REFERENCE INFORMATION

10.2 BACKGROUND TO THE ACCOUNT
10.2.1 COMPANY HISTORY
10.2.2 BACKGROUND TO THE FACILITY

10.3 CHRONOLOGY

10.4 COMPLIANCE WITH POLICIES AND PROCEDURES
10.4.1 INITIATION OF THE FACILITY
10.4.2 APPROVAL OF FACILITY
10.4.3 SECURITY
10.4.4 HINDSIGHT OVERVIEW
10.4.5 ADVANCEMENT OF FUNDS
10.4.6 MANAGEMENT OF THE ACCOUNT
10.4.7 MANAGEMENT OF NON-PERFORMING FACILITY
10.4.8 CREDIT INSPECTION

10.5 OTHER MATTERS IDENTIFIED IN THE INVESTIGATION
10.5.1 EQUITY ACQUISITION
10.5.2 "WINDOW DRESSING"
10.5.3 "LOOK AT SELLING SHARES"
10.5.4 CONDUCT OF AN OFFICER OF CELTAINER LTD

10.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
10.6.1 TERMS OF APPOINTMENT A
10.6.2 TERM OF APPOINTMENT C
10.6.3 TERM OF APPOINTMENT E

10.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

10.8 APPENDICES
A Summary of Movements in the Facility
B Chronology of Events During the Life of the Loan

 

10.1 REFERENCE INFORMATION

The following information on the facility for Celtainer Ltd (In Liquidation) is set out for reference purposes:

REFERENCE INFORMATION
Account Name . Celtainer Ltd (In Liquidation)    
Directors

at 13 July 1987

(ie date of referral of facility to Lending Credit Committee for approval)

. Mr S O Lundgren;

. Mr K B Godson;

. Mr A F Swain;

. Mr A Reinli; and

. Mr C J Atkins. (also Secretary)

   
Industry Sector . Light Engineering    
Facility Type . Commercial bills;

. Overdraft;

. Multi-currency loan; and

. Trade finance line.

In addition the Bank had an equity holding in Celtainer of 900,000 25c "B" class shares at an initial cost of $0.52M. At 31 March 1991 the market value of these shares was zero.

Principal Outstanding at 31 March 1991 . Overdraft $M

3.00

 
Unrecognised Income at 31 March 1991 . Overdraft 0.20  
Provision for Loss

at 31 March 1991

. Overdraft 3.00  
Estimated Loss

at 31 March 1991

. Loss on equity holding

. Overdraft

0.52

3.00

 

 

 

 

10.2 BACKGROUND TO THE ACCOUNT

 

10.2.1 COMPANY HISTORY

Digitec Pty Ltd was incorporated in South Australia in 1972. Its principal business was the design and manufacture of specialised products mainly for the shipping and mining industries.

In 1985 it changed its name to Celtainer Pty Ltd and following a change in status it became Celtainer Ltd. In 1986, the company was listed, for the first time, at the Adelaide Stock Exchange. The company is now in liquidation.

10.2.2 BACKGROUND TO THE FACILITY

Early in 1987 the activities of the Company came to the notice of Mr C B Taylor, the Bank's Manager, Corporate Marketing and Finance, whose responsibilities and activities included "targeting all South Australian based companies that were listed on the Main and Second Board of the Adelaide Stock Exchange." ()

Mr Taylor maintained an information file on any such company which was not at that time a client of the Bank. He gathered information on the Company, from various sources, including (but not limited to) press reports, and from Todd Partners, Stockbrokers, (which included analysis of the publicly available financial information relating to the Company). It was noted in the initial information which came to the attention of the Bank, through Mr Taylor, that the Company had reported a profit of $0.486M in the period of 6 months to December 1986, and had a turnover in that period of $3.2M.

In April 1987, Mr Taylor and other officers of the Bank invited the Managing Director of Celtainer to lunch. In the discussion which took place, the Bank was informed that:

"... on current sales and demand for product line, Celtainer projects export sales of $100.0M per annum by 1990. Expansion program due to commence and some debt requirements will be sought." ()

After that meeting, Mr Taylor spoke with the Secretary of Celtainer, Mr C J Atkins, about the borrowing requirements of the company, and, in the course of that conversation, Mr Atkins indicated that Celtainer was looking for "equity placement" ().

Not long afterwards an invitation was extended by Celtainer for the Bank to take equity in the Company. () The precise terms of the invitation are not known, and are unimportant. On 25 June 1987, Mr Taylor wrote to SVB Day Porter, Stockbrokers, seeking their advice on an equity investment by the Bank.() On or about 6 July 1987, Mr P E Miller, the Bank's Senior Manager, Corporate Administration visited the premises of Celtainer, together with Mr G Day and two investment analysts (of SVB Day Porter), and had further discussions with the Managing Director of Celtainer.

The Diary Note prepared by Mr Miller in connection with that visit is of some importance. It reveals, more explicitly than earlier documents, the fact that the Bank was simultaneously looking to provide substantial credit facilities to Celtainer Ltd, and to making an equity investment in that Company.()

Some time between 6 and 13 July 1987, SVB Day Porter provided the Bank with written advice with respect to Celtainer. This document was prepared by the investment analysts employed by SVB Porter. It was entitled "Investment Memorandum" and dealt, inter alia, with the background of the Company, its Directors, its capital structure, its manufacturing and design activities, its Trading Activities, its Profitability, its Worth, and details of trading in its shares. It concluded with comments and conclusions including the following:

"A maximum entry price of 66 cents represents a price/earnings multiple of 8.4 times estimated 1986/87 earnings and 5.1 times projected 1987/88 earnings - well below current market averages for any sector. We believe the stock has an upside potential to around $1.40 within the next 12 months or so, based on a price - earnings rating of 11 on projected 1987/88 earnings.

An investment in Celtainer at 60-66 cents would appear to have excellent capital growth potential in the short to medium term and represents an attractive opportunity to secure a holding in a thinly traded, tightly controlled company with a sound longer term future." ()

Arising from these initial discussions, the Bank received a credit application from Celtainer. Concurrently, the Bank began to take steps toward acquisition of equity in Celtainer.

A written proposal dated 13 July 1987 ("the Proposal") was then prepared for consideration by the Bank's Lending Credit Committee. It was prepared by Mr Taylor and his subordinate staff, and was endorsed as "supported" by another Bank officer. As to that "support", that officer said in evidence before me, on 12 February 1992, that the exercise of that function meant that he:

"... would have inquired of the person submitting the paper, that he had made due inquiry and due analysis of (the profit and loss projections of Celtainer)." ()

It is clear, that as the "supporter" of the Proposal, that officer did not personally review the supporting analysis, or personally scrutinise the factual basis of the information provided by Celtainer.

In essence, the Proposal recommended the grant of credit facilities totalling $2.75M secured by:

(a) a First Registered Debenture over all assets and including uncalled capital of the Company and its subsidiaries;

(b) a First Registered Mortgage over the Company's commercial property at Royal Park; and

(c) a negative pledge by the Company that:

(i) Its net tangible worth not fall below $3.5M;

(ii) Its total liabilities not exceed 75 per cent of its Total Tangible Assets; and

(iii) `A' Class shareholding of Mr S O Lundgren not to be depleted without written consent of the Bank.

The said credit facilities were recommended to be extended subject to certain `conditions precedent' including:

(a) "Provision of audited financial accounts of Celtainer Ltd and its subsidiaries as at 30/6/87 and such being satisfactory to the Bank. Alternatively, an investigating accountant's report by a recognised accounting firm appointed by the Bank and to substantiate assets and liabilities disclosed in balance sheet 28/2/87"; and

(b) A licensed valuer's opinion being obtained disclosing an `open market' value of not less than $0.65M of the Company's real estate. ()

The Proposal also recommended acquisition of 1 million shares in Celtainer Ltd at 5 per cent less than current market price. Such an investment involved expenditure of approximately $0.627M and would have made the Bank the holder of 7.1 per cent of the issued capital of Celtainer.

The Proposal itself was five pages in length. It followed the established standard format, and included descriptive segments (eg the facilities proposal, the equity proposal, the terms, security and fee structure), and as well expressions of opinion on future developments (eg the Safety Assessment and General Comments, which listed, without comment, advantages and disadvantages of the transactions).

No useful purpose would be served by repeating in full the advantages/disadvantages of the transactions stated in the Proposal. I draw attention, without comment at this stage, to two of the matters stated. First, the document refers to, and is entirely consistent with, a corporate charter on the part of the Bank to be involved with and to assist South Australian industry. (Several of the written submissions received by me, including that of the Bank refer to this matter.) Secondly, the author of the proposal warned, in listing the disadvantages of the transactions:

"...

3. Heavy reliance on Mortgage Debenture and outwardly moving Gearing Ratio.

4. Company is relatively immature when viewed against the business cycle. 1986/87 is the first profit turnaround.

5. Assessment is based on future outlook as historical results do not inspire financial confidence." ()

In so far as the Proposal to the Lending Credit Committee concerned equity acquisition, it did little more than to describe the equity acquisition transaction, and to repeat some of the factual material and the basic opinion as to the future value of the shares in Celtainer which were contained in the SVB Day Porter Investment Memorandum. The Proposal did not contain any further assessment of the investment opportunity beyond that stated in the Investment Memorandum.

The Proposal annexed 3 substantial documents. The first two were entitled "History Sheet -27/8/87" and "Security" respectively. They are obviously documents prepared by Bank staff. The third was the Investment Memorandum of SVB Day Porter.

The History Sheet contains information on the capital structure of the Company, its trading activities, its worth, and a commentary in relation to these matters.

The "Security" annexure listed the assets (other than real estate) of the Company, as valued in it's unaudited balance sheet to 28 February 1987, and, in the case of the Company's real estate, as valued at 30 June 1985.

The written Proposal, as a whole, presented Celtainer as a company which had, in the recent past, operated at a moderate loss, but which had more recently returned to profitability; which was "quite sound" and had prospects in its future manufacturing and trading activities which were likely to expand in the near future; and which could provide adequate security for advances by the Bank of approximately $2.75M (made up of an overdraft facility, commercial bills, a multi-currency loan and a trade finance facility of $0.75M). ()

The Proposal was considered, on 15 July 1987, by the Lending Credit Committee. The Committee approved lending totalling $2.75M, subject to conditions requiring, amongst other matters, the monitoring of cash flow projections, which had been made by Celtainer, and verification of compliance with the negative pledge requirement that the net worth of Celtainer be not less than $3.5M. The advances on this loan were not made until December 1987. In the period between approval by the Lending Credit Committee and the making of the initial advance, the financial position of Celtainer deteriorated to the extent that its activities were unprofitable. Neither the deterioration in its financial position nor the deterioration in its profits were detected prior to the Bank advancing funds to Celtainer, because there was a failure, on the part of the Bank, adequately to verify the net worth of Celtainer, and there was no verification of its cash flow and profitability for the period July 1987 to December 1987. The account became problematical almost immediately, although it was not classified as "non-performing" until March 1989.

Although Celtainer continued in business until 1990, it did so only with the continued support of the Bank and another substantial investor. In September 1990, that investor advised the Bank that it would no longer provide support for Celtainer, whereupon it was obvious to the Bank that Celtainer could not satisfactorily service the loan and its security was inadequate. The Bank immediately appointed a Receiver. Celtainer has since been put into liquidation.

The acquisition of shares in Celtainer, at a cost to the Bank of $0.52M (approximately), was made after only superficial examination of the merit of that acquisition by the Lending Credit Committee which, although expressing satisfaction with the acquisition, recommended consideration of the matter by the Equities and Underwriting Group of the Bank. That Group did not consider the merit of the acquisition. Purchase of the shares took place on the mistaken belief by the Bank officer involved that the Lending Credit Committee recommendation was all that was required, and that the merit of the acquisition had been thoroughly assessed. The acquisition was never approved by an authorised delegate of the Board. As at 31 March 1991, the shares were worthless.

 

10.3 CHRONOLOGY

 

Appendix A of this Chapter of the Report contains a summary of movements in the facility.

Appendix B sets out a detailed chronology of events in respect of the facility.

 

10.4 COMPLIANCE WITH POLICIES AND PROCEDURES

 

Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" of this Report details the lending policies and procedures that applied over time within the Bank.

The initiation of the loan to Celtainer, and the approval of that loan, both took place in 1987, as did settlement of the loan. As noted in Chapter 8, substantial changes occurred in the policies and procedures of the Bank in March 1988, when new practices and procedures were implemented for the first time. Accordingly, the initiation, approval and settlement stages of the Celtainer credit transaction occurred prior to the implementation of those new processes practices and procedures. This Chapter therefore deals with those stages of the credit transaction not with a view to describing non compliance with established procedure nor to allocating degrees of culpability to the relevant bank officers and employees, but rather with a view to illustrating the errors capable of being made when the established procedures are inadequate.

The following Section does not descend to detail with respect to compliance with procedures introduced in March 1988 with respect to Hindsight Overview, Management of Loans, Management of Non-Performing Loans and Credit Inspection. That is because those procedures and processes were largely concerned to detect problem loans, and to implement special arrangements thereafter to avoid loss. The Celtainer account was recognised as problematical, in March 1988, whereupon monitoring of it outside of the normal processes was assumed. There was no need to proceed through the stages designed to detect problems - the problem was well recognised.

This section of this Chapter is therefore largely descriptive of what occurred, and contains my criticism of it having regard to the matters which I am required to investigate.

10.4.1 INITIATION OF THE FACILITY

Relevant facts relating to the general preparation and content of the Proposal are stated above.() I am of the opinion that the Proposal was deficient and irregular in the following respects:

(a) The financial information available with respect to Celtainer included cash flow projections and profit projections. Those estimates were relevant to assessment of the capacity of Celtainer to service a loan and to repay it. Any inconsistencies between those estimates would have provided reason to suspect that the estimates were unreliable. There was an inconsistency in those estimates. The `payments to creditors' in the cash flow projection was $0.828M lower than the equivalent item (`purchases') in the profit projection. This matter ought to have been noted and significance attached to it. No significance was attached to it.

When this matter was put to the officers who prepared and `recommended' the Proposal they each submitted in a written reply:

"The total figure for `payment to creditors' in the cash flow projections is $3,938,750.00. The total figure for `purchases' in the profit projections is $4,767,000.00. As the difference between these two figures is $828,250.00, I assume these are the figures referred to in your letter and report. The significance which you seem to attach to the difference between the two figures is, with respect, misplaced. There is nothing untoward in the figures being different as they represent different items and timing and can be easily explained. One would expect the `payments to creditors' figure to be less than the `purchases' figure in every company which operates on deferred purchase terms and with increasing sales growth. Assuming, for example that the company operated on 90 day trading terms, the figure of $828,000.00 difference is entirely consistent with such terms, representing as it does 18 % of the value of goods purchased during the year..."

This explanation is implausible. My reasons for that conclusion are two fold. First, it is to be noted that an examination of the Celtainer projections (ie the cash flow projection and the profit projection) reveals that the figures for payments are constant throughout the year with the exception of the immediate post-Christmas holiday period, and therefore the difference cannot be accounted for as being due to timing in an expanding business. The figures, in both cases, forecast a constant purchases figure/payment to creditors. The figures do not show "... increasing sales growth ..." as the Bank officers allege. Secondly, if the flow of payments is constant (as was the prediction), a deferred payment practice would not cause the figures to vary greatly and indeed, possibly not at all, except perhaps at the beginning, or at the end, of the accounting period - where payments might be made out of the usual pattern, for tax or other purposes.

In my opinion, an examination of the documents containing the estimates, and the application of common sense, justifies the conclusion that the difference between these figures should have been noted by a competent analyst who was carefully examining the documents and significance ought to have been accorded to this discrepancy. The discrepancy is ground for suspecting that the figures presented may not have had a sound factual basis.

The submissions of the officers concerned confirm, by inference, that no significance was placed by them on the fact that the figures for payments were different in the cash flow projections and profit projections.

The fact that the discrepancy was either not noted, or not considered significant, would explain why this specific matter was not brought to the attention of the Lending Credit Committee.

The Proposal contained neither comment on the degree of examination and/or analysis exercised by the Bank officers on those projections, nor comment concerning their reliability. The General Comments - Downside/Disadvantages section of the Proposal contained the statement "Assessment is based on future outlook as historical results do not inspire financial confidence". This statement certainly did not amount to a clear warning that profit estimates had not been analysed or verified so far as was possible. Nor did it amount to an acceptance of responsibility for reliability of the estimates.

Accordingly, I consider that the Proposal was deficient in that:

(i) in the preparation of the proposal, a relevant matter was not considered significant; and

(ii) the Proposal did not contain a warning with respect to the reliability of information.

(b) Prior to submitting the Proposal to the Lending Credit Committee, the officers responsible for its preparation made no attempt to inspect the banking records of Celtainer.

They suggest, in their written submissions to me, that it would have been contrary to the interests of the Bank to request the client's consent to seek information from the existing banker to Celtainer, because that banker would have been alerted to competition emanating from the Bank. I agree that an intending financier would not, in other than exceptional circumstances, ask for the consent of an intending borrower to approach that borrower's existing financier. This may well explain why no enquiry was directed to the bankers, but does not explain why "the records" of Celtainer were not examined.

The failure to seek this information may have been because a decision was taken not to obtain it. Such a decision might have been made because the Bank officers thought that Celtainer was potentially a good customer, and worth pursuing in order to obtain its business. In such circumstances, it might have been thought undesirable to ask Celtainer for its past banking records lest that cause annoyance to the potential customer. If that was the case, the failure to obtain and inspect those documents was not so much the result of lack of due diligence as the result of an error of judgement arising from a decision, policy, or ethos, within the Bank, whereby the pursuit of market share was insufficiently tempered by reasonable and prudent credit assessment practices.

An alternative is that no one thought to ask Celtainer for its records. If this were the case, then, in my opinion, there was a lack of due diligence.

In my opinion, thorough assessment of credit risk involves consideration of past banking activities of the borrower, such information being obtained from the borrower itself, at least unless the borrower consents to do otherwise. Accordingly, the matter should have been considered as part of the preparation of the Proposal. The Proposal should have stated either that Celtainer had previously kept within its Banker's limits, or that it had not done so.

In making these findings for the reasons outlined in Section 10.4 above, I am not concerned to attach blame to the officers who prepared and supported the proposal. The practices and procedures in place at the relevant time did not provide adequate guidance with respect to analysis of information. The result, which is so clearly evidenced in this matter, is that whilst the Proposal had the appearance of a document prepared after careful investigation and judgement, it was a superficial document, and in some respects inadequate. I am reinforced in this conclusion by the submission I received in connection with this transaction, from the Bank.

On behalf of the Bank, its Solicitors submitted that:

"... the Bank accepts that the initiation ... of the transaction was inadequate." ()

In the submission accompanying that letter, the Bank explained that the Instruction Manuals which it maintained when these transactions were initiated (and at other times not presently relevant):

"... had limited applicability to more complex `corporate' transactions e.g. involving multiple lending products, company groups, negative pledge, lending etc.

The history of specific "Corporate" policies and procedures is not clear until March 1988 ... Prior to this time it seems that specific "Corporate" policies were manifested in various memos - not necessarily integrated or comprehensive - issued on an ad hoc basis by the department's senior management." ()

Accordingly I consider that there was inadequate guidance in this matter to those bank officers whose duty it was to prepare Proposals for consideration by the Lending Credit Committee.

In my opinion, there is no reason to doubt these statements made by the Bank. My Investigation in connection with Celtainer confirms the correctness of the submission of the Bank in this respect.

(c) The processes, practice and procedures, ie the system, insofar as it concerned the preparation of the Proposal, was deficient and defective by reason of the following matters. When one examines the processes, procedures, practices, and policies, of the Corporate Banking department, as evidenced by the Celtainer transactions, to the stage of submission of the Proposal to the Lending Credit Committee, the following observations may be made:

(i) The Bank had a corporate ethos of seeking to assist South Australian based industry.

(ii) This lead to the Bank seeking out South Australian based companies in order to do business with them. Celtainer was one such company.

(iii) Bank officers concerned with this task were aware that they had to attract the customer, and to entice it away from its existing banker, and they were prepared to do so. Thus, they were involved in a competitive `marketing' exercise.

(iv) Concurrently with the marketing activity, the Bank assessed the credit worthiness of the client, and, in this instance, the merit of an equity investment as well. That assessment of credit risk was made, or supervised or both by the same officer as was involved in the `marketing' exercise.

(v) The analysis of credit worthiness was not a well defined or controlled process within this department. There were no applicable manuals or substantial guidelines to be followed in transactions of this particular kind.

(vi) The requirement that the Proposal be endorsed both by the officer `recommending it' and as well by the officer `supporting' it, whilst giving the appearance of an analysis by two persons, was an inadequate quality control mechanism. There was no analysis and detailed consideration of the document by the officer `supporting'.

(vii) As a consequence of the two matters noted above, the accuracy and adequacy of analysis was entirely dependant on the capacity and diligence of the person recommending the Proposal.

(viii) Bearing in mind the corporate ethos and the marketing function of the officer recommending the Proposal, he may well have been influenced, at the time of making his analysis, by a pre-disposition to `do business' if possible, and, if his impression during the marketing exercise was that the company looked sound, his analysis might not have been as probing as the circumstances warranted.

In my opinion, the analysis of credit risk was not as probing as it should have been, in that no significance was attributed to the discrepancy in payments shown in the cash flow and profitability estimates (as discussed above).

(ix) The content of the Proposal had the capacity greatly to influence the decision of the Lending Credit Committee. Yet the form of the Proposal contained no certification with respect to the identity of the analyst; no indication of the extent of the analysis; and, most importantly, no statement of responsibility for the correctness of the information contained in it. The Bank's records do not contain a clear acceptance of responsibility for the correctness of the information submitted to the Lending Credit Committee, or a clear warning that the information was unreliable.

(x) Thus, no-one checked the analysis, in detail, before it was submitted to the Lending Credit Committee. The Proposal contained no warranty that the information and assessment contained in it had been checked and was accurate, and no clear warning that it had not been checked or was likely to be inaccurate. Thus, if there was to be consideration of the accuracy of the analysis, that had to be done orally at the Lending Credit Committee meeting. The way in which the system worked meant that it was most unlikely that the matter would be raised at the Lending Credit Committee meeting. That is because the Proposal contained no material which would cause the Committee members to question the material; the person recommending the Proposal was unlikely to volunteer that his work to that stage was incomplete or of poor quality; and the Committee did not see it as its function to examine the minute detail of the financial analysis presented to it.()

For the above reasons, it must be concluded, and I find, that the system, to the stage of submission to the Lending Credit Committee did not require or enforce a thorough and independent assessment of risk nor a clear and comprehensive presentation of the same to the Lending Credit Committee which was the designated decision maker. The system allowed significant scope for errors to be made in the assessment of lending risk, and, for these errors to remain undetected.

10.4.2 APPROVAL OF FACILITY

The Lending Credit Committee was the designated delegate of the Board for the purpose of approval of a lending transaction of this size.()

Each of the members of the Lending Credit Committee involved with the approval of this particular lending transaction submitted that:

"The role of the Lending Credit Committee in relation to Credit Proposals, was to decide upon the merits of the Proposal as a whole based on the information submitted to it by the Proposer and Supporter of the Proposal. It was not the role of the Lending Credit Committee to manually check the accuracy of the figures in the Proposal. Checks on the reliability of the figures provided by the customer and a sensitivity analysis of the customers cashflow etc were carried out by the Account Manager responsible for that particular account." ()

As the ultimate decision maker with respect to the lending transaction, the Committee would have been required to consider the following matters:

(a) the ability of the customer to service the loan;

(b) the ability of the customer to repay the loan;

(c) the adequacy of security in the event that the customer did not repay the loan and charges on it;

(d) whether the lending was in breach of prudential guidelines by reason either of over exposure to a particular customer, or of over exposure to a particular sector of the economy; and

(e) other matters.

It is noteworthy that the Proposal contained information which is relevant to the factors identified immediately above. It is also noteworthy that neither the Proposal, nor the Annexures to it, provided sufficient information to enable members of the Lending Credit Committee to make a detailed sensitivity analysis, or any substantial analysis at all, of the reliability of the figures presented in connection with both the future cash flow and future profit of Celtainer. The Lending Credit Committee was, in effect, presented, in connection with the assessment of ability to service the loan and assessment of the ability to repay the loan, with the barest of information ie a projection of profits, details of assets and liabilities of the kind found in the balance sheets of a public company, and some estimate of the available security. Anything more than this, the members of the Lending Credit Committee would have had to obtain by way of oral presentation from the person presenting the Proposal.

The Proposal was distributed to the Lending Credit Committee before it met on 15 July 1987.

The minutes of that meeting record that an oral report of `background' to the application was made by Mr Taylor and that the following matters were discussed or noted by the Committee on 15 July 1987:

(a) details of the equity investment;

(b) reference to the fact that SVB Day Porter had given a favourable report with respect to equity acquisition;

(c) "Members were satisfied with the credit risk noting the profit performance in 1986/87 and the positive future outlook for added growth, given the demand for the company's product ..."

(d) "It was agreed that the advances should be subject to monthly monitoring of cash flow projections in view of the fluctuations in the value of the Australian dollar and that there should be no constraints on the sale of the equity investment if agreed to by the Bank's Equities Group"; ()

(e) "Decision;

Facilities of $2.75M approved subject to monthly monitoring of cash flow projections. The proposal for an equity investment of $0.627M recommended to the Bank's Equities Group for approval on the understanding that there will be no constraints on the sale of the equity investment by the Bank."(18).

It cannot be doubted that the Committee members placed great reliance in making their decision upon the estimate of profits made by Celtainer, and as stated in the Proposal.() They had to do so in order to assess the ability of the customer to service the loan and to repay it.

It would be wrong, however, to conclude that the members of the Lending Credit Committee simply accepted the profit figures and made a decision on them. It would be wrong to do that because the Proposal contained conditions precedent to the making of the loan, one of which was:

"Provision of audited financial accounts of Celtainer Ltd and its Subsidiaries as at 30/6/87 and such being to the satisfaction of the Bank. Alternatively, an Investigating Accountant report by a recognised accounting firm appointed by the Bank and to substantiate assets and liabilities disclosed in balance sheet 28/2/87." ()

Moreover, the minutes of meeting disclose that the Committee expected monthly monitoring of cash flow projections before advances were made.

In my opinion, the condition precedent did not provide any useful criteria on which to decide whether the audited accounts were to "... the satisfaction of the Bank". Nor did it specify who was to make the assessment. Nor did it specify what was to occur if there was variance between the situation as presented in the Proposal, and the situation appearing in the audited accounts. In these respects, from a management perspective, the condition precedent was inadequately expressed.

In effect, what the Lending Credit Committee did, by making its decision in this form, was to say "we accept that if these cash flow and profit projections are reasonable then the credit risk is acceptable - but the facts have to be verified". By simply accepting the cash flow projection and by imposing a condition precedent, which was far from specific, the Lending Credit Committee approved the recommendation only `in principle'. The matter then proceeded back down the chain of command (and control) to a subordinate officer who had to make the decision to proceed, and that officer had to make that decision without any clear direction as to how it was to be made. Moreover, the decision-making function was remitted to a subordinate who was, in the discharge of it, outside of the control of the Lending Credit Committee.

Accordingly, by approving the recommendation, the Lending Credit Committee effectively circumvented the procedure which had been laid down by the Board, ie, that loans of this size had to have the consideration and approval of the Lending Credit Committee.

Members of the Lending Credit Committee might well say "Well we expected that if the accounts were materially different from the accounts presented to us, advances would not have been made or that the matter would have come back to us". Be that as it may, the point which must be made is that the approval given by the Lending Credit Committee did not require that the accounts should be in conformity with the projections, and did not require that the matter be re-submitted to the Committee if the accounts were not in accordance with the projections. The recommendation, and the approval, left it to someone else to decide whether or not advances would be made. At the point of acceptance of the recommendation, and by means of the inadequate and confusing condition precedent, the Lending Credit Committee lost control over the lending decision.

I do not imply any specific lack of judgment or lack of due care in the process of exercising judgment by the members of the Lending Credit Committee. It may well be that the members recognised the inadequacy of the information which was being submitted to them. It was the system which was at fault. Either the proposal was submitted to the Lending Credit Committee before it should have been, or, alternatively the system in operation was so loose as to enable a decision to be made "in principle" on inadequate information, with the fundamental decision then being transferred to someone else, who was then burdened with the duty to examine the situation, and the duty to make a decision which, properly, ought to have been part of the considerations of the Lending Credit Committee.

In short, in my opinion, the deliberations of the Lending Credit Committee, and the form in which it approved the Proposal, left the fundamental decision as to whether or not this loan should be made to a body other than the designated body. It does not help to characterise this decision as an abrogation of responsibility or as something else. The point is that the designated decision-maker did not, in the end result, make the decision. The decision was ultimately made by someone at a lower level, and, as will be discussed below, by someone who had insufficient training and experience to make it. The way in which the Lending Credit Committee conducted itself facilitated the circumvention of the system, which had been put in place in order to ensure proper lending credit decision-making.

10.4.3 SECURITY

I am of the opinion that no departures from the approved procedures of the time occurred in relation to the security phase concerning this facility.

10.4.4 HINDSIGHT OVERVIEW

No Hindsight Overview was undertaken in relation to this loan when it was first approved (in July 1987) because the process had not been implemented by that time.()

10.4.5 ADVANCEMENT OF FUNDS

The Lending Credit Committee's approval was, as discussed above, subject to a number of conditions. These conditions were not all clearly laid down in a resolution or decision of the Committee, and had to be extracted from both the Proposal and the `decision' stated in the minutes of the Lending Credit Committee meeting of 15 July 1987. The following pre-conditions for advancement of funds which were required by the Lending Credit Committee are relevant for present purposes:

(a) Monthly monitoring of cash flow projections was required (see Lending Credit Committee decision - stated in its Minutes of Meeting);

(b) The condition precedent to the loan required either audited accounts to 30 June 1987 "... being to the satisfaction of the Bank" or alternatively an accredited statement of assets and liabilities as at 28 February 1987 (see the Proposal);

(c) The negative pledge was required, and the Bank had to verify compliance with it - in effect - that net tangible worth of Celtainer would not fall below $3.5M (see annexure "B" to the Proposal and the Proposal).

The financial analysis, prior to draw down, was not undertaken until four and a half months after the decision of the Lending Credit Committee. It was prepared by Mr C C Ritchie, a Corporate Analyst and contained the endorsement `recommended by' Mr B J Parker, Corporate Manager. It was incorporated into a Diary Note dated 19 November 1987, and was submitted to Mr A Kloot, Senior Manager Corporate Banking.

Mr Ritchie submitted to me:

"... at that time I had been with the Corporate Department for two years and had received very little technical training and guidance from the Bank in respect of Corporate Banking. Many of the departments policies and procedures were fragmented, deficient, inconsistently applied and in respect of some aspects of Corporate Banking no policies and procedures existed.

At the time I performed the analysis I understood that the method of calculation that I used was the same as that commonly used by the Bank for such calculations. I had received no training in tax effective accounting. ... In performing the analysis of Celtainer's audited financial statements I submit that I performed my duties to the best of my capabilities, skills and knowledge of the time." ()

In his submissions to me, Mr Parker, who "recommended" the analysis, made comments which are, for all practical purposes, identical to those made by Mr Ritchie, in so far as they concern departmental policies and procedures. Mr Parker had, at the time, been in the Corporate Banking department for only two years. Mr Parker submitted, in connection with the preparation of the analysis, that he was acting under constraints of "... inadequate training, guidance and lack of resources." ()

There can be no doubt that the analysis which was performed in November 1987, and which formed the basis of the decision to advance funds, was inadequate in two respects:

(a) There was no actual monitoring of cash flow, as required. This was a serious defect. Had there been a monitoring of cash flow it would have been observed that the period from July to November 1987 was one of incredible difficulty for Celtainer due to a number of factors, and that the Company had sustained losses in this period. The down turn in business, seen against projected business, was dramatic. (As was revealed early in 1988, sales of the major production line of Celtainer were only 40 per cent of budgeted sales of that item - gross profit margin had fallen from 30 per cent to 13 per cent, an increase of overheads above budgets had occurred, and extraordinary items of cost were being experienced).()

(b) Errors of principle were made in the process of verifying compliance with the negative pledge. The negative pledge requiring that net tangible worth should not fall below $3.5M was scrutinised by Mr Ritchie. In the process, neither he nor Mr Parker observed and/or appreciated the significance of a qualification to the audited accounts for the period ended 30 June 1987. The consequence of this qualification was to reduce group profits, if tax effective accounting standards were applied. Furthermore, neither Mr Ritchie nor Mr Parker removed, for the purposes of assessment of net tangible worth, intangible assets such as the deferred cost of development and flotation. Had tax effective accounting standards been adopted and had the net tangible worth of the Company been assessed properly, it would have been observed that, as at 30 June 1987, on the audited accounts, Celtainer could not comply with the negative pledge.

In my opinion, there is no doubt that the analysis, as a whole, was grossly defective. Regard should be had to the submission made by the officers concerned, with respect to the inadequacies in their training, and in the lack of guidelines for them to carry out the task in question. I have no reason to doubt either of them when they say that they carried out their tasks to the best of their skill and ability. Once again, it is very much the case that `the system' was at fault.

Careful observation of the Diary Note prepared by Mr Ritchie, which contained his financial analysis, reveals that it purports to be a discussion of events only up to 30 June 1987. Accordingly, it should have been obvious to anyone reading that document that cash flow monitoring, for the period July to November 1987, had not been done.

The analysis prepared by Mr Ritchie, and recommended by Mr Parker, was then submitted to Mr Kloot, Senior Manager Corporate Banking.

It appears, from the records which I have examined, that Mr Kloot wrote, on the bottom of the written analysis prepared by Mr Ritchie:

"We have no option but to proceed as they have fulfilled the requirements laid down. However, everything must be in place before we assume the debt.

This is the Co's first good performance - I was not party to the original approval and I am still sceptical about their long term prospects. Hopefully I will be proved wrong." ()

Mr Kloot was wrong when he considered that all of the requirements for lending had been met. He was wrong in that a correct assessment of net tangible worth would have revealed that the actual net tangible worth was less than the amount required by the negative pledge. Worse than that, he was wrong in the sense that the original decision, which had been made back in July, had required a monitoring of cash flow and no monitoring of cash flow had occurred. I do not suggest any lack of care on the part of Mr Kloot, because the Diary Note submitted to him contained neither mention of the fact that monitoring of cash flow was required nor sufficient detail for him to check the verification of compliance with the negative pledge.()

On the basis of Mr Kloot's approval, the preparation for settlement and draw down subsequently took place. The security documents were then prepared, and were signed on 25 November 1987.

Settlement on the transaction took place on 1 December 1987. It is noteworthy that that settlement was in markedly different terms from that actually approved by the Lending Credit Committee. Whereas that Committee had approved of a facility involving an overdraft of $0.2M, and a multi-currency loan of $1.2M, the overdraft facility was increased at draw down to $0.8M and the foreign currency advance reduced to $0.6M. This was necessary in order to accommodate a larger payout to the previous bankers of Celtainer. It will be observed that by increasing the overdraft and reducing the foreign currency advance by the same amount, the overall facility made available by the Bank was the same as that approved by the Lending Credit Committee. The form was different.

Had the Lending Credit Committee been confronted in July with the true facts (as they were by November 1987), and had that Committee exercised the judgment of a prudent banker after due diligence, would it have approved credit to Celtainer on the terms which were actually approved in July?

In my opinion, the answer to this question is that the Lending Credit Committee almost certainly would not have approved the loan at all, and certainly would not have approved it on the terms which were in fact approved. The fact is that, in the intervening period between July and November 1987, the financial and trading affairs of Celtainer deteriorated so seriously that a decision to extend credit on those terms would have been unthinkable. The situation reached by November 1987 was that the profit projection and cash flow projection of Celtainer had not been achieved, and had been shown to be grossly erroneous. Moreover, the form of security which was required could not have been provided as the net tangible worth, at 30 June 1987, was less than that specified in the conditions which were approved, and that situation deteriorated still further between July and November 1987. Finally, the trading pattern of the company had slumped back into a loss making situation.

The immediate cause of the erroneous decision in November 1987 was the failure of Mr Ritchie to examine the affairs of Celtainer in connection with the period July to November 1987, and the failure of Mr Kloot to ascertain that he had not done so and/or to ascertain that this was required and/or he himself was to consider that this was necessary. The underlying causes however, and, in my opinion, it is the underlying causes which are important, were failures of `the system'. These are identified as follows:

. `the system' worked in a way which effectively left the decision making to Mr Ritchie. He was neither trained for it, nor aware of his inadequacies in this respect; and

. the system of reporting from Mr Ritchie to Mr Kloot was inadequate, in that it did not clearly disclose what the Lending Credit Committee required (ie cash flow monitoring, scrutiny of the negative pledge and other matters), and because the form of Diary Note containing the analysis prepared by Mr Ritchie did not contain sufficient information for Mr Kloot to ascertain, or check for himself, whether or not a correct calculation of net tangible worth had been made.

10.4.6 MANAGEMENT OF THE ACCOUNT

Within a period of about two months, the account became a problem. On 5 February 1988, the overdraft had been drawn to the extent of $1.0M, and the overall facility was marginally overdrawn.

The Account Manager did not, during the first three months after settlement (ie in the period December 1987 - end February 1988), undertake a monitoring of the Negative Pledge. This was remedied early in March 1988.

At a meeting between Bank officers and the Secretary of Celtainer, Mr Atkins, on 9 March 1988, (the exact purpose of which I have not been able to ascertain, but the timing of which suggests that it was prompted by the Bank as a result of the need to verify compliance with the Negative Pledge), Celtainer (through its Managing Director and Financial Director) revealed a gross shortfall in predicted receipts over the first half of the financial year commencing 1 July 1987, and an overall loss for that period.()

Records of the Bank, disclose an intense and probing interest in the affairs of Celtainer commencing from March 1988.

It is sufficient, for present purposes, if I record, in very broad outline, the significant events which occurred in the management of the account. In March 1988, the account was some $50,000 in excess of approved limits. Furthermore, the company had undertaken, early in that month, to provide substantial financial information and, by the last week of the month, had not done so. The Bank notified the Managing Director of the company that these events were unsatisfactory. The problems were then rectified by Celtainer.

Throughout the remainder of 1988, the position of Celtainer was reviewed continuously, and in considerable detail. Although by the end of the calendar year 1988, the extent of facilities were limited to $2.0M, and the account was being operated within that facility, it was obvious to the Bank that the financial position of Celtainer had deteriorated substantially. The Bank continued its support because Celtainer presented realistic plans to overcome its problems. Celtainer was developing plans for capital restructuring and sale of assets as a means of minimising its debt and returning to profitability.

Early in 1989, it was proposed that a Swedish company, HAB Mercator Pty Ltd, would purchase up to 40 per cent of the shares in Celtainer, thus indicating substantial support for the company as a trading concern. HAB Mercator Pty Ltd was also to provide Celtainer with further working capital.

On 15 March 1989, the account was, for the first time, noted in the Bank's records as non-performing. It was reclassified as `performing' in September 1989 through to September 1990.

During 1989, the Bank's monitoring of the Celtainer account continued. Although the limits of the account had been retracted to $2.0M, in the latter half of 1988, requests for temporary increases in the facility were made, during 1989, and were approved. At the time of the annual review, in December 1989, the limit of the account was $2.4M (which incorporated a temporary increase operative to 31 March 1990, whereupon the limit was to be reduced to $2.0M).

One of the temporary increases was for a matter of months only, and the account appears to have operated within its limits, during that time, and then to have reverted to the new (reduced) limit. Another of the temporary increases was approved, after noting, an increase in capital provided by Mercator.

In March 1990, the Bank noted that, even with the approved temporary increase in facilities, the account should have been operated subject to a maximum limit of $2.4M, whereas it had been drawn to the extent of approximately $2.8M. The Bank formed the opinion that cash flows as indicated by Celtainer were such that the position then obtaining was likely to continue for the foreseeable future. Accordingly, on 14 March 1990, the Bank required Celtainer to maintain its debt within the agreed limits.

Throughout the next period of approximately six months, Celtainer continued to perform poorly. Early in September 1990, the Swedish company which had acquired a substantial interest in Celtainer, and which had been supporting it financially, advised the Bank that it would provide no further support. Accordingly on the same day, the Bank met with its accountant, and later in the day appointed a Receiver.

Further advances were made after the appointment of the Receiver, in order to facilitate recoveries.

On 6 December 1990, provision was made in the Bank's accounts, for a loss of $2.8M. On 21 March 1991, this provision was extended to $3.0M.

I find, in relation to the management of the account:

. The fact that there was no monitoring of the Negative Pledge, in the period of three months immediately after draw down, is indicative of laxity in the performance of duty by the Account Manager. Whether or not this was due to lack of training, overwork, or other factors, I am unable to say. It is sufficient, however, in my opinion, to note that the requirement was not carried out. Moreover, it was not carried out for a period of three months and this was not detected. There was both an inadequacy in the performance of duty, and an inadequacy in the supervision of duty.

Otherwise, the management of the account was appropriate for the circumstances, apart from several minor irregularities not worthy of further consideration in this Report.

10.4.7 MANAGEMENT OF NON-PERFORMING FACILITY

As reported above, the facility was regarded as non-performing in the period March 1989 to September 1989. In my opinion, nothing occurred in connection with the management of the account during this period which warrants further comment.

10.4.8 CREDIT INSPECTION

The credit inspection procedure was introduced at the Bank during August 1990. No credit inspection was carried out on the Celtainer account prior to the appointment of the Receiver in September 1990.

 

10.5 OTHER MATTERS IDENTIFIED IN THE INVESTIGATION

 

10.5.1 EQUITY ACQUISITION

Consideration by the Lending Credit Committee

When the possibility of an equity investment in Celtainer by the Bank was raised with Mr Taylor, his initial action was to refer it to the Lending Credit Committee.

In so far as the Proposal to the Lending Credit Committee concerned equity acquisition, it did little more than to describe the proposed investment, and to repeat some of the factual material and the basic opinion as to the future value of the shares in Celtainer Ltd which were contained in the SVB Day Porter Investment Memorandum. The Proposal did not contain any further assessment of the investment opportunity than that stated in the SVB Day Investment Memorandum.

With respect to the consideration by the Lending Credit Committee of the equity acquisition aspect of the Proposal (which occurred at the meeting of the Lending Credit Committee on 15 July 1987) each of the members of that Committee has submitted to me:

"It was my understanding that it was not the role of the Lending Credit Committee to take decisions on whether or not the Bank should make a particular equity investment." ()

In fact, the Lending Credit Committee was given the role of approving equity acquisition of this size by the Board at its meeting of 22 November 1984. Clearly the members of the Lending Credit Committee were mistaken as to their role, at least, when they made submissions to this Investigation.

At the meeting of the Lending Credit Committee, or perhaps some time later, the Chairman of the meeting wrote on the bottom of the Proposal submitted to that meeting:

"Facilities of $2.75M approved at Lending Credit Committee No. 267 held 15/7/87. The proposal for an equity investment of $.627M was recommended to the Bank's Equities Group for approval on the understanding that there will be no constraint on the sale of the equity investment by the Bank."

The members of the Committee in their respective submissions to me, state:

"The hand written note at the foot of page 5 of the Celtainer proposal dated 13 July 1987 ... may give the misleading impression that the Bank's Equities Group would necessarily act upon the advice of the Lending Credit Committee. In fact, the decision as to whether or not to invest in Celtainer Ltd was a matter for the Equities Group to decide and the Lending Credit Committee's "recommendation" to the Equities Group was in fact no more than a referral of the proposal to the Equities Group for its consideration. I assume that the reason why details of the proposed equity investment were advised to the Lending Credit Committee in the Proposal, was to ensure that the Lending Credit Committee was appraised of the Bank's potential total exposure to Celtainer." ()

This submission is plainly incorrect in so far as it concerns the role and the discretionary authority of the Lending Credit Committee. It is inconsistent with the Board's delegation made on 22 November 1984, as amended in August 1986.

In my opinion, the author of the Proposal had more in mind than that the Lending Credit Committee should be appraised of the potential exposure of the Bank to Celtainer. Had he nothing more in mind than that fact, then he needed simply to have referred only to the extent of the proposed investment, and there would have been no need to refer to details of it, or, indeed, to the assessment of the merit of it (which was contained in the annexed Investment Memorandum prepared by the SVB Day Porter analyst).

The minutes of the Lending Credit Committee meeting might well give the impression that the Lending Credit Committee did consider the merits of the equity acquisition and did recommend it. That is because the minutes contain:

(a) a detailed description of the equity investment and its purpose;

(b) a record of discussions, including a reference to a favourable report from SVB Day Porter;

(c) a note as to cash flow and other matters relevant to the profitability of the business (which were equally relevant to the lending decision and to the decision to acquire equity); and

(d) the Statement that the equity investment "... recommended to the Bank's Equities Group for approval (emphasis added) ...." ()

In my opinion, having regard to the contents of the Proposal and of the Minutes and the submissions made to me by members of the Lending Credit Committee, it is reasonable to conclude and I find, the following:

(a) that it was not generally the function of the Lending Credit Committee to consider and approve equity acquisition - that was a matter for the Equities and Underwriting Group - but the Lending Credit Committee did have authority to approve a large acquisition of this size;

(b) that the Lending Credit Committee considered the investment proposal, as to its merits, only superficially, and it did so in the context of examining the potentially adverse affects of that acquisition on the management of the lending operation which it was approving;

(c) that the Lending Credit Committee, by "recommending" the acquisition to the Equities Group, was intending no more than that Group should consider the merit of the equity acquisition, but should do so in the knowledge that it would not prejudice the Bank's lending function provided that there were no constraints on the sales of the equity investment; and

(d) that Mr Taylor could well have believed, after reading the Minutes of the Lending Credit Committee meeting of 15 July 1987, that the members of that Committee had considered the merits of that acquisition, and had approved it, and it is the fact that it was within the power of the Lending Credit Committee to authorise that acquisition.

The decision of the Lending Credit Committee to "recommend" the acquisition of shares in Celtainer to the Bank Equities Group was taken on 15 July 1987. Notwithstanding that the Lending Credit Committee had recommended the purchase to another body for assessment, Mr Taylor wrote to Celtainer, on the same day informing Celtainer that:

"... it is the Bank's intention to purchase up to 1,000,000 fully paid "B" class shares in Celtainer Limited.

We have this day instructed Mr Geoff Day ... to commence negotiations with Russell De Vere Finance Ltd with a view to securing the investment at a discount to current market price. Mr Day has indicated that should these negotiations be successful, he will endeavour to sell up to 200,000 fully paid shares to his clients and expand the current level of shareholders to later assist in main board listing." ()

Consideration by the Equities and Underwriting Group

Mr Chamberlain, the former Secretary to the Equities and Underwriting Group, has informed this Investigation that minutes of the meetings of the Group, held in the period between the decision of the Lending Credit Committee and the actual acquisition of shares, do not evidence any consideration of this transaction. This is not surprising because the Equities and Underwriting Group had authority only to engage in transactions up to the sum of $0.3M, whereas the transaction which the Lending Credit Committee had recommended to that Group involved about twice that amount.

Mr Taylor was aware that the Equities and Underwriting Group did not have authority to approve the acquisition, and had been informed of that fact by the Chairman of the Equities and Underwriting Group on 25 June 1987.()

I refer to the submissions of the Bank, in connection with this aspect of the matter. The Bank has submitted:

"What the Bank failed to understand was that the skills required for evaluating and managing equity and credit positions, whilst not mutually exclusive, require sufficiently different an emphasis as to warrant separate management.

As to the adequacy of the approval process for the purchase of Celtainer shares, the bank cannot offer any rationalisation of what was clearly a failure of process. A process for equity acquisition should have been well defined and it was not.

Clearly, given the size of the transaction, the actual approval with hindsight could only have emanated under the authority of the Lending Credit Committee. The fact the LCC Docket referred the matter to the Equities Group was either a case of poor drafting or a lack of understanding of the authority limits of the Equities Group." () [Emphasis Added]

This submission is entirely consistent with everything known about this equity transaction. On the basis of all the evidence and submissions received, I am satisfied that the only approval that was given was that of the Lending Credit Committee. It seems highly likely, however, bearing in mind particularly the submissions of the members of that Committee, that they considered that they were not evaluating the merit of the equity transaction, but were simply referring the matter on to a body which was required to carry out that task.

The investment which was to be made in Celtainer shares was a significant investment from a number of points of view. First, the amount involved was a large amount - it exceeded the normal limit of the Equities and Underwriting Group. Accordingly it was a significant expenditure for the Bank. Secondly, by making simultaneous acquisition in shares and extending credit, the management of credit became more difficult by reason of the acquisition of shares - particularly when the block of shares being purchased was significant in the overall capital structure of the company itself. I have referred to this issue in Chapter 25 - "Securities Dealing".

Purchase of Shares

Mr Taylor's evidence is that he recalls writing to SVB Day Porter placing an order for the purchase of shares in Celtainer.() The Bank's letter of 15 July 1987 offering finance also confirmed that the Bank had authorised "negotiations" for the purchase of Celtainer shares. On 20 July 1987, a written order for the purchase of shares was placed by the Bank with SVB Day Porter.()

The sale and purchase of shares occurred with Mr Day, acting for the Bank, and Mr Atkins (who was also incidentally the Secretary to Celtainer), acting for the vendor, which was Russell de Vere Finance Ltd. The transaction was eventually concluded on 3 August 1987 through the stock market by the `crossing' method of transaction.()

The purchase price paid by the Bank was 57 cents per share. The total of the purchase price, brokerage, and stamp duty, was approximately $0.520M. In addition, the Bank paid SVB Day Porter $5,000 for financial services in connection with the preparation of the Investment Memorandum. Thus, the transaction involved the Bank in an expenditure of approximately $0.525M.

Payment of the purchase price of the shares and for the financial services in connection with the preparation of the Investment Memorandum was made, the Bank's records indicate, through Mr R Caesarowicz of the Bank's Finance and Planning division. The SVB Day Porter invoice for the purchase of the shares is actually addressed to him. The invoice for the financial services charges was addressed to Mr Taylor. This latter document has written on it a note addressed to Mr Caesarowicz requesting that payment be made, and stating "charge costs to Celtainer shares". I do not know who wrote that note directed to Mr Caesarowicz. The signature does not appear to be that of Mr Taylor.

Findings in Relation to Equity Acquisition

On the evidence and material discussed above, and having regard to the submissions received by me, I conclude and find the following with respect to the processes of the Bank with respect to equity acquisition on this occasion.

(a) The process for an acquisition of equity of this size was poorly promulgated. The matter was beyond the authority of the Equities and Underwriting Group, and it was within the functional responsibility of the Lending Credit Committee. Members of the Lending Credit Committee who attended the meeting of 15 July 1987 were unclear as to which body had authority to approve the acquisition.

(b) The "recommendation" which was made by the Lending Credit Committee with respect to the acquisition of these shares was not intended as an authorisation to purchase.

(c) There is no evidence to suggest that there was any other delegate of the Bank from which approval ought to have been sought, and from which approval was granted.

(d) The acquisition was, in substance, unauthorised, although it appeared as if it had been approved by the Lending Credit Committee.

(e) This aspect of the matter reveals defects in management. They are:

(i) The functions and limits of authority of various committees within the structure of the Bank were not well understood - even by Senior Management.

(ii) The resolution of the Lending Credit Committee was misleading.

(iii) the Bank's structures were so ill defined, and its practices so loose, that even substantial investments could be made without proper consideration.

(f) Before leaving this aspect of the matter, it is worthwhile making the following general observations:

(i) The opportunity to acquire shares in Celtainer was quite speculative in its nature. The value of the shares was dependant on the continued good performance of the Company, and that was a matter which had not been and was not capable of being, established in a reliable manner.

(ii) There was no particular benefit to the Bank in making this acquisition of shares, save as a speculative investment. The acquisition of shares was not formally linked to the credit transaction, nor was the acquisition of shares any substantial benefit to Celtainer - the benefit would have been to the vendor of the shares.

(iii) There was no particular requirement for haste in this acquisition. The shares could have been purchased on the open market, over time.

(iv) The acquisition looks like being prompted by a desire to support, and to be seen to be supporting, a "winner" (ie Celtainer) and, in that event, to be supporting a SA based company to expand and prosper.

10.5.2 "WINDOW DRESSING"

On or about 22 August 1990, Celtainer sought additional facilities of $0.5M for a period of three days from 30 August 1990. Those funds, when received by Celtainer, were to be made available to Axtrade (Australia) Pty Limited, which was a company related to HAB Mercator Pty Ltd (which at the time held 40 per cent of the shareholding in Celtainer). Axtrade proposed to use the said $0.5M, as at 31 August 1990, to repay part of its own debt outstanding to the Bank. Axtrade gave an irrevocable undertaking to re-draw the said sum, from the Bank, on 1 September 1990, and to use the proceeds by lending them back to Celtainer which, in turn, would repay the Bank the temporary increase which it had obtained.

The effect of this transaction was temporarily to improve the financial position of Axtrade at the end of its financial year (31 August 1990). The whole exercise appears to have been a deliberate distortion of Axtrade's year end financial report. No other purpose appears from records held by the Bank. The matter was submitted to Mr Masters for approval, on 24 August 1990. After some consideration, and obtaining advice from the Legal department of the Bank, he gave that approval, and the transaction was put into effect on the due date.

Mr Masters has made a detailed submission in connection with this transaction. It is as follows:

"I believe it is important to understand the background to this transaction before drawing any conclusions. HB Mercator Pty Limited and Axtrade Pty Limited were subsidiaries of the Axel Johnson Group of Companies based in Sweden.

In August 1990, these companies had invested $400,000 by way of equity and $1.9 million by way of loans in Celtainer (see memorandum from Mr Dean Kowald to Mr Barry Elphick to me dated 22 August 1990) and I believe that by this time Celtainer would not have been able to continue to trade without the support of Mercator/Axtrade. I recall that discussions on the possible expansion of Celtainer's business had taken place between the Bank and Mr Thomas Westling, the Managing Director of HB Mercator Pty Limited in Adelaide. I recall that at one stage, Mr L A Sodenberg, a Senior Executive of the Axel Johnson Group, travelled from Sweden to Adelaide to have discussions with Mr Tim Marcus Clark and myself regarding the Axel Johnson Group's plans for Celtainer and possible further investments by the Group in South Australia. At one or more of these meetings, Mr Sodenberg gave his assurance that the group and any company associated with it would, at all times, honour any funding commitment it gave to the Bank. He indicated that, over the long term, Mercator would probably make an offer for the balance of Celtainer shares. Given the international stature of the Axel Johnson Group and its good relations with the State Bank, I believe that the decision to provide accommodation of $500,000 to Axtrade via Celtainer for a period of three days only, as requested, was justified. As I recall, the loan was repaid at the end of the three day period. As indicated by my handwritten note on the memorandum dated 22 August 1990, I was concerned that "this is a window dressing exercise". As my handwritten note suggests, I was however more concerned that the loan could be repaid, was "valid and enforceable" and that it "doesn't provide a preference of any sort in favour of this Bank should (the) company be wound up". As is indicated on the memorandum, the Bank's Legal Department was of the view that there was nothing unlawful about the loan. While I had misgivings about the reasons why Axtrade might want to borrow these moneys for a short period of time, it seemed to me that my responsibility was to ensure that the transaction was commercially sound from the Bank's point of view and I believe I exercise my judgement correctly in deciding that was in fact the case." ()

The Bank has also made a submission in connection with this transaction. It reads:

"Regarding the matter of window dressing and Axtrade (Aust) Pty Ltd, it is not possible for Bank management to form a view on the background of this transaction. The Bank accepts, however, that prima facie it would appear to have been a window dressing transaction. On the assumption that this was window dressing, the Bank wishes to distance itself from this type of transaction.

While a financier can never be totally sure of the ultimate purpose of borrowings (the so-called fungibility of money) there is no doubt that a conscious effort to accommodate window dressing is not in keeping with the standards of professionalism expected of Bank officers." ()

I accept the submissions made by Mr Masters, notwithstanding that there has been no attempt to verify them, because those submissions are, in my opinion, against his self interest.

In my submission, there can be little doubt that the whole exercise had the appearance, to the Bank, of "window dressing". I accept the Bank submission that this activity was unprofessional.

The submission of Mr Masters quoted above does not state whether the opinion given by the Bank's Legal department as to the legality of this transaction was a written opinion, or was given orally. The Investigation has not sought to obtain the precise questions which were asked of the Legal department, nor the facts stated to the Legal Department, nor the reasons of the officer of that department, who gave the opinion, for holding the opinion (if that was his opinion) that the transaction was not unlawful. For my part, I state that I have not considered these matters in depth. The ingredients of the transaction do, however, involve the Bank, through Mr Masters, in assisting in an act of deception. It assisted the perpetrator of a deception. That deception involved the sum of $0.5M and the accounts of a company. On the basis of these facts, I have formed the opinion that Mr Masters behaved "improperly" within the meaning of my Terms of Reference A(h).

It does not appear that Mr Masters received any personal benefit from this transaction which appears to have been done for the benefit of his employer, and in the belief that what he was doing was lawful. (Whilst his belief, in this respect, is not completely exculpatory of his acts, it is certainly a factor which makes the conduct less culpable than would be the case if there was knowledge of the fact that what was being done was unlawful.)

I have reported my opinion, because I am obliged to make such a report. I do not recommend further investigation of the matter. Taken in context of a whole career and having regard to the factors which motivated Mr Masters and his lack of personal gain in the matter, proper consideration of the conduct involved leads me to the opinion that the matter is not worthy of any further investigation or action.

Finally, before leaving the "window dressing" exercise, there is one further aspect of it to which I would draw attention. It is that the whole exercise is another example of the Bank "chasing business". Although the Bank may well have been acting in this transaction with a view to protecting its position in relation to the credit advance to Celtainer, it also had the added motive of seeking to enhance its position with the Axel Johnson Group.

10.5.3 "LOOK AT SELLING SHARES"

On 10 January 1989, Mr Masters received a report which dealt with the activities and financial affairs of Celtainer at that time, and generally with the Bank's position with respect to Celtainer. Suffice it to say that the position of Celtainer at that stage was grave, and the Bank's investment looked insecure. Mr Masters, after reading that report, noted on the foot of it:

"... If the account cannot be placed on a proper basis and managed, then force it out now whilst we still have something to offer. Also look at selling shares." (The emphasis is mine.)

One might conclude that the reference to selling shares indicated a lack of awareness or indifference to the provision of Section 128 of the Securities Industry Code.

Whilst it is not my function to make judgements with respect to the applicability of the Code to the Bank, the general matter raised (ie the use of confidential information for the purpose of trading in securities) deserves some consideration, and is, as noted above, considered by me in Chapter 25 - "Securities Dealing" of this Report.

In this context, the submissions of Mr Masters to me should be carefully considered. He has submitted:

"As to the assertion that my comment "also look at selling shares" indicated either a lack of awareness or indifference on my part about Section 128 of the Securities Industry Code, I regard that assertion as being without foundation. I recall that at the time my concern was that the account was clearly not in order and the Bank's relationship with the customer was hampered by the fact that the Bank was also a shareholder in the company. I was aware that Celtainer's management was advising its creditors that the Bank was a shareholder in the company, thereby providing comfort to creditors that their money was safe as the company had the support of the Bank. I felt that the situation would improve if the relationship between the Bank and Celtainer was confined to that of banker and customer as it would oblige Celtainer to regard the Bank as being a provider of finance on a commercial basis only and not as a source of unequivocal support. On making the comment "look at selling shares", I was expressing the view that the Bank should consider whether it could, from both a practical and legal point of view, sell its shares for the reasons set out above. I have always been very conscious of the need to avoid providing price sensitive information concerning customers of the Bank to the Bank's equities group which was the body that made decisions as to whether to buy or sell shares ..." ()

I accept the submission by Mr Masters that there was no improper use of price sensitive information, which had been obtained by the Bank as Celtainer's banker. Nevertheless, there are several matters need to be noted. First, and most obviously, the acquisition of a substantial investment in Celtainer shares made the management of credit more difficult, in that actions which the Bank might take as the provider of credit might be to the Bank's own detriment in so far as those actions might produce a diminution in the value of shares. Secondly, and less obviously, but as Mr Masters points out, Celtainer might well take advantage of that situation, in its dealings with the Bank. The Bank was vulnerable because if the Bank sold its shares, and if this was known to the market, the confidence in Celtainer held by the market and by those who were trading with Celtainer or otherwise involved with Celtainer might diminish, whereupon the trading activities of Celtainer would be effected and, most probably, its cash flow and its profitability would also be affected. Accordingly, I find that the position of the Bank as a substantial shareholder in Celtainer was indirectly, but substantially, to its detriment as a provider of credit.

10.5.4 CONDUCT OF AN OFFICER OF CELTAINER LTD

I have in the course of investigating the affairs of the Bank in relation to Celtainer Ltd as required by my Terms of Appointment considered a matter which may disclose improper activity by an officer of Celtainer Ltd.

I am of the opinion that that matter ought to be further investigated.

In order that that investigation will not be prejudiced and in order to protect the reputation of the officer concerned pending the outcome of more extensive investigations, I have determined to report confidentially with respect to my consideration of the matter.

 

10.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

 

As directed by Terms of Appointment A(a) to (f) (inclusive), A(h), C and E, I have investigated circumstances that occurred over the period from April 1987 to March 1991 surrounding certain facilities granted to Celtainer Ltd.

For the reasons given elsewhere in this Chapter of the Report, on the basis of the facts which I have set out and on the basis of the documents to which I have referred, I am of the opinion that:

10.6.1 TERMS OF APPOINTMENT A

(a) So far as concerns the "Initiation of the Facility":

(i) The preparation of the Proposal submitted to the Lending Credit Committee and the Proposal itself, were deficient, in that matters relevant to the assessment of credit risk were not considered relevant.

(ii) An investigation which ought to have been made was not made.

(iii) The Proposal contained no warning with respect to the reliability of the information contained in it.

The defects in the preparation of the proposal by officers of the Bank and the proposal itself occurred because the practices and procedures of the Bank did not provide adequate guidance to its officers whose duty it was to prepare the proposal for the consideration of the Lending Credit Committee. The practice and procedures were, on the Bank's own admission, inadequate.

The system of credit assessment, to the stage of submission to the Lending Credit Committee, prior to 1988 did not require or enforce a thorough and independent assessment of risk, nor a clear and comprehensive presentation of the same to the Lending Credit Committee. The system allowed significant scope for errors to be made in the assessment of lending risk and for those errors to remain undetected.

(b) So far as concerns the "Approval of the Facility":

(i) There is no evidence upon which it would be reasonable to conclude that in the deliberations of the Lending Credit Committee, the members of that Committee in this matter failed to exercise due diligence.

(ii) The manner in which the Lending Credit Committee expressed its approval to the Proposal was to approve the application subject to substantial conditions, compliance with which had to be assessed by another officer. That decision, and the manner in which it was expressed, effectively delegated consideration of factors relevant to the primary decision to extend credit to a subordinate. Accordingly, the way in which the Lending Credit Committee conducted itself unintentionally facilitated the circumvention of the system which had been put in place in order to ensure proper lending credit decision-making.

(c) So far as concerns the "Advancement of Funds":

(i) The task of ascertaining whether there had been compliance with the conditions precedent to the making of the advance required in the Proposal and in the Minutes of Meeting of the Lending Credit Committee was committed to a staff member who had not been sufficiently trained for it. The analysis which he made was substantially defective, in that it omitted to compare actual cash flow with projections of cash flow in the period from July to November 1987, and in that it made errors of principle with respect to the calculation of net worth.

(ii) The omissions and error contained in the analysis was not detected prior to advancement of funds. The failure to detect the omission and error was not due to a lack of diligence on the part of the officer who gave approval to the advancement of funds, because the Diary Note submitted to him for that purpose contained no reference to the requirement of the Lending Credit Committee that cash flow projections be monitored prior to advancement of funds. Nor did the Diary Note contain sufficient information for that officer himself to check the method of calculation of net worth.

(d) So far as concerns the "Management of the Facility", there was no monitoring of the Negative Pledge in the period of three months immediately after draw down. In this respect, the performance of duty by Account Managers was inadequate, and the supervision of his work was inadequate. These defects were not, however, productive of loss to the Bank. Accordingly, I have not determined the cause of the inadequacies.

(e) So far as concerns the "Equity Acquisition":

(i) The acquisition involved significant mismanagement by officers and employees of the Bank in that the acquisition:

. was not approved by a properly authorised delegate of the Board;

. was not considered as to its merits, except by the Lending Credit Committee, which made only superficial examination of it believing that the matter would be considered by the Equities and Underwriting Group of the Bank;

. was not referred to, and was never considered by, the Equities and Underwriting Group of the Bank; and

. was made because an officer of the Bank believed (erroneously) that the Lending Credit Committee had approved the acquisition, when in fact it had not.

(ii) This mismanagement occurred, at least in part, by a reason of:

. failure of senior management sufficiently to promulgate the limits of authority and definitions of function of its committees; and

. the ambiguity of the resolution of the Lending Credit Committee with respect to acquisition of shares in Celtainer.

I have not referred to officers of the Bank in the matters referred to above for reasons as stated in this Chapter and having regard to the fact that with respect to a particular aspect of this transaction I have recommended that there be further investigation.

For the reasons given in Section 10.5.2 hereof, and on the basis of the evidence, documents, and information and having regard to the submissions which I have received:

(a) I have formed the opinion that Mr D C Masters acted unprofessionally; and

(b) I have formed the opinion that Mr D C Masters' conduct in facilitating the advances made to Axtrade (Australia) Pty Limited on or about 30 August 1990, as described in Section 10.5.2 was improper.

10.6.2 TERM OF APPOINTMENT C

For the reasons given in this Chapter and in the respects which I have set out in Section 10.4.6 and 10.5, I am of the opinion that the operations, affairs and transactions of the Bank with reference to Celtainer were not adequately and properly supervised, directed and controlled by the officers and employees of the Bank.

10.6.3 TERM OF APPOINTMENT E

For the reasons given in my confidential report I am of the opinion that an officer of Celtainer Ltd may have acted improperly. I recommend further investigation of the matter.

 

10.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

 

The deficiencies in the approval, initiation and advancement of funds phases of this credit transaction all occurred before the Bank formalised its lending processes and procedures in the manual entitled Corporate Banking, Policy Guidelines and Reporting Procedures, March 1988. Thus, there is no useful purpose to be served by the making of recommendations for further action within the Bank, in connection with those phases, because the Manual corrected and changed the policies, procedures and practices. In so far as the Manual is inadequate, those inadequacies are addressed in Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" of this Report. I will not repeat those matters here.

I recommend that the conduct of an officer of Celtainer, to which I have referred in my confidential report, be referred to the Australian Securities Commission for such further investigation as it considers appropriate.

 

10.8 APPENDICES

 

SUMMARY OF ABBREVIATIONS

 

LENDING ABBREVIATIONS

CBA Commercial Bill Acceptance

MCL Multi Currency Loan

O/D Overdraft

TFL Trade Finance Line

OTHER

AM Acting Manager

ASM Acting Senior Manager

C Controller

CA Corporate Accounts

CB Corporate Banking

CC Corporate Credit

CGM Chief General Manager

CM Corporate Manager

CMCB Chief Manager, Corporate Banking

CMF Corporate Marketing & Finance

CO Corporate Officer

CPQ Credit Policy & Quality

GMCB General Manager, Corporate Banking

LCC Lending Credit Committee

M Manager

SAC&CB South Australian Corporate and Commercial Banking

SM Senior Manager

TCA Technical Chief Analyst

 

Appendix A

Summary of Movements in Facility

Date Recommendation Facility Details Fee

Structure

Prepared

By

Supported and Recommended By Approval LCC Comments
    Type Amount ($M)       Approved By Date Approved by Date  
13.07.87 The Bank to offer to take out existing debt & provide additional facilities to Celtainer Ltd &/or wholly owned subsidiaries.

Proposed facility (signed 25.11.87)

O/D

CBA

MCL

TFL

0.20

0.60

1.20

0.75

2.75

.Bank's prevailing Indicator Rate plus margin of 0.85%pa payable quarterly in arrears.

.1.25%pa over the Bank Bill Rate payable on each rollover.

.1.25% over LIBOR payable quarterly in arrears.

CB Taylor ASM,CMF PE Miller SM,CA N/A   Minute 267

Approved

KS Matthews

JB Macky

JT Hazel

DC Masters

VR Pfeiffer

In attendance:

PE Miller

CB Taylor

JF Farrell

RW Wigley

15.07.87  
13.07.87

(Cont'd)

      .0.85% over LIBOR for the period of the loan. Interest payable on maturity of each drawing. Line Fee 0.5%pa on total facility amount payable quarterly in arrears.

.Establishment Fee of $5,000 payable on draw down.

             

 

03.12.87 Limit reallocation to accommodate large Over Draft requirement at settlement & provide sufficient working capital. O/D

CBA

MCL

TFL

0.80

0.60

0.60

0.75

2.75

.Insufficient information on file. BJ Parker, CM           This reallocation appears to have been informal and was ignored for monitoring purposes.
07.04.88 Restructuring of limits. O/D

CBA

MCL

TFL

1.00

0.60

1.00

0.15

2.75

.Insufficient information on file. BD Elphick M,CB N/A P. White SM,CB

Noted by

DC Masters GM,CB

14.04.88

14.04.88

N/A   Overdraft excess of $0.2M recorded.
02.08.88 Decrease in overdraft by $0.4M. O/D

CBA

TFL

0.60

1.60

0.15

----

2.35

.Insufficient information on file. N/A N/A N/A   N/A   Overdraft almost always in excess.
02.11.88 Decrease in overdraft by $0.15M. O/D

CBA

TFL

0.45

1.60

0.15

2.20

.Insufficient information on file. N/A N/A N/A   N/A   Overdraft excess of up to $0.37M.
01.89 Decrease in overdraft by $0.2M. O/D

CBA

TFL

0.25

1.60

0.15

2.00

.Insufficient information on file. N/A N/A N/A   N/A   Overdraft excess up to $0.5M in 02.89;

$0.8M in 03.89.

07.06.89 Facilities review incorporating temporary increase of $0.7M to provide adequate working capital. O/D

CBA

TFL

1.00

1.60

0.10

2.70

.Banks indicator rate plus margin of 0.85%pa payable quarterly in arrears.

.Acceptance fee of 1.25%pa payable on draw down/rollover of bills.

.As achieved by International Department on an individual transaction basis. Line fee 0.5%pa calculated on rural facility amount and payable quarterly in arrears.

.Establishment fee $2,500.

AM Pearson TCA,CB BD Elphick

D Kowald

Deferred (until 10.07.89)   N/A    
10.07.89 Further to submission dated 07.06.89. O/D

CBA

TFL

1.00

1.60

0.10

2.70

.Banks indicator rate plus margin of 0.85%pa payable quarterly in arrears.

.Acceptance fee of 1.25%pa payable on draw down/rollover of bills.

.As achieved by International department on an individual transaction basis. Line fee 0.5%pa calculated on rural facility amount and payable quarterly in arrears.

.Establishment fee $2,500.

BD Elphick N/A Approved

DC Masters

12.07.89 N/A   Reduction of $0.7M to be effected by 08.09.89.
08.11.89 Existing Limit as per Corporate Banking Report. O/D

CBA

TFL

0.30

1.60

0.10

2.00

.Banks indicator rate plus margin of 0.85%pa payable quarterly in arrears.

.Acceptance fee of 1.25%pa payable on draw down/rollover of bills.

.As achieved by International department on an individual transaction basis. Line fee 0.5%pa calculated on rural facility amount and payable quarterly in arrears.

.Establishment fee $2,500.

D Kowald N/A N/A   N/A    
08.11.89

(Cont'd)

Increase in overdraft sought of $0.1M until 31.11.89. (sic) O/D

CBA

TFL

0.40

1.60

0.10

2.10

.Banks indicator rate plus margin of 0.85%pa payable quarterly in arrears.

.Acceptance fee of 1.25%pa payable on draw down/rollover of bills.

.As achieved by International department on an individual transaction basis. Line fee 0.5%pa calculated on rural facility amount and payable quarterly in arrears.

.Establishment fee $2,500.

D Kowald N/A Approved

DC Masters

16.11.89 N/A   Approved until 31.11.89. (sic)
29.11.89 Annual Review incorporating temporary increase in facilities of $0.3M. O/D

CBA

TFL

0.70

1.60

0.10

2.40

.Banks indicator rate plus margin of 1.0%pa payable quarterly in arrears.

.Acceptance fee of 1.25%pa payable on draw down/rollover of bills.

.As achieved by International department on an individual transaction basis. Line fee 0.5%pa calculated on rural facility amount and payable quarterly in arrears.

.Establishment fee $1,000.

BD Elphick D Kowald

yNL Mathews

C CP & Q

DC Masters 01.12.89 N/A   Reduction of $0.4M by 31.03.90.
28.12.89 Temporary increase referred to on 01.12.89 extended to 31.08.90. O/D

CBA

TFL

0.70

1.60

0.10

2.40

.Insufficient information on file. BD Elphick D Kowald Questioned by DC Masters 29.12.89 N/A   Overdraft usually in excess.
22.08.90 Extension of existing facility to 30.11.90. Granting of temporary facility for 2 days O/D

Temp facility

2.41

0.50

2.91

Insufficient information on file BD Elphick D Kowald DC Masters 24.08.90 N/A   Requested $0.5 temporary facility for 2 days. Repaid on time.
05.10.90 Temporary overdraft of $0.1M to 31.10.90 (for Receiver). O/D

Temp O/D

2.40

0.10

2.50

.Insufficient information on file. Su Goh, AM,CB D Kowald Supported by M. Fildes

ie M,CC

Approved by DC Masters

09.10.90

10.10.90

N/A   Extended to 30.11.90 on 31.10.90.
29.11.90 Increase in Receivers & Managers temporary overdraft by $0.5M pending close down of operations. O/D

Temp O/D

2.40

0.60

3.00

.Insufficient information on file. BD Elphick D Kowald N/A   Minute 106/90

DR Brewer, Chairman

06.12.90 Specific provision of $2.8M approved against loans.
 

Appendix B

Chronology of Events
During the life of the Loan

DATE CHRONOLOGY OF EVENTS

CELTAINER

31.03.87 Mr Taylor, MCMF notes that Celtainer has been "looked at" previously, but since its listing in 1986 and profitability of $0.486M for the half year to 31 December 1986 it now looks to have "some appeal".
07.04.87 Initial marketing meeting between Mr Lundgren, Managing Director of Celtainer and officers of the Bank at which possibility of the Bank taking an equity investment was discussed.
17.06.87 Proposal to the Bank's Equities and Underwriting Group by Mr Taylor to consider investing in 1.0M B class shares @ 70¢ each and $1.5M convertible notes.
25.06.87 Note that Board of Celtainer now wish Bank to consider take up of approximately 1.0M shares only, following Bank's rejection on 23.06.87 of investment at the level sought (no copy of this rejection letter available).
06.07.87 Meeting between the Bank (Mr Miller), Day Porter (Stockbroker) and Celtainer, following submission to raise equity by Mr Atkins, Financial Controller and Celtainer director. Interest expressed in taking over funding of trade finance facility, but not (yet) Westpac's $2.5M debt facility. The meeting clarified that Celtainer was not seeking new equity but was facilitating the sale of shares held by Russell de Vere Finance Ltd.
13.07.87 Application to Lending Credit Committee by Mr Taylor supported by Mr Miller. Lending Credit Committee approval on 15.07.87 (Minute No. 267/87). Also notes that equity investment proposal referred to Bank's Equities and Underwriting Group for approval, on the understanding "that there will be no constraints on the sale of the equity investment by the Bank".
15.07.87 Offer Letter to Celtainer from Mr Taylor for $2.75M combined facility; also notes Bank's intention to purchase up to 1.0M shares in Celtainer.
03.08.87 Contract note confirms purchase of 900,000 B Class ordinary shares in Celtainer for $0.52M.
August - November 1987 Correspondence between the Bank, Celtainer and existing bankers (Commonwealth and Westpac) to transfer facilities to the Bank.
14.08.87 Equities and Underwriting Group minute acknowledges purchase of Celtainer shares (no other Equities and Underwriting Group minute available detailing approval for share purchase).
11.09.87 Security valuation of Celtainer's property at Royal Park of $0.75M ($0.685M with vacant possession) provided by external consultant (Colliers International Property Consultants).
19.11.87 Financial analysis based on audited Financial Statements for year to 30.06.87, prepared by Mr Ritchie, Corporate Analyst and supported by Mr Parker (then Account Manager). Passed to Mr Kloot (then SMCB) for approval. Having apparently complied with the 3 negative pledge covenants specified in the loan approval it was recommended that settlement of the funds proceed.

Mr Kloot noted:

"This is the Co's first good performance. I was not party to the original approval and I am still sceptical about their long term prospects. Hopefully I will be proved wrong."

25.11.87 Credit Facility Agreement signed.

Also signed:

i) Deed of priority of charge, whereby the Bank has priority for $2.75M against security.

ii) Mortgage debenture over all assets of Celtainer. (Certificates of entry of particulars of the charge by the Commissioner for Corporate Affairs, dated 04.12.87, which evidences perfection of security, was seen).

iii) First registered mortgage over various titles to property.

03.12.87 Confirmation that the Bank settled Commonwealth and Westpac facilities on 01.12.87. Also notes re-allocation of $0.6M from foreign currency loan to overdraft to meet the payouts and working capital requirements.
13.01.88 Insurance cover documents not yet provided to the Bank. Letter to Celtainer requests immediate follow up. (Insurance documents were subsequently obtained)
11.02.88 Mr Taylor noted audit qualification on treatment of company income tax, and the downward effect of $0.078M on the company's profit to 30.06.87 if Accounting Standard had been complied with.

In fact, net tangible worth of the company at 30.06.87 would have been below covenant by $0.023M if Standard had been complied with.

Also notes significant facility excesses already arising: $0.8M overdraft excess at 05.02.88.

01.03.88 Note by Mr Gale, CMCB of problems dealing with Celtainer (particularly, Mr Atkins).

Comments from Mr White, SMCB that accounts had not been conducted in satisfactory manner to date. Also states:

"Negative pledge calls for monthly info. This has not been discussed or followed up."

09.03.88 Meeting note prepared by Mr Elphick, then Account Manager that:

. Second half of year to June 1988 will pick up ("Y/E 30.06.88 will show profit" in spite of losses to December 1987); and

. concern raised regarding minimum net tangible worth covenant as a result of losses.

09.03.88 Letter from Mr Elphick, MCB to Mr Atkins setting out the information required by the Bank for monitoring purposes. The provision of such information was agreed to in a meeting on 08.03.88 attended by Mr Elphick, Mr Atkins and Mr Lundgren.
25.03.88 Letter from Mr White to Mr Lundgren, refers to $0.05M excess over approved limits. The letter indicates that "conduct of facilities has been less than satisfactory to date", and again requests that the financial information referred to at 09.03.88 above, be provided.
07.04.88 Letter from Mr Atkins, notes $0.952M loss for the half year to 31 December 1987 and breach of Net Tangible Worth covenant by approximately $0.5M.
07.04.88 Diary Note prepared by Mr Elphick, notes breach in Net Tangible Worth covenant by approximately $0.5M. Refers to half year accounts to 31.12.87, but no mention of profit/loss made except by subsequent handwritten note - $0.917M loss. Budgeted profit for second half $0.6M but the Bank expects this to be closer to $0.4M. Re-allocation of facilities to provide larger overdraft limit (however no increase in overall facilities ) requested by Celtainer and approved by SMCB who further directs that review of facilities to proceed as a matter of urgency.
05.88 Various notes of facility excesses in spite of increased overdraft limit of $1.0M.
10.06.88 Further reminder to Mr Elphick to obtain monthly financial information. Notes loss for 8 months to 28 February 1988 of $1.221M.
10.06.88 Memo to Mr Elphick from Mr Altman, Manager Credit Management. Mr Altman performed a detailed analysis of Celtainer's balance sheet 30.04.88, its trading results for the 10 months then ended, cash flows and general prospects. Also notes $1.2M loss to 28 February 1988, but concludes that advance orders and higher sale prices provide reasonable chance that Celtainer would comply with the net tangible worth covenant by 31 December 1988.
18.08.88 Lending examination performed by Mr Karutz, Senior Lending Examiner following excess over facility limits. Recommends that 1988 Financial Statements should be examined as soon as practicable. Also suggests that due to heavy reliance by Celtainer on one customer Technical Equities "Bank opinion on Technical Equities should be regularly sought and placed on file". Mr Karutz also notes that Celtainer had recently repaid a second RMD to Michell NBD in an amount of $0.45M. He questions the Bank "condoning" (his words) such repayment. As things worked out, the Bank effectively refinanced the Michell NBD loan through additional advances over the following few months. This money was eventually lost by the Bank.
22.09.88 Report to Mr Mullins, CMCB from Mr Goulding, AMCB, supported by Mr Kowald, giving financial highlights on draft 30.06.88 figures, and noting:

"The above figures reflect a severe deterioration in the viability of Celtainer."

Based on a good product, advance orders and improved financial management he recommends to support Celtainer until 31.12.88 at current levels. Approved by CMCB on 05.10.88.

Facility limit now noted as $2.350M, including re-allocation of trade finance and overdraft lines.

01.11.88 Mr Elphick noted very late monthly accounts (July and August still not received) - this is latest in a series of requests for this information.
02.12.88 Restructure proposals for Celtainer, including provision of financial assistance by Celtainer to allow Lundgren Nominees and Candler Canadian to buy more shares, put forward and commented upon by solicitors. Deal to involve purchase of 1.0M shares from Southern Capital, Celtainer's largest shareholder. Not proceeded with.
10.01.89 Memo to Mr Masters, GMCB from Mr Elphick, supported by Mr Kowald; noted by CMCB. Notes audited 30.06.88 results and covenant shortfalls based on those figures, also the YTD figures for 4 months to October 1988 which show $0.07M loss compared with $0.613M budgeted profit.

Restructure proposal noted which may reduce debt by $1.0M via sale of part of security by March 1989.

GMCB response:

i) Consider whether management can restore company, otherwise

"force it out now whilst we still have something to offer".

ii) "Also, look at selling shares."

14.02.89 Clarification of details of proposed capital restructure in memo by Mr Elphick to Mr Masters.
24.02.89 Discusses changes to be made in directorships and management at Celtainer. Mr Atkins to be asked to resign directorship and Mr Lundgren to step down as Managing Director. Notes Mercator's intention of acquiring Southern Capital's 40% equity stake in company which appears to render obsolete Mr Lundgren's intention to buy more shares.
15.03.89 Celtainer loan classified as non-performing for the first time (as noted on monthly report of irregularities and excesses to GMCB).
07.06.89 Application for temporary facility increase of $0.7M to provide adequate working capital. Addressed to GMCB and CMCB from Mr Elphick, supported by Mr Kowald.

Notes:

(i) Value of equity held by Bank is $0.108M compared to purchase cost of $0.54M;

(ii) Risk grade 6 (old scale) adjusted to 5e) - "Limited Financial Strength".

(iii) Large overdraft excess;

(iv) Unacceptably high gearing ratio of 6.35; and

(v) Security gives an extended value of $1.66M, a reduction since previous review on approximately 10.01.89 of approximately $1.0M.

First mention of possibility of bringing in a receiver.

Approval deferred by GMCB, although his comments (mainly negative) are made on the application.

15.06.89 Ernst & Whinney commissioned to report on ongoing viability and break up value of Celtainer. (Not proceeded with, because of Mercator's involvement - Mercator is part of a listed Swedish group which was contemplating taking a shareholding in Celtainer).
20.06.89 Recommendation to Mr Masters, GMCB from Mr Fildes, Corporate Finance, to vote in favour of Mercator acquiring the 40% shareholding held by Southern Capital in Celtainer. Notes present market value of shares is $0.072M, a book loss of $0.452M.

Approved by GMCB on 26.06.89.

03.07.89 In a letter from Mr Westling, General Manager, Mercator to Mr Elphick, having acquired the major shareholding of Celtainer, of 40% of `B' shares, from Southern Capital on 28.06.89, promises $0.8M support in the form of a prepayment for goods due for delivery in 1990.

Reason:

"commitment to Celtainer";

"improve (Celtainer's) cash flow position".

05.07.89 The Bank was asked to provide facility to a company, Celsiunator Pty Ltd ("Celsiunator"), controlled by Mr Lundgren, to purchase the assets of one of Celtainer's subsidiaries, Celservices Pty Ltd ("Celservices"). This request was to be made after a letter of comfort has been received from Mercator.
10.07.89 Application dated 07.06.89 resubmitted to Mr Masters. Approved 12.07.89. Temporary increase of $0.7M advised to Celtainer 18.07.89.
15.07.89 Valuation by Lindblom & Hadley Independent Valuation Network Pty Ltd issued which shows value of land and buildings, on a going concern basis, of $1.035M and $0.88M on a security valuation basis.
25.07.89 Celservices, a wholly owned subsidiary of Celtainer, ceases trading. Credit balance of $0.019M set off against Celtainer's overdraft.
11.08.89 Facility increase of $0.7M approved in July resulted in amendments to terms of cross guarantee from subsidiary Australian Container Leasing Pty Ltd.
15.08.89 Valuation report dated 15.07.89 re security (land & buildings) sent to the Bank. Confirmed by the Bank's Property department as acceptable 28.8.89.
28.09.89 Report to Australian Stock Exchange by Celtainer of unaudited results for 1988/89. Loss of $2.048M before tax credit.
02.10.89 Following preliminary 1988/89 results, Mr Westling of Mercator offers to buy the Bank's shares in Celtainer @ 10.3¢ per share as proof of his confidence in the company.
06.10.89 Offer rejected by the Bank (Mr Taylor and Mr Kowald).
08.11.89 $0.1M increase in overdraft facility approved by GMCB. Approved facilities now exceed lending margin by approximately $0.4M. The Bank believes change in Celtainer's management and Mercator's involvement justify increased facilities.
29.11.89 Mr Elphick and Mr Kowald perform annual review and support request for further temporary overdraft increase of $0.3M to $2.4M. This is to be matched by an equal input of $0.3M from Mercator. Proposed regrade to 5d, up from 5e is rejected by Controller Credit Policy & Quality. Increased facilities approved by Mr Masters 01.12.89. He says "it is a little early to consider that turnaround point has been reached - signs are encouraging but sustained profitability is not yet demonstrated and financial position is at all time low".

Security value (as extended) $1.72M compared with outstanding liability of $2.23M. Another large loss after tax of $1.325M for the year ended 30.06.89 noted with losses continuing into first quarter of 1989/90. Company has negative shareholders' funds.

Appendices to the Annual Review give detailed financial analysis including ratios, but no detailed cashflow projections prepared by month.

06.12.89 Notification to Celtainer of increase in overdraft facility by $0.3M subject to equal injection by Mercator. Increase to be available until 30.06.90. Facility (including this increase) to stand at $2.4M in total.
28.12.89 Recommendation to Mr Masters by Mr Elphick and supported by Mr Kowald to extend temporary facilities increase from 31 March 1990 to 31 August 1990:

While the company had originally projected its cashflows would be sufficient to reduce the loan limits to $2.0M by 31.03.90, it was subsequently discovered that those cash flow projections "did not take into account working capital requirements associated with fulfilling a prepaid $1.1M order for Mercator which was scheduled for completion July/August 1990".

Note: Client advised of increased period of the temporary facilities on 27.12.89, two days before GMCB approved. GMCB subsequently only approved an increase to 30.06.90 not 31.08.90.

24.01.90 Lending examination of Celtainer performed by Mr Karutz. Essentially this was no more than a history of the account and a note of shortfall of security against loan (on extended value basis) of approximately $0.735M. Mr Karutz concludes that unless the company strengthens its financial position, the shortfall on lending margin gives rise to potential for loss to the Bank.
12.02.90 Amending deed signed, altering limits of individual facility tranches and also the total facility size.
07.03.90 Report by Mr A Pearson, Trainee COCB records visit to Celtainer's premises and discussions with management. Mr Pearson notes unsatisfactory financial results to 31.01.90, and expresses disappointment that Celtainer have not kept within facility arrangements.
14.03.90 Letter from Mr Kowald to Celtainer stating that exposure of $2.8M, $0.4M above the approved limits, was unacceptable, and noting need for further cash injection.
06.04.90 Letter from Mr R Perkins, Managing Director detailing poor performance for February 1990-gross profit percentage 5% - very weak. This follows January $0.167M loss and first half year loss, to 31.12.89 (after tax credit) of $0.479M.
22.08.90 Memo to Mr Masters from Mr Elphick and Mr Kowald noting:

i) Mercator wishes to sell its 40% stake in Celtainer;

ii) "the most likely scenario is that the Bank will be repaid by 30.11.90"; and

iii) Verbal confirmation of further $0.5M prepayment of orders from Mercator.

Requests additional $0.5M loan to Celtainer for two days from 30.08.90 to repay a loan from Axtrade (Australia) Pty Ltd ("Axtrade"), a sister company of Mercator. Axtrade would then repay $0.5M of its own facility with the Bank. Thereafter, Axtrade would re-lend the $0.5M to Celtainer by reborrowing from the Bank. In addition, Mercator would make a $0.5M payment to Celtainer being an advance on future orders. While consideration was given to Celtainer providing a written request disclosing full particulars of and reasons for this transaction, it was eventually deemed unnecessary by Mr Elphick, Mr Kowald and Mr Masters on the basis that "our trust in management is strong". Mr Masters did insist on a valid and enforceable undertaking on the part of Axtrade to make the draw down and relend the $0.5M to Celtainer to repay the Bank. The transaction proceeded and was completed according to plan.

27.08.90 Mr Elphick noted steps taken to assure Bank's position regarding 22.08.90 request.
31.08.90 $0.274M excess over Celtainer's facility noted and reminder of $0.5M advance payment against future orders to which Mercator `committed' verbally on 22.08.90.
03.09.90 Letter from Mr Westling of Axtrade to Mr Elphick of the Bank detailing intention to bid for Celtainer's remaining share capital, subject to ratification by Axtrade's Board. However, unless privatisation of Celtainer is successful, Axtrade does not intend making the $0.5M advance payment as per 31.08.90, above.
04.09.90 Note to Board by Mr Masters (now GMSAC & CB) noting Axtrade intentions of 03.09.90 and likely press coverage. Mr Masters advises of press exposure on recent collapse of Celsiunator, to which the Bank was also exposed. He also indicates that if the takeover bid by Mercator or its related company Axtrade is unsuccessful, the Bank will have to appoint a receiver or manager or become mortgagee in possession.
04.09.90 Memo to GMSAC & CB from Mr Elphick noting courses of action if takeover was successful or not. In particular, if bid is unsuccessful, memo notes that a receiver will need to be appointed.
06.09.90 Letter from Axtrade stating that "we no longer intend to extend our support".
06.09.90 Note by Mr Miller of appointment of receivers. Formal documents on correspondence file.
10.09.90 Memo to CMCB and GMSAC & CB from Mr Elphick and Mr Kowald. Recommends that following the appointment of a Receivers and Managers (Price Waterhouse) on 06.09.90 the exposure be classified non-accrual. Approved by CMCB & GMSAC & CB on 10.09.90.
17.09.90 Receiver's first report concludes that he will offer the business for sale as a going concern. On that base, the Bank's projected deficiency is $1.36M ($2.15M on breakup value).
24.09.90 Information paper to the Lending Credit Committee from Mr Elphick and Mr Kowald based on Receiver's preliminary report. Notes current exposure of $2.783M, $0.383M in excess of facility.

Also notes estimates of break up value of security, less preferential creditors, of only, $0.623M.

Paper noted by the Lending Credit Committee on 04.10.90 (Minute 83/90). The Lending Credit Committee requested Action Plan, summary of factors leading to this adverse position, and recommendation of provision levels.

28.09.90 Valuation of 20 Dixon Street, Royal Park South Australia by Rushtons, commissioned by Receiver gives an open market value of $0.935M.
05.10.90 Requests to approve $0.1M temporary overdraft increase until 31.10.90 on application from Receiver. Approved 10.10.90 by Mr Masters, GMSAC & CB.

Hindsight overview on 16.10.90 by S Paddison, CGM Australian Banking.

31.10.90 Further request for $0.1M overdraft excess to be extended until 30.11.90. Approved and Hindsight Overviewed.
29.11.90 Application by Mr Elphick and Mr Kowald to the Lending Credit Committee to approve an increase of $0.5M until 31.03.91 for Receiver's account, and to approve a $2.8M provision against the remaining debt.

Notes Receiver's decision to cease Celtainer's operations from 21.12.90.

The Lending Credit Committee approval of above terms on 07.12.90.

27.12.90 Confirmation from property valuers, Colliers, that land and buildings should realise $0.935M at auction.
27.02.91 Indicates expected lease of Celtainers land and buildings by an independent third party - Bank debt will be serviced from rental income.
27.02.91 Credit Inspection review performed in brief by Mr R Wright, Chief Manager Credit Inspection. Notes failure to perform hindsight review on 24.08.90 approval of facility increase.
21.03.91 The Lending Credit Committee approved additional $0.2M increase in provision to $3.0M.