VOLUME SIX
THE MANAGEMENT OF CREDIT: CASE STUDIES

 

 

CHAPTER 11
CASE STUDY IN CREDIT MANAGEMENT:
THE COLLINSVILLE STUD GROUP

 

 

TABLE OF CONTENTS

 

 

11.1 REFERENCE INFORMATION

 

 

11.2 BACKGROUND TO THE ACCOUNT
11.2.1 COMPANY HISTORY AND STRUCTURE
11.2.2 BACKGROUND TO THE FACILITY

 

 

11.3 CHRONOLOGY

 

 

11.4 COMPLIANCE WITH POLICIES AND PROCEDURES
11.4.1 INITIATION OF FACILITY
11.4.2 APPROVAL OF FACILITY
11.4.2.1 Lending Credit Committee
11.4.2.2 Board Sub-Committee
11.4.2.3 General
11.4.2.4 Board Approval or Confirmation
11.4.2.5 Communication of the Approval
11.4.3 SECURITY
11.4.4 HINDSIGHT OVERVIEW
11.4.5 ADVANCE OF FUNDS
11.4.6 MANAGEMENT OF FACILITY
11.4.7 MANAGEMENT OF NON-PERFORMING FACILITY
11.4.8 CREDIT INSPECTION

 

 

11.5 OTHER MATTERS IDENTIFIED IN THE INVESTIGATION
11.5.1 DISCLOSURE OF CONFLICTS OF INTEREST

 

 

11.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
11.6.1 TERMS OF APPOINTMENT A
11.6.2 TERM OF APPOINTMENT C
11.6.3 TERM OF APPOINTMENT D

 

 

11.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

 

 

11.8 APPENDICES
A Collinsville Group Structure
B Summary of Movements in Facilities
C Chronology of Events During Life of Loan

 

 

 

11.1 REFERENCE INFORMATION

 

The following information on the facility of Ambia Pty Ltd (Receivers and Managers appointed) and Collinsville Stud Pty Ltd (Receivers and Managers appointed) is set out for reference purposes:

REFERENCE INFORMATION
Account Name . Ambia Pty Ltd (Receivers and Managers appointed); and

. Collinsville Stud Pty Ltd (Receivers and Managers appointed).

   
Directors (of both companies)

at 18 July 1989

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

. Mr M J Bahen;

. Mr N L Garnett;

. Mr D J Rundle; and

. Mr P H Veitch.

   
Industry Sector . Rural    
Facility Type . Commercial bills and Overdraft    
Principal Outstanding at 31 March 1991 . $38.7M    
Unrecognised Income at 31 March 1991 . $4.6M    
Provision for Loss

at 31 March 1991

. $20.0M    
Estimated Loss

at 31 March 1991

. Principal outstanding

. Interest foregone

. Estimated recovery under security

. Total estimated loss

$M

38.7

4.6

(12.0)

31.3

 

 

 

 

11.2 BACKGROUND TO THE ACCOUNT

 

11.2.1 COMPANY HISTORY AND STRUCTURE

Collinsville Stud Pty Ltd is an exempt proprietary company which was incorporated in South Australia on 29 June 1982. Ambia Pty Ltd, the holding company of Collinsville Stud Pty Ltd since 1985, is also an exempt proprietary company. It was incorporated in Western Australia on 28 September 1984. Ambia Pty Ltd was also the holding company of a number of other companies associated with the Stud operation. Ambia was in the sole beneficial ownership of Mr N L Garnett. (Hereafter Collinsville Stud Pty Ltd and Ambia Pty Ltd and their subsidiary companies will be referred to as collectively "Collinsville Stud").

Pastoral activities on the land ultimately acquired and farmed by Collinsville Stud commenced originally in 1895 under the Collins family. Over the years, the Collins family established a high reputation for breeding large framed sheep of strong constitution, capable of producing soft handling, heavy cutting, medium to strong wool. The stud farm was situated near Mount Bryan and Burra in the mid north of South Australia. At the time when the Bank became involved, the stud farm consisted of some ten separate parcels of land covering approximately 49,470 hectares.

According to the Ayers Finniss Memorandum (paragraph 5.1) to which I refer below, in March 1985 Mr Garnett purchased Collinsville Stud for $10.5M after the property had experienced "almost ten bad seasons and only average wool prices had taken their toll on the Collins family", the original owners. Mr Garnett, "an experienced stud master", planned "to unlock the potential value of the Collinsville Merino through the use of technology". The purchase by him of Collinsville Stud was fully funded by Elders Rural Finance Ltd ("Elders Rural Finance"). In 1986, Mr Garnett established a Breeding Research Centre for the purpose of applying to the merino industry artificial insemination and embryo transfer techniques then used with cattle, recognising at the time that there would be a two to three year time lag before the program would show a return on investment. The breeding research centre was located at Mount Bryan. The source of the information as to Mr Garnett's plans is the Ayers Finniss Memorandum.

The group structure at March 1991 is set out in Appendix A.

11.2.2 BACKGROUND TO THE FACILITY

In March 1989, the Bank was keen to expand its lending portfolio in the mid-north. Mr T M Clark met Mr Garnett at the Burra Show in March 1989. Subsequently, at Mr Garnett's request, Mr M G Hamilton (to whom I refer more fully below) telephoned Mr J F Farrell and arranged a meeting with the Bank.() In the months of May and June 1989, Mr Garnett held meetings with both the Bank and later Ayers Finniss Ltd ("Ayers Finniss") to discuss a proposal regarding the refinance of Collinsville Stud's existing loans with Elders Rural Finance Limited. The meetings were attended, on behalf of the Bank, by Mr D K Hutchinson, Mr Farrell and Mr M A Wedd. Mr Hamilton, not then on the Bank staff, also attended two of the meetings. At that stage Mr Hamilton was still employed by Elders Rural Finance as its Managing Director. It is likely that Mr G S Ottaway, who was both on the Ayers Finniss Board and an employee of the Bank, introduced Mr Garnett to Ayers Finniss employees in June 1989.() In an informal submission to the Auditor-General, Mr Ottaway denied that he introduced Collinsville Stud to Ayers Finniss and informed the Investigation that his first involvement with Collinsville Stud was at the Lending Credit Committee meeting on 20 July 1989.() At all events, in June 1989 Collinsville Stud retained Ayers Finniss to arrange refinancing of its $30.0M debt to Elders Rural Finance and an additional $2.0M for working capital.

Ayers Finniss subsequently prepared an Information Memorandum() which proposed that the Bank provide $32.0M of funding, $8.0M of that amount in the form of bridging finance which was to be repaid within four months from institutional investor funds to be arranged by Ayers Finniss. The balance, $24.0M, was to be borrowed over 5 years, with some reductions of principal in the meantime.

On 20 July 1989, the Lending Credit Committee recommended approval of a loan to Ambia Pty Ltd, in the form of the following facilities:

Facility

$M

Fluctuating Overdraft Limit

2.0

Fully Drawn Advance No 1

12.0

Fully Drawn Advance No 2

6.0

Commercial Bill Acceptance

4.0

Bridging Commercial Bill Acceptance ("CBA")

8.0

 

32.0

The Board Sub-Committee approved the refinancing proposal on 20 July 1989 and the Board confirmed the approval on 24 August 1989. The funds were advanced on 31 August 1989.

According to the proposal to the Lending Credit Committee, the bridging component was proposed to be repaid "within 4 months of 20 July 1989 from institutional investor funds (quasi equity) arranged by Ayers Finniss ... ." () It was clear on the face of the Ayers Finniss Limited memorandum and it was clear to Bank staff in the Business Banking Section() that the ability of Collinsville Stud to meet its interest and principal repayment obligations pursuant to the proposed loan was dependent on two critical events:

(a) Collinsville Stud achieving an increase in revenue from its "Embryo Leasing Package" from almost $2.0M in 1989 to $4.86M in 1990; and

(b) Collinsville Stud obtaining an injection of non-debt capital, such as the "quasi-equity" proposed to be arranged by Ayers Finniss, of the order of $8.0-$15.0M. In fact, the Ayers Finniss proposal to the Bank was that Collinsville Stud would seek through Ayers Finniss $8.0M in the form of five year bonds at 8 per cent per annum, payable on maturity, thus reducing borrowing to an amount which would enable Collinsville Stud to service its borrowings out of cash flow.

Without these conditions eventuating, it was most likely Collinsville Stud would not be in a position to service even the interest on its debt of $32.0M. As I shall indicate, the second of these conditions was not disclosed to the Board Sub-Committee or to the Bank Board and was insufficiently disclosed to the Lending Credit Committee by the authors of the lending proposal. In making this finding, I am not intending to convey that there was any deliberate attempt by any of the three Bank officers involved in preparation of the lending submission either to mislead the Lending Credit Committee or the Board Sub-Committee or to withhold important information from either the Lending Credit Committee or the Sub-Board. I am, however, of the view that the enthusiasm of those officers involved in preparation of the submission to win the account prevailed over their objectivity and resulted in their preparing a submission which was unbalanced.

Neither of these two critical events occurred, and, about 12 months after the draw down of the facilities, the loan was classified by the Bank as "non-performing" and "non-accrual". In January 1991, the Bank recognised the need to make a sizeable provision against this facility. Collinsville Stud was put into receivership in November 1991.

11.3 CHRONOLOGY

Appendix B of this Section of the Report contains a summary of movements in the facility and, where applicable, details of amendments to financial covenants and security.

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

 

11.4 COMPLIANCE WITH POLICIES AND PROCEDURES

 

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

The following Section identifies and comments upon departures which occurred from those policies and procedures of the Bank which should have been followed at each stage of the loan cycle.

Other departures of a minor nature from the Bank's policies and procedures were noted by the Investigation but do not warrant mention in this report.

11.4.1 INITIATION OF FACILITY

(a) The proposal submitted for approval to the Lending Credit Committee, dated 18 July 1989(), was prepared by Mr D K Hutchinson, District Rural and Commercial Manager and Mr M A Wedd, Rural and Commercial Lending Manager, supported by Mr Farrell, Senior Manager Business Banking, and recommended by Mr V R Pfeiffer, Chief Manager Personal and Business Lending. The proposal was the sole document relevant to Collinsville Stud tabled before the Lending Credit Committee at its meeting on 20 July 1989.

(b) I am of the opinion that the proposal to the Lending Credit Committee and the steps taken on the part of the Bank which lead to preparation of the Lending Proposal were deficient and irregular in the following respects:

(i) No notes of the initial interview with Collinsville Stud could be found on the Bank's files and none have been produced to the Investigation by the Bank. This is a direct departure from the Bank's policy which requires records of preliminary discussions to be retained, as the initial interview is the foundation of a decision as to whether to continue with the proposal. Each of Mr Farrell, Mr Hutchinson and Mr Wedd should have made detailed notes of information relayed to them orally by representatives of Collinsville Stud. As I indicate below, it is possible that information material to the decision of the Bank to lend monies to Collinsville Stud was withheld from Bank officers and that an incorrect explanation was given to Bank officers as to why Collinsville Stud was seeking to refinance its debt. The absence of Diary Notes in these circumstances may prejudice the ability of the Bank to obtain redress in relation to non-disclosure of information on topics to which I refer below.

The officers of the Bank interviewed by the Investigation informed the Investigation that in the course of their meetings with representatives of Ayers Finniss, representatives of Ayers Finniss relayed to them a very confident assessment of its prospects of raising the quasi equity referred to in the Ayers Finniss information memorandum. The information memorandum itself does not indicate a particular view as to the likelihood of success on the part of Ayers Finniss in raising the quasi equity. The Bank's files contain no Diary Notes of any meetings or conversations in the course of which such an optimistic assessment was conveyed. The likelihood of success of Ayers Finniss was a matter most material to the Bank's consideration of the lending application. The meetings with representatives of Ayers Finniss were, for practical purposes, meetings with the borrower. (Ayers Finniss relationship with Collinsville Stud is explained below) It was imprudent for officers of the Bank to have failed to record information conveyed orally to the Bank by representatives of Ayers Finniss, even though such records were not literally required by Bank policy.

(ii) Certain assertions in the proposal may have been misleading in the form and context in which they appeared. For example, Annexure "D" to the proposal contained details of actual financial results for the 1987, 1988 and 1989 years and projections for years 1990-1994. On page 4 of the proposal itself was a schedule "Projected Income/Budget Figures" showing, in summary form, details for years 1989-1994 with the comment:

"Above figures have been carefully prepared and vetted by Ayers Finniss in conjunction with Collinsville principals and are considered to be achievable."

The Bank's files do not indicate who prepared Annexure D and the other Annexures to the Lending Proposal. The Investigation received evidence that Annexure D, along with the other Annexures, was prepared by Mr Wedd and that such analysis and scrutiny of the financial information in the Information Memorandum as was conducted by the Bank was carried out by Mr Wedd.() (Mr Wedd denied that he prepared Annexure D. He also denied that he was alone in conducting analysis and scrutiny of the contents of the information memorandum. He informed the Investigation that preparation of the lending submission involved a combined effort by officers of the Bank in Business Banking.) This is an issue on which I have not been able to make a positive finding.

The assertion set out above in fact contradicted the text of the Information Memorandum and, in particular, the disclaimer in paragraph 1.1 and paragraph six thereof. Ayers Finniss professedly prepared the projections from information obtained from Collinsville Stud and accepted no responsibility for the financial information in the Memorandum. The Information Memorandum stated (paragraph 6.1):

"While detailed analysis of these results (projected profits) supplied has been undertaken, reliance has been placed on the information provided by management".

"Much time has been spent reviewing the income and expenditure categories and totals between the year ended 30 June 1989 and 1990".

It was professedly based "on information furnished by Collinsville Stud and other publicly available sources". It contained a disclaimer to the effect that:

"Any person proposing to take any action on the basis of the information contained in this paper should seek ... independent advice in respect of same."

The assertion which I have quoted from the Bank's lending proposal may have mislead members of the Lending Credit Committee() and, at Board Sub-Committee level, Mr A G Summers.() Each of Mr Farrell, Mr Hutchinson and Mr Wedd accept joint responsibility for this assertion.

Mr Wedd's explanation for it was:

"... to point out to the Committee [that is to say the Lending Credit Committee] that these weren't just figures that have been prepared by us." ()

The Bank officers knew that Ayers Finniss had prepared the Information Memorandum in less than two weeks.() According to Mr G J Hayes (an employee of Ayers Finniss working under the supervision of Mr P S Shinkfield, Executive Director of Ayers Finniss, in preparing the Memorandum), the only check carried out by Ayers Finniss staff of financial information supplied by Collinsville Stud was to review the cash flow projections so as to ensure the validity of the mathematical calculations and that the general basis of preparation was fundamentally correct. Accordingly, the review by Ayers Finniss was not an analytical review. This much appeared on the very face of the Information Memorandum.

I am satisfied that no employee of Ayers Finniss made a statement to any officer of the Bank inconsistent with the qualifications in the Ayers Finniss Information Memorandum which I have set out.() The Bank has produced to the Investigation no Diary Note of any Bank officer recording any communication from an officer or employee of Ayers Finniss in which the disclaimer in the Information Memorandum was withdrawn or qualified in any way. In the circumstances, the statement at page four of the lending proposal was misleading and there was no factual foundation upon which the Bank's officers could make it. I do accept, however, that none of the officers involved in preparation of the submission intended their document to be misleading. And I do add that some criticism of Ayers Finniss is warranted. It acted with excessive haste in preparation of its Information Memorandum. Its officers did not sufficiently investigate its prospects of success in the equity raising. Nor did they sufficiently inquire of their client whether it had in the past endeavoured to raise equity or quasi-equity.()

(iii) The Bank staff did not go behind the material in the Ayers Finniss Memorandum. They should have done so for the reason that they knew that Ayers Finniss had a financial interest in the success of the proposal. The Bank's files no longer contain any working papers indicating that a detailed review of the projections was conducted by the Bank. However, those Bank officers involved in formulating the lending proposal informed the Investigation that in order to assess the viability of the Collinsville Stud operations, the Bank's officers compared Collinsville's projections (as set out in the Information Memorandum) to its past income and costs, taking into consideration planned changes in the business and they considered the logic of the borrower's costings having regard to the Bank's knowledge of the wool industry.() But the authors of the lending proposal relied principally on the information in the Information Memorandum prepared by Ayers Finniss, supplemented by a guided tour of the operations and facilities at Collinsville Stud. In particular, the Bank's officers relied upon Ayers Finniss to assess the financial worth of the Embryo transfer program, a program the success of which was crucial to the achievement by Collinsville Stud of its projected cash flow.()

Ayers Finniss negotiated a success fee by a series of letters the first of which is dated 5 July 1989.() It is my opinion that the very fact that Ayers Finniss was mandated by Collinsville Stud to obtain debt finance, for which there was a success fee of $0.12M, was sufficient ground to warrant an "independent assessment" by the Bank of the financial information in the Information Memorandum. I am satisfied that Bank staff were aware, by virtue of the preliminary discussions to which I have referred, that Ayers Finniss was to be paid a success fee, that Collinsville Stud was the client of Ayers Finniss and that Ayers Finniss did not regard the Bank as its client.() In addition, Mr Ottaway was both a Director of Ayers Finniss and a member of the Lending Credit Committee which ultimately approved the proposal. He must be taken to be aware of the success fee and its magnitude. At all material times, Ayers Finniss was a wholly-owned subsidiary of the Bank. Nevertheless, it had independent profit - making objectives. There was some ambiguity associated with Ayers Finniss' position. It was wholly owned by the Bank and in that sense its interests and those of the Bank coincided. At the same time, it had been retained by Collinsville Stud to act at arm's length to the Bank and to persuade the Bank to extend loan accommodation to Collinsville Stud. I accept that the Bank officers, including members of the Lending Credit Committee, may not have been conscious of this ambiguity and may have expected Ayers Finniss to act with the paramount objective of furthering the Bank's interests. Nevertheless, in this transaction, for the reasons which I have given, none of the Bank staff was reasonably entitled to expect that Ayers Finniss would act either in the interests of the Bank, or impartially as between intending lender and intending borrower.

This transaction involved a proposed advance of $32.0M. The Bank was to become the sole financier of substance of an enterprise involved in the pastoral industry. The Bank had conducted no prior dealings with the borrower. Patently, Ayers Finniss was relying on unverified information from the borrower. Close analysis and scrutiny of the assertions in the Ayers Finniss Memorandum were called for.

Close analysis would in all probability have indicated:

. a projected increase in revenue of 143 per cent ($2.864M) between 1989 and 1990 in Embryo Transfer Sales through leasing of pregnant ewes to partnerships of investors arranged by an Investment Broker in Melbourne. The commercial viability of these transactions was dependent upon the attitude of the Commissioner of Taxation to such schemes, rather than upon the intrinsic fortunes of the merino industry;

. depreciation charges based upon a notional value of assets rather than the value at which the assets were actually recorded in the books of account, resulting in an understatement of depreciation expense;

. that the annual capital expenditure budget was unrealistically low. The budgeted amount was a mere $0.25M, which was merely nominal by comparison with previous years' outlays on capital expenditure. (The Bank's officers informed the Investigation that, on the basis of discussions with representatives of Collinsville Stud, they took the view that the Collinsville Stud capital expenditure budget was unable to be compared with previous year's expenditures due to the upgrading which had already taken place on the Collinsville Stud properties and that, as property improvements had been substantially completed and the property taken through its development stage by June 1989, there was a need only for general capital improvement over the next few years. I am not able to either accept or reject the factual basis of this assertion. However, it remains a cause for concern that the Bank's files do not contain any working papers indicating that the budgeted amount to which I have referred would be sufficient for such general capital outlays as were or should have been foreseen by officers of the Bank);

. that no contingency plan had been formulated by Ayers Finniss to address the state of affairs which would arise should the "quasi-equity" not be forthcoming from financial institutions;

. that no provision was allowed for income tax until 1993, with no explanation or indication of the levels of income tax losses available for carry forward at 30 June 1989(); and

. that the Collinsville Stud Group was, on the basis of past earnings, unable to service the proposed borrowings.

(iv) A second reason why close scrutiny was called for was that the income of the borrowers was derived exclusively from pastoral and associated activities. The pastoral industry is subject to vicissitudes both internal and external to the Australian economy. The success of the Collinsville Stud operation depended entirely on the continued buoyancy of the market in merinos and merino wool, on the Embryo Transfer Program and on the borrower coping with adverse fluctuations in the wool market. The operation had been under the control of existing management for a relatively short period. The proprietor, the intending borrower, had never made a profit and a run of `bad seasons' had lead the previous proprietor to sell.()

The use of an adequate and carefully prepared industry analysis was therefore essential to the preparation of a balanced, reasoned and informative submission to the Lending Credit Committee.

An industry analysis prepared in July 1989 for Ayers Finniss by Mr M Krause, Rural Economist with the Bank, and used by Ayers Finniss in the Information Memorandum(), concluded that there would be:

"...

. a small nominal increase in wool price over the next five years;

. a decrease in demand for wool and a decrease in the Australian dollar;

. at worst, a marginal fall in prices; and

. maintenance of market stability by the Australian Wool Corporation floor price."

These points were used in the submission to the Lending Credit Committee. The conclusions of this industry analysis, however, were not applied to the financial projections which, for example, predicted an increase in sheep sales revenue of approximately 41 per cent from 1990 to 1994. These projections were, of course, the work of Collinsville Stud. Their use in juxtaposition with the conclusions of Mr Krause involved a patent contradiction. There was simply no support in any of the underlying information for the projected increase in sheep sales revenue. A detailed analysis of the financial information would have raised these contradictions and required adequate explanations. Mr Hutchinson did inform the Investigation that he formed the view that the use by Collinsville Stud of artificial insemination and high quality semen would result in Collinsville Stud breeding higher quality merinos and that higher quality of sheep made the projected increase in sheep sales revenue achievable given that the projected rate of increase was 10 per cent per annum.() The fact remains, however, that these projections were not subjected to a detailed analysis by the Bank officers.

(v) The submission to the Lending Credit Committee failed to include details about the key financial relationships. This was a direct departure from the Bank's policy which requires that a ratio analysis on the financial statements be performed, covering:

. current ratio (current assets to current liabilities);

. gearing (total liabilities to equity); and

. interest cover.

(vi) The submission to the Lending Credit Committee contained the following additional deficiencies:

. it did not address the practical impact of default by the borrower and the difficulties which the Bank would have, in the special circumstances of Collinsville Stud, in realising its security at real market value;

. it did not contain a contingency plan to operate in the event that the quasi equity was not forthcoming;

. it did not address appropriate insurance arrangements such as insurance in favour of the Bank of livestock, semen, improvements, the genetic laboratory and the contents thereof, storage facilities and of records and information storage systems of the borrower(); and

. it did not unequivocally relay to the Lending Credit Committee the view formed by Business Banking that the borrower could not carry more than $24.0M in debt in the long term and could not continue to operate without an injection of equity or non-debt capital in the range of $8.0M to $15.0M and that the Bank should not lend more than that sum in the long term.()

(vii) This last deficiency was not merely a matter of omission. Quite the contrary, the proposal to the Lending Credit Committee asserted, on the topic of equity injection:

"From these discussions it was perceived that Neil Garnett was quite keen to attract some form of equity participation in Collinsville to reduce his annual interest commitment and improve his liquidity position."

The clear implication of this sentence is that the decision to seek an injection of equity was that of the proprietor of the business and not that of the Bank staff. Given the assessment made by the Bank's officers themselves, the sentence which I have set out, in the form and in the context in which it appears, is misleading.

The minutes of the Lending Credit Committee of 20 July 1989, at which the Lending Proposal was considered and approved, disclosed that the Lending Credit Committee was told or formed the view that:

"Mr Garnett has a need to attract some form of equity participation to reduce his annual interest commitment and improve his liquidity participation." ()

Despite this observation in the minutes, I am not satisfied that the members of the Lending Credit Committee were told in sufficiently forceful terms that an injection of non-debt capital was critical to the survival of the stud operation. I refer again to this topic at Section 11.4.2.1 (a).

(viii) The submission asserted both at page 3 and in "Annexure C" respectively that institutional investor funds had been "arranged" by Ayers Finniss and that "Ayers Finniss had `committed' to place $8.0M of quasi equity with selected institutions on `certain' terms". The Ayers Finniss Memorandum contains no particulars of any such commitment. On the contrary, it merely asserted an expectation. It projected a substitution of the bridging loan of $8.0M with "quasi equity" four months after draw down, but contained no suggestion that arrangements were in place or even that steps were being taken to secure that equity. Paragraph 3.3 did assert that "Ayers Finniss has committed to place $8.0M of quasi equity with selected institutions on" terms then set out.() No document has been found in which, in either a legal or other sense, Ayers Finniss had bound itself either in favour of the Bank or the borrower to place $8.0M of quasi equity. To that extent, the proposal to the Lending Credit Committee was inaccurate and may have misled Committee members.() By contrast, Mr Wedd and Mr Hutchinson informed the Investigation that they made it clear to the Lending Credit Committee that there was no commitment on the part of Ayers Finniss.() In any event, the fact remains that the submission did not adequately address the state of affairs which would confront the Bank if the quasi equity was not forthcoming or if the borrower defaulted.

(ix) No information had been obtained (or even sought) from Collinsville Stud concerning its credit record with its existing bankers and financiers and no inquiries were made by the Bank of credit reporting agencies. Officers of the Bank interviewed by the Investigation accepted that no action, had been taken by the Bank to request Collinsville Stud to produce to the Bank its records of or file of dealings with Elders Rural Finance. Accordingly, I find that the Bank made no enquiry of the borrower as to the credit history of the Collinsville Stud Group or as to the group's compliance with its obligations under the Elders Rural Finance loan. In particular, no inquiry was made of Collinsville Stud and/or Elders Rural Finance as to the explanation for the increase in Collinsville Stud's capital indebtedness to Elders Rural Finance since 1986. In my opinion, as a matter of prudence, the Bank's officers should have obtained from Collinsville Stud its bank statements showing its dealings with Elders Rural Finance for a minimum period of twelve months leading up to the date of the loan application. Those documents would have enabled the Bank to ascertain whether Collinsville Stud was acting inside its facility limits with Elders Rural Finance, to gauge the fluctuations in the overdrawn account maintained with Elders Rural Finance and to assess the peak needs and minimum requirements of Collinsville Stud. I do accept that there were objectively speaking good grounds for not seeking a general banker's opinion from Elders Rural Finance and I do accept that given the extensive credit arrangements between Collinsville and Elders Rural Finance, Collinsville may have had no other significant external creditors and nothing may have been achieved by conducting credit checks in the circumstances.

Despite this, the proposal of 18 July 1989 to the Lending Credit Committee stated that Collinsville Stud "continues to enjoy a good relationship with Elders". There is no support in papers furnished to the Bank (other than in Section 1.0 of the Ayers Finniss Memorandum) for this assertion. The only explanation appearing in the Bank's papers as to why Collinsville Stud wished to change its principal lender is found in the Ayers Finniss Memorandum. The Ayers Finniss report [paragraph 1.0] attributed the proposed change of lender to an initiative by Collinsville Stud arising both from Elders Rural Finance's insistence that Collinsville Stud use Elders Rural Finance services on an exclusive basis and from the level of charges exacted by Elders Rural Finance in relation to pastoral agency work.

In fact, Elders Rural Finance was pressing Collinsville Stud to repay its debt. Mr K E Lawson was appointed late in 1988 to take the place of Mr Hamilton as Manager of the Elders Rural Finance office in Adelaide. By that stage, Elders Rural Finance was pressing Collinsville Stud to seek an injection of equity into the business. In January 1989, Mr Lawson reviewed the Collinsville Stud account. In early 1989, Collinsville Stud committed one or more defaults in meeting interest payments pursuant to its facilities with Elders Rural Finance. The Agribusiness Quarterly Board meeting of Elders Rural Finance then resolved on 10 April 1989 to serve immediate notice of default on Collinsville Stud and to require repayment or a substantial reduction of the debt due to Elders Rural Finance by Collinsville Stud within 90 days. On 20 April 1989, Mr Lawson met with three Directors of Ambia Pty Ltd, namely Mr D J Rundle, Mr P H Veitch and Mr M J Bahen. On that occasion, Mr Lawson informed those directors that Elders Rural Finance would continue its financial support of Ambia Pty Ltd to a limit of $30.0M including interest and other charges (the approved limit being only $27.5M), but only to 20 July 1989, by which time Elders Rural Finance would require that the current level of debt due to Elders Rural Finance be substantially reduced, if not eliminated.() Mr Lawson had spoken with Mr Garnett on 12 April and had then communicated to him the Board's decision. Subsequently, by letter of 9 May 1989, Mr Lawson informed Mr Garnett that an associate director of Elders Finance Group would be attending at the Collinsville Stud premises on a regular basis with a view to monitoring the day to day operations of Collinsville Stud. Mr Lawson reiterated that Elders Rural Finance would continue to support Collinsville Stud only until 20 July, provided that he was satisfied that there was a strong likelihood of an equity investor being introduced to Collinsville Stud on or prior to that date. (On 25 July, Elders Rural Finance was notified by a director of Collinsville Stud that it would be paid out on 31 August.)()

None of these facts became known to the Bank prior to settlement of its loan to Collinsville Stud. As I have said, the proposal to the Lending Credit Committee (page 1) asserted that:

"Collinsville continues to enjoy a good relationship with Elders."

The impression which this assertion would naturally create is that some inquiry had been made by the author of the proposal which would justify that assertion and secondly, that it was Collinsville Stud which was initiating the change of the financier. Neither of those implicit assertions was in fact true. Had the Bank officers made proper inquiry, they would have ascertained that it was in fact Elders Rural Finance which had initiated the change of financier on the part of Collinsville Stud.

The submission to the Lending Credit Committee set out at page 4 information as the current and deferred liabilities of Collinsville Stud. Deferred liabilities - which I infer included the loan from Elders Rural Finance - are shown to have increased from $20.0M in June 1987 to $30.0M as of June 1989. No explanation appears in the Bank's papers, or in the Ayers Finniss Memorandum, of this increase in capital indebtedness. As I have said, no inquiry of Elders Rural Finance was made by either the Bank by Ayers Finniss as to whether the borrower was operating within the terms of the Elders Rural Finance's facilities. It is, in my opinion, and notwithstanding evidence to the contrary adduced by the Investigation(), unsatisfactory that no inquiry was made as to the reason for the substantial increase in Collinsville Stud borrowings over those two years and as to whether Collinsville Stud was operating within the limits of its facilities with Elders Rural Finance.()

According to Bank officers and employees of Ayers Finniss interviewed by the Investigation, representatives of Collinsville Stud did, in the course of meetings prior to 20 July, assert one explanation for their desire to switch their financial facilities from Elders Rural Finance to the Bank. That reason was the rather implausible reason that, if Collinsville Stud procured its substantial financial facility from a credit provider other than Elders Rural Finance, it would be able to negotiate more favourable terms and conditions for Elders Pastoral agency work. It was further asserted that the agency arrangements between Collinsville Stud and Elders Rural Finance would fail to be renegotiated in July and, for that reason, Collinsville Stud was desirous of having an approval from the Bank either in July or before the sale season in August and September.() In fact, as I have indicated, Elders Rural Finance had required Collinsville Stud to repay or substantially reduce its indebtedness by 20 July. I am satisfied that fact was not relayed to either Bank staff or Ayers Finniss employees in the period leading up to 20 July 1989.() At the same time, I am satisfied that representatives of Collinsville Stud told officers of Ayers Finniss, prior to 20 July, that Collinsville Stud had received but had rejected offers of equity(); that Bank officers did not raise with Collinsville Stud's principals the question whether Collinsville Stud had previously been seeking equity; and that Collinsville Stud failed to disclose to Bank officers and to Ayers Finniss employees that its approaches to State Government instrumentalities had been unsuccessful.()

The Investigation received evidence (contradicted by Mr Hamilton) that Mr Hamilton did make or participate in the assertion on behalf of Collinsville Stud representatives that their reason for changing accounts was the reason to which I have referred.() That assertion, Mr Hamilton agreed, was incomplete and false.() It is not appropriate that I express a positive view as to whether Mr Hamilton did or did not make or participate in the assertion ascribed to him. I do accept that officers of the Bank involved in preparation of the submission to the Lending Credit Committee may have been influenced in favour of recommending the loan application by the involvement of Mr Hamilton. Mr Farrell, for example, became aware before 18 July 1989 that Mr Hamilton was going to join the Bank.() Mr Farrell, by virtue of his previous dealings on behalf of the Bank with Mr Hamilton, was of the belief that Mr Hamilton was on friendly terms with the Bank's Managing Director, Mr Clark. Mr Farrell was also influenced by his knowledge of Mr Hamilton's involvement with Elders Rural Finance Rural Finance and its dealings with Collinsville and by the fact that Mr Hamilton had been appointed to a senior executive position in the Bank. Mr Farrell's recollection was that, at the initial interview between Mr Hamilton and Mr Garnett (on the one hand) and Bank officers (on the other) Mr Hamilton was the main spokesman; that Mr Garnett himself had little or nothing to say; that Mr Hamilton's comments regarding both Mr Garnett and Collinsville were all favourable and were, in addition, critical of Elders Rural Finance who, Mr Hamilton claimed, were dominating the affairs of Collinsville and in effect restricting its opportunity to make more profit in the marketplace. Interest rates charged by Elders Rural Finance, along with commission exacted by it, were also put forward as factors. Mr Farrell was also lead to believe that Collinsville was a valued client of Elders Rural Finance which Elders Rural Finance would not wish to lose.() It was on that occasion that Mr Farrell was lead to believe that it was principally for the reason to which I have previously referred that the Bank was being approached to pay out Elders Rural Finance finance. Mr Farrell has also informed the Investigation that at no stage on either of the two occasions prior to 18 July 1989 on which Bank officers met with representatives of Collinsville Stud was it disclosed to the Bank that Elders Rural Finance was putting pressure on Collinsville Stud to repay or substantially reduce the debt due to it and that both Mr Hamilton and Mr Garnett requested the Bank officers that they ensure that Elders Rural Finance did not learn of the negotiations between Collinsville Stud and the Bank. Mr Farrell's recollection was that the reasons given for this were that relationships would be impaired and more importantly, that Mr Hamilton's current employment with Elders Rural Finance might be embarrassed.() At no stage after being approached by the Bank to join its staff but prior to 18 July 1989 did Mr Hamilton approach Mr Farrell and inform him of matters known to Mr Hamilton but not disclosed explicitly to Bank staff in the course of the two initial interviews.

It is a matter which has occasioned me considerable disquiet that, on topics as important as this, officers of the Bank did not make and retain Diary Notes recording matters relayed to them by and on behalf of Collinsville Stud. The reason for Collinsville Stud's change of credit provider and the strength of its relationship with Elders Rural Finance was a matter of materiality both to the Board Sub-Committee and to the Board.() The failure of the Bank officers to retain Diary Notes coupled with their failure to make inquiries, directly or indirectly, of Elders Rural Finance and their failure to obtain bank statements from Collinsville Stud resulted in officers of the Bank putting forward a loan proposal based on incomplete information when full knowledge of the facts may have resulted in the Bank adopting a more cynical and sceptical view of the financial information provided by Collinsville Stud. That full knowledge, too, may have induced the Bank to approve the loan subject to the proposed equity having in fact come in.

I do add, in favour of the Bank officers involved, that they could reasonably have formed the view, based on Mr Hamilton's participation in the initial meetings, that inquiry of Elders Rural Finance would disclose nothing adverse. But, on such an important matter, they were content to form that view and did not extent their inquiries as they should have.

(x) The initiation of the loan was patently and consciously influenced by an attitude of enthusiasm for the perceived wider implications of winning the Collinsville Stud account on the part of those involved in the loan application an attitude which, I am satisfied, was at least partly attributable to the Bank's obsession with growth at the time.() The enthusiasm was particularly reflected in the Lending Credit Committee submission, dated 18 July 1989() which emphasised the following points several times:

"Proposal presents SBSA with opportunity to form a long term association with the most prestigious Merino stud in the world and one which is firmly based in South Australia."

"Proposition presents the Bank with an opportunity to obtain the banking business of the most prestigious rural connection in the state. Collinsville Stud's management expertise is excellent and their future prospects are exciting."

"SBSA have very little business from the stud sheep industry, but the acquisition of this account will raise our standing among this wealthy and influential sector of the South Australian rural community."

"Our association with Collinsville Stud name could provide marketing opportunities."

In my opinion, their enthusiasm over the possibility of winning the Collinsville Stud account led to the failure of those involved in the initiation phase to comply with prudent banking practice.

This enthusiasm also lead to the Bank considering and approving the loan application with excessive haste. The lending submission was prepared on 18 July 1989. It was considered by the Lending Credit Committee and by the Board Sub-Committee on 20 July 1989. The Lending Credit Committee convened to deal with the application was a special committee. The application was a complex one and should not have been resolved with such haste. No officer of the Bank interviewed by the Investigation could recall that Collinsville Stud or Ayers Finniss requested the Bank to process the application with haste.() It must, however, be more than a coincidence that the Lending Credit Committee approved the loan application on the very day that the ultimatum delivered by Elders Rural Finance to Collinsville Stud expired. The only reasonable inference is that there was a causal link betwen these two events.

(xi) The submission to the Lending Credit Committee generally adopted the historical narrative, farming, and technical information contained in the Information Memorandum, and it uncritically accepted the cash flow projections in the Information Memorandum. Of the assets to be charged, land was put by Ayers Finniss at a value of $14.1M (Section 7.1). Stock was valued for security purposes at a slightly higher figure.() The financial results summarised in the memorandum were based on unaudited accounts "prepared by the management team at Collinsville Stud in conjunction with" (a named firm of accountants) (Section 16.1). The viability of the proposed borrowing depended on acceptance of projections which in turn were based merely on budgeted figures for 1990 and not on actual performance. The submission accepted that the borrower had an ability to reduce principal by $10.0M over 5 years() and that the bridging Commercial Bill Acceptance would be repaid within 4 months. It noted that, based on normal lending margins, "65 % of the proposed borrowing would be secured by "second class" security" but continued that "the risk of loss in a forced sale of the business as a going concern is minimal". Appendix B to the submission indicated that an unlimited guarantee was to be obtained from Mr Garnett and from several of his companies. The submission considered the matter of obtaining guarantees from other parties, ie Mr Garnett's co-directors and Mrs Garnett. This matter is discussed further below.

At page 4 of the submission to the Lending Credit Committee, a ten-fold increase in current assets as between 1988 and 1989 was asserted. Appendix E attributed this increase in value to semen ($3.308M) and livestock ($26.689M). The increase was attributed to a departure from reporting "at cost" to reporting "at valuation". Appendix E did not demonstrate any increase in the value of hard fixed assets such as land and buildings. In addition, the valuations of semen and livestock set out in Appendix E were not verified or sought to be verified by the Bank in any way. Livestock numbers were not confirmed and underlying values were not assessed. The valuations found in the Information Memorandum (Section 7.1) were professedly "prepared by management". A qualified valuation of the flock was Appendix II. Patently, stock numbers were not verified by the consultant who prepared that valuation.

I am conscious of the need not to indulge in hindsight in judging the lending submission prepared by Mr Farrell, Mr Hutchinson and Mr Wedd. In formulating the criticisms which appear on the preceding pages, I have had regard, in favour of those officers of the Bank, to the following matters:

. the Australian wool industry generally, during 1988 and 1989, was enjoying buoyant conditions and was prospering;

. the Federal Government's wool floor price scheme was in place and there was no reason in 1989 to think that it would be abolished, as it ultimately was;

. the collapse of the market in and demand for the embryo transfer packages being sold by Collinsville in July 1989 was not foreseeable as a probable event prior to 20 July 1989;

. the severity of the economic downturn which afflicted the Australian economy from about the end of 1989 was not foreseeable as a reasonable probability in or prior to July 1989 nor was the impact on the wool industry and the rural economy generally of the property market crash foreseeable as a probability prior to July 1989; and

. the disintegration of the United Soviet State of Russia and the associated collapse of the Russian economy was not foreseeable as a probability prior to July 1989. (I mention this factor because Russia was a significant market for Australian wools in the years leading up to 1990.)

Nevertheless, for the reasons given above and on the basis of the findings which I have set out and the documents and other evidence to which I have referred, I am of the opinion that Mr Hutchinson, Mr Wedd and Mr Farrell did not exercise proper care and diligence in the preparation of the proposal submitted to the Lending Credit Committee for approval.

11.4.2 APPROVAL OF FACILITY

11.4.2.1 Lending Credit Committee

(a) On 20 July 1989, the Lending Credit Committee recommended approval of the facility.() Members present at the meeting were Mr G S Ottaway, Mr K S Matthews, Mr T L Mallett, Mr D C Masters and Mr R L Wright. Mr Farrell, Mr Hutchinson and Mr Wedd also attended, to speak to the proposal.() The minutes of the Lending Credit Committee of that day() record that the Lending Credit Committee "was informed that Business Banking was satisfied as to the achievability of the projections" (including the projection that the borrower would be able to repay $10.0M of principal over 5 years) the projections "having been prepared in a most professional manner". The only variation on the proposal stipulated for by the Lending Credit Committee was that Keyman Insurance be arranged on Mr Garnett "for an appropriate amount." ()

(b) As I have said, the proposal to the Lending Credit Committee was deficient in not directly and explicitly asserting that the ability of Collinsville Stud to continue to trade was contingent upon an injection of non-debt finance of between $8.0-$15.0M. Notwithstanding this shortcoming on the part of the proposal, I am satisfied that the members of the Lending Credit Committee should have inferred from a reading of the papers that the injection of equity was indeed crucial to Collinsville Stud's continued operations and, for that reason, should as reasonable and prudent bankers, have rejected the submission or should have approved the loan subject to the equity injection having in fact come in, or having been firmly contracted for. I am satisfied that a proper reading of the proposal would have led the Lending Credit Committee members to realise that the transaction was unsafe in the absence of the equity injection.()

In addition, I am satisfied that, by reason of a conversation between Mr Hamilton and Mr Matthews prior to the meeting of the Lending Credit Committee, Mr Matthews at least was aware that the equity was necessary for the continued survival of the borrower in the long term() and that Mr Hamilton told Mr Matthews that Elders Rural Finance had been bringing pressure to bear on Collinsville Stud to replace some of its debt burden with equity in the months leading up to January 1989. Mr Hamilton's evidence was that he told Mr Matthews that he could not participate in the Bank's decision-making and that he made clear to Mr Matthews that Mr Garnett would require, and Elders Rural Finance had pushed him in the direction of requiring, an injection of equity funds.() Mr Hamilton also said that he told Mr Matthews that the maximum amount that should be advanced to Collinsville Stud was $30.0M. Mr Hamilton did not say that he disclosed to Mr Matthews the unsuccessful attempts to raise equity from State Government instrumentalities. I am satisfied that Mr Hamilton did tell Mr Matthews that valuations in rural business were very important and that the Bank needed to be particularly careful in its valuations of Collinsville Stud.()

While these matters were clear to Mr Matthews, and while I am satisfied that the equity injection was discussed at the Lending Credit Committee meeting, I am not satisfied that either the lending submission or the oral presentation of Mr Farrell, Mr Hutchinson and Mr Wedd made it clear to other members of the Lending Credit Committee that the proposed transaction would be unsafe and Collinsville Stud non-viable if the proposed non-debt capital was not injected in the short term.() Nor does the evidence adduced by the Investigation enable me to find that Mr Matthews relayed to the Lending Credit Committee the substance or effect of the information imparted to him by Mr Hamilton. Mr Farrell's recollection was that Mr Matthews arrived late at the meeting and, having arrived, that he spoke favourably both of the character and ability of Mr Garnett and of the operations of Collinsville Stud generally. If Mr Matthews did speak in those terms, his knowledge on those topics can, on the evidence available to me, have been derived only from Mr Hamilton.()

In addition, it is possible that the Lending Credit Committee was told of the confidence of Ayers Finniss that the equity would be procured() and that, in the light of such assessment, its members consciously decided not to impose a deadline on the equity injection and not to approve the loan subject to the equity having come in. The Lending Credit Committee failed, I am satisfied, sufficiently to direct its attention to the contingency of the equity not coming in and, in my opinion, acted imprudently.() In my opinion, it was imprudent for the Lending Credit Committee to have approved the fifth form of facility sought , that is to say the $8.0M Commercial Bill Acceptance Bridging Finance.

Further, in my opinion, the Lending Credit Committee failed to give sufficient weight to the foreseeable consequences of the failure of the borrower to obtain the quasi equity to which I have referred, to the impact of default, and to the problems which would arise if a forced sale became necessary. A proper and balanced consideration of all the facts known to the Lending Credit Committee would have led the Lending Credit Committee either to reject the proposal or, at most, to approve the proposal subject to the equity having been obtained.

In reality, the Lending Credit Committee took the chance that equity would be procured by Ayers Finniss. The meeting was a short one and, on the evidence available, may have lasted no longer than 15 or 20 minutes.() The minutes of the meeting() record some discussion of "possible ways out". None of the members of the Committee could explain precisely to what this was a reference. According to Mr Farrell, the principal way out would have been to have sold land, owned by Collinsville Stud, "which was then considered very valuable". Mr Hutchinson has informed the Investigation that the reference to "ways out" was a reference to the sale of small parcels of land, the sale of which would not have been detrimental to the operations of Collinsville Stud and to the sale of stock to daughter studs.() Mr Wedd's recollection was that the matters adverse to the application discussed at the Lending Credit Committee were the effect on the profitability of the business of a fall in wool prices; the possible effect on stud ram sales if farmers and graziers were able to utilise the modern technology of embryo transfers rapidly to improve the quality of their flocks without regular purchase from Collinsville Stud of high quality rams (that is to say, a flooding of the market); the effect of failure to obtain the equity placement; the reliance on sales of the embryo leasing packages to achieve cash flow; and partial reliance by the Bank on livestock by way of security.() The fact was, however, that land to be secured in favour of the Bank was valued at approximately $16.0M and was supporting only about half the amount proposed to be lent by the Bank. The inference is, therefore, irresistible that the Committee gave inadequate attention to "possible ways out".

(c) For the following reasons, which would have been apparent to the Lending Credit Committee, the Committee should have cynically and sceptically analysed the proposal before it:

(i) The applicant had not traded at a profit in its then ownership, whereas substantial profits were projected in future years.()

(ii) Current assets had been revalued upwards by a factor of 10 and total assets by a factor of 7.

(iii) The greater part of the loan was to be secured by security which was, in the Bank's terms, second class. Real estate was valued by the Bank's valuer, Mr Ellis, at slightly less than $16.0M (lending submission, page 5).()

(iv) The borrower, was and was proposing to remain, very highly geared.

(v) A substantial component of the value of the operation depended on Mr Garnett (who was in charge of marketing at Collinsville Stud) and on his personal willingness to comply with the Bank's stipulations. This fact would inherently make it very difficult for the Bank to sell the secured assets, without Mr Garnett's acquiescence and co-operation, as a going concern, and other than at a substantial loss, in the event of default.

(vi) Equally, the safety of the loan depended on the continued reputation of and goodwill in the name of Collinsville Stud. That reputation and goodwill was inherently likely to be jeopardised by a credit provider overtly taking steps to realise its security. Much of the security was intangible and precarious. In the circumstances, the security would be difficult for the Bank to realise without depreciating the asset in the marketplace. The operation as a whole was such as to be not readily marketable in a forced sale situation at a price which would clear the Bank's debt. The specific sub-components of the security, including the various parcels of land, were not capable of being sold without jeopardising the value of the business as a going concern and the value of the name Collinsville Stud.()

(vii) Insufficient weight was given to actual trading figures as opposed to projected earnings. The Committee should have had regard to the strength and stability of Collinsville Stud's cash flow. The increase in projected cash flow was to come, as I have observed, from the sale of artificial tax avoidance packages the success of which would depend on the attitude of the Australian Taxation Office. That source of cash flow was, therefore, inherently unstable and it was also unproven.

(viii) To a large extent, the value of the assets to be secured depended on future income growth. That growth in turn depended on the involvement and goodwill of Mr Garnett.

(d) The Committee erred in not directing that the Bank be, and be entitled contractually to be, actively involved in and informed of the efforts of Collinsville Stud and Ayers Finniss in finding the quasi equity contemplated in the submission. Whilst Ayers Finniss was a subsidiary of the Bank, its client was Collinsville Stud.() As it turned out, unbeknown to the Bank, the task committed to Ayers Finniss by Collinsville Stud changed even before the Bank's funds were advanced to Collinsville Stud on 31 August 1989, from a pursuit of $8.0M to a pursuit of $15.0M. That increase made the task of Ayers Finniss more difficult to accomplish.() This change in the instruction given to Ayers Finniss made the loan unsafe even before the Bank had advanced its funds.() Ayers Finniss in fact did not at any stage seek the $8.0M in quasi equity referred to in its Information Memorandum and in the loan submission of 18 July 1989. Instead, in August 1989, in conjunction with Day Cutten, it sought $15.0M by way of the issue of new shares.()

As I have said, the financial information known to the Bank emphasised the need for an injection of equity funds into Collinsville Stud. The refinancing by the Bank of Collinsville Stud's debt to Elders Rural Finance was viable only if the cost of funds to Collinsville Stud was reduced. Notwithstanding this, no consideration was given by the Lending Credit Committee to imposing a specific deadline on finding an investor. On every occasion on which the Bank's officers later tried to impose some deadline on injection of equity and repayment of the bridging loan, they were advised by the Collinsville Stud Board that one or other intending investor required more time to make a decision. Matters were allowed to deteriorate. Had the Bank's Lending Credit Committee determined specific criteria and timetables for equity funding and enforced those conditions, the loss sustained by the Bank could have been mitigated.

(e) In 1989, there was no credit inspection process in Business Banking. For that and other reasons, the loan should not have been approved for management by Business Banking, which generally did not manage exposures in excess of $5.0M and whose staff had a large number of accounts to manage and did not have, and should have been foreseen not to have, sufficient time to manage a complex account such as Collinsville Stud. The intended loan to Collinsville Stud was, in fact, the largest loan written to that stage in Retail and Business Banking.()

(f) The Lending Credit Committee erred in approving the loan without guarantees additional to that of Mr Garnett. Guarantees were not sought from any directors apart from Mr Garnett. (Indeed, there would appear to be no information in the Bank's files as to his personal worth and as to the value of his personal guarantee as security). In addition, whilst the lending proposal asserted that Mrs Garnett was "independently wealthy", there is no suggestion that consideration was ever given by the Lending Credit Committee to requesting a guarantee from her. In addition, the Committee appears not to have directed its attention to seeking guarantees from the co-directors of Mr Garnett.() The Investigation was informed that Mr Wedd and Mr Hutchinson discussed the topic of guarantees with Mr Garnett and were told that a guarantee by Mrs Garnett would not be offered. The matter was left there.

In relation to directors' guarantees, Mr Wedd and Mr Hutchinson informed the Investigation that directors apart from Mr Garnett were not requested to give guarantees because they had no substantial financial interest in the business.() Collinsville Stud was a private company. The business operated by it was, in effect, a family business, given that Mr Garnett was the sole beneficial shareholder in Ambia Pty Ltd. The policy of the Bank at the time was, in the case of private companies, that personal guarantees from the directors should be obtained whenever possible and particularly when only second class securities are available.() In the case of the loan to Collinsville Stud, the greater part of the debt was secured on second class security. Given the uncertainty associated with the equity raising and the fact that Mr Garnett's co-directors were persons of substance, it was in my opinion imprudent on the part of the Lending Credit Committee not to have at least sought supporting guarantees from those persons.

(g) The lending submission was, in my opinion, patently a "marketing document". A reasonable and prudent banker would have recognised it to contain insufficient substance to support a loan of $32.0M, or any substantial loan other than a loan of $20-24.0M on terms that the borrower find $8-15.0M in non-debt capital before settlement.() The prestige that was anticipated to be associated with acquisition of an account such as Collinsville Stud was emphasised in the submissions to the Lending Credit Committee and the Board Sub-Committee. It was influential at least at Lending Credit Committee level.() The ability of the borrower to service interest and effect repayment of the debt was insufficiently scrutinised. A reasonable and prudent banker would have required to be satisfied that a customer could service the loan facility and that the debt could be repaid without resort to realisation of security under power of sale.

11.4.2.2 Board Sub-Committee

(a) On 20 July 1989, the Board Sub-Committee approved facilities to Collinsville Stud of $32.0M. Members present at the meeting were Mr Summers and Mr Clark. Mr G S Ottaway was present, having chaired the Lending Credit Committee.()

(b) The Board Sub-Committee, as it was called, was created in 1984 at the first meeting of the Bank Board.() Its role was the consideration of loan applications. It had no wider function.

At paragraph 12 of Minute 84/10, the Board resolved in relation to the Sub-Committee:

. The Board would approve all loans over $2.5M and when urgency is required this would be done by a Sub-Committee of two directors who would approve the loan subject to confirmation at the next Board meeting; and

. The Board would receive monthly, for information, brief details of all loans made during the month between $0.5M and $2.5M.

This resolution abounds in ambiguity. For example, it does not make it clear whether, in cases of urgency, the authority of the Board Sub-Committee is binding on the Bank or is merely provisional. Nevertheless, what is clear is that the Board Sub-Committee was given no authority to approve loans except when some urgency was involved. This requirement of urgency was never rescinded by the Board.

By July 1989, employees of the Bank had come to regard the Board Sub-Committee as a discrete lending institution within the Bank. Employees of the Bank were of the view that the Board Sub-Committee had authority to approve loans without reference to the Board in non-urgent circumstances and that decisions of the Board Sub-Committee in favour of lending proposals were valid whether ratified or confirmed by the Board or not.() This view is reasonably open on the first paragraph which I have set out above from minute 84/10. However, the second paragraph which I have set out indicates that decisions of the Board Sub-Committee were merely provisional and were not intended to bind the Bank unless and until confirmed or ratified by the Board.

The Bank Board probably had authority under Section 18(1) of the Act to constitute sub-boards or Sub-Committees and, in particular, to prescribe a quorum of two for such Sub-Boards. However, in my opinion, to describe the Sub-Committee which was convened on 20 July 1989 as a Board Sub-Committee is to apply a misnomer. Only one of its members (Mr Summers) was present solely as a member of the Board. Mr Clark (also a director) was Chief Executive Officer of the Bank. Mr Ottaway was an employee of the Bank and was not a director. He was present, not as a member of the Sub-Committee, but to assist it. The effect of this was that only a minority of those present (Mr Summers) was independent of the staff of the Bank. The position was aggravated by the fact that Mr Ottaway was a member of and the Chairman of the Lending Credit Committee which recommended the proposal to the Board Sub-Committee and the General Manager of the division which was advancing the proposal. My perusal of Board Sub-Committee papers indicates that it was common for Mr Clark to attend those meetings and for only one other Board member to attend.() In my opinion, it was inappropriate for a Chief Executive Officer to participate in deliberations of the Sub-Committee and it was inappropriate for the Board to permit the Chief Executive Officer to participate in deliberations of the Sub-Committee.()

In addition, Mr Summers and Mr Clark would have had inadequate time in which to consider the lending proposal. Mr Summers cannot have had more than 36 hours within which to read the submission to the Lending Credit Committee(), which was the only document placed before the Board Sub-Committee.() Mr Clark, in his submission to the Investigation, did not accept that 36 hours was an inadequate time in which to consider the lending proposal and he observed that Mr Summers had special knowledge of the rural industry.() It is possible that Mr Summers, who chaired the Sub-Committee, may have seen the lending submission only one hour before the Board Sub-Committee meeting.() It is not clear whether any members of the staff of Business Banking were present to provide additional information to the Board Sub-Committee but it is probable that they were.() As was usual(), no minutes were kept of the deliberations of the Sub-Committee. The meeting probably lasted approximately 30 minutes.() It was conducted informally.() I have been unable to ascertain whether it transacted any business on 20 July apart from Collinsville Stud.

(c) I am satisfied that the decision of the Board Sub-Committee was irregular. It was irregular because there was no circumstance of urgency which justified the convening of the Sub-Committee. None of the Bank officers interviewed by the Investigation asserted that there was, to their knowledge, any haste or urgency associated with the Collinsville Stud loan application. As I have said, the Sub-Committee had authority to approve loans only in cases of urgency. There having been no urgency attendant upon consideration of the Collinsville Stud loan submission, the Sub-Committee did not have authority finally to approve the loan. Only the Bank Board could validly approve the Collinsville Stud application.() The conduct of the staff of the Bank in procuring a Board Sub-Committee meeting to consider the Collinsville Stud application was, in the absence of urgency, irregular.() The only explanation advanced to the Investigation for the convening of the Sub-Boards or Sub-Committees was the Bank's desire to expedite loan approvals.() That is not a sufficient situation of urgency.() It was, I am informed, quite common for the Sub-Committee to act where urgency was not present.()

In participating in the deliberations of the Sub-Committee, Mr Summers seems to have been under the impression that the Sub-Committee was merely part of the Board and that its decisions had no status unless and until confirmed by a Board. In other words, Mr Summers' understanding was that the Sub-Committee's powers were simply powers of recommendation.() Mr Summers did not take steps to acquaint himself with the powers and role of the Sub-Committee.()

(d) The Sub-Committee was not told that the equity injection was critical to the viability of the loan(), but was told that Ayers Finniss were confident that they would be able to raise $8.0M.() There was no discussion on the topic of approving the loan subject to the equity having been provided.()

11.4.2.3 General

I am of the opinion that the approvals of the facility by the Lending Credit Committee and the Board Sub-Committee were imprudent. I am so satisfied in relation to the Lending Credit Committee for the reasons given in Section 11.4.2.1 of this Chapter.

I am also satisfied that the Board Sub-Committee should not have approved the loan or, in the alternative, the fifth component of the loan in the absence of equity having been injected or having been firmly contracted for, on the following grounds:

(a) no contingency plan had been formulated in the Lending Submission;

(b) the Board Sub-Committee should have inferred from the contents of the lending submission that the loan was unsafe in the absence of equity;

(c) the Board Sub-Committee should have inferred from the contents of the lending submission that the loan was unsafe on the basis of the borrower's past earnings as disclosed in the lending submission; and

(d) the Board Sub-Committee knew or should have known that the wool industry was volatile and that it would be very difficult for the Bank, in the event of a default, to exercise the ordinary powers of a mortgagee and sell the intended securities without a substantial loss.

In coming to this conclusion in relation to the Board Sub-Committee, I have had regard to the fact that from 1984 onwards, the Board arrogated to itself and to the Board Sub-Committee an active role in the approval of loan applications and thereby took upon itself the responsibility to exercise a judgement on loan applications independently of views expressed by Management. I have had regard to the position of Mr Clark as Chief Executive Officer and I have had regard to the knowledge of Mr Summers of the wool industry as gained by him through his business affairs.()

I have also reached the conclusions which I have expressed on the following additional grounds. The financial information, representing actual and forecast profits and consolidated balance sheets for the years 1987-1994, was included in the submissions to the Lending Credit Committee and the Board Sub-Committee in summarised form only. I am satisfied that summarised financial information can acceptably, apart from exceptional circumstances, be relayed to and acted upon by the Board and Board Sub-Committee provided that it is accurate and omits no material information. The Lending Credit Committee, in my opinion, had a responsibility to satisfy itself that the Board Sub-Committee was informed of all material information. It should have taken positive steps to ensure that the Board Sub-Committee was properly informed of all matters relevant to the risk of Collinsville Stud defaulting under the proposed loan, to the value of the security, and to the potential extent of the Bank's loss should it come to exercise its rights as secured lender. In this case, a significant change in shareholders' funds in Collinsville Stud had occurred at 30 June 1989 as a result of adjusting the book values to take into account an increase in values of livestock and properties, which adjustments in turn resulted from valuations prepared by external consultants. The valuations brought the shareholders' funds from a negative position of $15.872M at 30 June 1988 to a positive position of $25.369M at 30 June 1989 in spite of additional operating losses in the 1989 year. Details of these revaluations were not included in the submission to the Lending Credit Committee or in the submission to the Board Sub-Committee. There is no indication that questions were raised concerning the propriety of and justification for the revaluation. Their propriety and the justification for them should have been, but was not, questioned by both organs.()

11.4.2.4 Board Approval or Confirmation

By memorandum of 2 August 1989(), Mr Ottaway submitted a minute to the Board seeking confirmation of the approval of facility resolved upon by the Board Sub-Committee at its meeting held on 20 July 1989. The memorandum to the Board was prepared by Mr Farrell but was adopted by Mr Ottaway and presented by him to the Board.() It was, as required by the instruction of Mr Clark that Board Papers not exceed two pages in length(), the barest of summaries of the proposal to the Lending Credit Committee which, in turn, was the barest of summaries of the Ayers Finniss Memorandum. One important difference between the terms of the proposal to the Lending Credit Committee and the proposal to the Board is that the latter, in referring to the bridging loan, spoke of "equity to be arranged by Ayers Finniss".

The memorandum to the Board was deficient in the following respects:

(a) it did not contain enough information to enable the Board to make an informed decision on the proposal;

(b) it did not inform the Board that the transaction would be unsafe if the quasi equity of $8.0M was not forthcoming by the end of 1989. The Investigation received evidence that this matter was not disclosed by Mr Ottaway to the Board in his oral presentation of the submission.() Mr Ottaway informed the Investigation that he did discuss this issue at the Board meeting();

(c) it did not disclose the extent of the revaluation of assets that had occurred or the basis of that revaluation; and

(d) it disclosed nothing of the nature of the assets (other than land or improvements) to be charged in favour of the Bank.

On 24 August 1989, the Board confirmed the decision of the Sub-Committee of 20 July 1989.()

11.4.2.5 Communication of the Approval

By the stage that the matter reached the Board, Mr Farrell's letter, dated 21 July 1989, by way of offer of loan (to which I refer below) had been sent to and accepted by Collinsville Stud. The Board was thus in fact confronted with a fait accompli. In my opinion, this was irregular, for reasons which I have given. I accept, however, that Mr Farrell believed that he was entitled to communicate the loan offer to the customer in advance of Board approval on the basis, contrary to the fact, that the application was being passed on to the Board merely for noting.

For the reasons given above and on the basis of the findings which I have set out and the documents and other evidence to which I have referred, I am of the opinion that the members of the Lending Credit Committee() referred to above did not exercise proper care and diligence in approving the loan facilities to Collinsville Stud.

Members of the Lending Credit Committee failed, in my opinion, to examine the lending proposal with the acumen and thoroughness which would be expected of diligent, competent and prudent bankers. The Committee should have sought further information and explanations concerning the deficiencies noted above. The Committee should not have approved the loan in the absence of an equity injection or a firm contractual commitment for that equity. Had it sought additional information, the Committee may well have considered that the loan facility should not have been recommended to the Board Sub-Committee for approval either at all or in the form presented.

While the constitutional position of the Board Sub-Committee() is not clear, its members, Mr Summers and Mr Clark (having taken on themselves the duty and the role of assessing the proposal as suitable for approval by the Board) - must accept responsibility for approval of the facility. In so far as the Board Sub-Committee failed (as I am satisfied it did) to take adequate steps to be satisfied as to the ability of the borrower to service the interest commitment and to repay the debt if called upon, its members did not adequately and properly direct, supervise and control the affairs, operations and transactions of the Bank.

11.4.3 SECURITY

I am of the opinion that departures from approved procedures occurred in relation to the Security phase concerning this facility.

(a) First, variations occurred between the security stipulated in the letter of offer dated 21 July 1989(), which generally reflected the terms of approval by the Bank, and the security which was actually obtained. The position can be summarised as follows. The letter offered the facilities set out in Section 11.2.2 of this Chapter and it stipulated for certain securities. As I report below, not all terms and conditions stipulated in the letter of offer were satisfied before funds were advanced. In addition, the terms in which the offer of the bridging finance of $8.0M was communicated were most unsatisfactory. Furthermore, there was no obligation imposed by the letter of offer to effect the repayments of principal contemplated by the Information Memorandum. Nor did the facility agreement later executed between the Bank and Collinsville Stud make repayment of the bridging loan before the end of 1989 a matter of obligation and potential default.()

Facility Number 5 (the Commercial Bill Acceptance) was stipulated in the letter of offer to be on the following terms - 30-90 roll-overs [sic] at borrower's option with repayment to be effected within 4 months from bond issue to be arranged by Ayers Finniss.

This stipulation was quite ambiguous. It did not impose a distinct contractual obligation on the borrower. It was not clear whether the bridging Commercial Bill Acceptance was to be repayable merely out of the bond issue, whenever arranged, or whether it was to be repaid within four months, using the proceeds of the bond issue. It was clearly the intention of the Lending Credit Committee in approving the proposal that the seeking of equity would be a matter of obligation on the part of the borrower rather than a matter of choice on its part. Given the contents of the lending proposal, it was, by necessary implication, a term and condition of approval by the Lending Credit Committee, and should have been made a term and condition of the contract of the loan with the customer, that Ayers Finniss procure $8.0M of quasi equity within four months.() Equally, the seeking of equity was not, as I have said, made a matter of obligation in the Facility Agreement. For this, Mr Farrell must accept responsibility, as with the defective expression in the letter of offer. Mr Farrell informed the Investigation that he did intend to impose on the borrower a contractual obligation to repay the bridging loan by the end of 1989 but only in the event that the bond issue was successful. His intention in using the words set out above was merely to designate the fund from which the bridging loan was to be repaid and, in the event that Ayers Finniss was unable to find suitable participants, then Mr Farrell's contemplation was that the Bank was to have no other recourse on the borrower "except to carry the debt and hope that something could be achieved in the future." () Neither this intention nor the expression in the letter was, in my opinion, consistent with the spirit of the proposal approved by the Lending Credit Committee. The Lending Credit Committee is also partly responsible in that it failed to spell out with sufficient clarity matters relevant to the equity raising.

As it turned out, Collinsville Stud changed the instructions given to Ayers Finniss in relation to the equity raising between the date of approval by the Bank and the date of settlement, increasing from $8.0M to $15.0M the amount of equity sought and changing the form of the capital raising from a bond issue (as proposed to the Bank) to a share issue.() This change reduced the probabilities that Ayers Finniss would succeed in its task.() The change was not disclosed to, or ascertained by, the Bank prior to drawdown of the loan.

(b) I now return to the discrete topic of departures at settlement from the terms and conditions of the letter of offer. The letter of offer stipulated for the following security:

(i) First Registered Mortgage Debenture over all the assets of the following Collinsville Stud companies:

. Ambia Pty Ltd;

. ALC Pty Limited;

. East Collinsville;

. Greenacres Pty Limited;

. LG&S Co Pty Limited;

. Old Collinsville Pty Limited;

. West Collinsville Pty Limited;

. Collinsville Pty Limited; and

. Merino Management Pty Limited.

(ii) First Registered Mortgage over all of the land owned by the above companies jointly or severally.

(iii) First Charge by Ambia Pty Ltd in favour of the Bank over all shares held in Collinsville Stud Pty Limited.

(iv) Unlimited Guarantees by Collinsville Stud Pty Limited, ALC Pty Limited, East Collinsville Stud Pty Limited, Greenacres Pty Limited, LG&S Co Pty Limited, Old Collinsville Stud Pty Limited, West Collinsville Stud Pty Limited, Merino Management Limited and Mr Garnett.

(v) First Registered Stock Mortgage over all stock carrying Collinsville Stud and Glenroy brands in land owned by the Collinsville Stud Group.

The security described by the Bank as a First Registered Mortgage Debenture to be obtained over the assets of the associated company Merino Management Ltd was not obtained. The Bank was told by Collinsville Stud representatives that Merino Management Ltd did not have any assets with any real security value capable of being changed in favour of the Bank.() In lieu of this security, the Bank obtained a charge over the assets and undertakings and the shares of Ambia Pty Ltd. The Lending Credit Committee and the Board Sub-Committee were not advised of the change. The Investigation has been unable to determine who, on the part of the Bank, was responsible for acquiescing in the change.

The Bank's letter of offer was signed by Mr Garnett and Mr Veitch on behalf of Ambia Pty Ltd (by way of acceptance) on 26 July 1989. On the same date, Mr Veitch faxed to Mr Hayes at Ayers Finniss a draft letter directed to Mr Farrell. The draft letter confirmed Collinsville Stud's "interim acceptance of the broad terms of your letter". It foreshadowed a request that the final mix of loan funds be adjusted with details to be provided. In addition, it informed Mr Farrell that it would not be possible for the Bank to take a mortgage debenture over all the asset of Merino Management Limited. Thirdly, it asserted that the First Registered Stock Mortgages would need to be qualified to exclude both ewe and ram progeny of the embryo leasing projects, those progeny, it was asserted, belonging to various partnerships. There is no recorded response in the Bank's files to this information and no record of it having been dealt with by the Lending Credit Committee. The Bank has not produced to the Investigation a letter of instructions from the Bank to Baker O'Loughlin in relation to preparation of the security instruments nor has it produced any letter authorising Baker O'Loughlin to settle the advance. The inadequate documentation of the security phase of this transaction has thwarted the Investigation in its attempts to ascertain who acquiesced in the changes of security referred to in this Section.

A First Registered Stock Mortgage was to be obtained over the stock bearing "Collinsville" and "Glenroy" brands "on land owned by the Collinsville Stud Group". In place of this, the Bank obtained a First Registered Stock Mortgage over the stock owned by Collinsville Stud Pty Ltd. This change represented a dilution of the security being offered to the Bank. No approval was obtained to change the extent of security, which could be significantly affected since stock purchased in the name of any company, other than Collinsville Stud Pty Ltd, would not directly form part of the security. The Investigation has been unable to determine who, on the part of the Bank, acquiesced in the above change. Again, in terms of the Bank's procedures, a reduction in the strength of the proposed security should have been referred, prior to settlement, to the Lending Credit Committee.() The Bank has produced to the Investigation no resolution of that Committee dealing with any of the departures referred to in this paragraph and no document emanating from a competent lending authority authorising settlement on varied security.

The initial facility to Collinsville Stud approved in July 1989 included a $2.0M overdraft facility provided as additional working capital. Security was obtained to cover this facility. By July 1990, as I indicate below, the overdraft had increased to more than $7.0M. The excess over $2.0M was not secured. It was a policy of the Bank to ensure that all security documents be up upgraded and, if necessary, up-stamped whenever there is an increase in the borrower's liability. In this particular instance, upstamping may have been unnecessary. However, the Bank's Legal department should have been but was not requested to advise whether any upgrading was necessary. The Bank's Legal department was not advised of the additional borrowings until about 26 September 1990. This was a direct departure from the policies of the Bank.

Mr Farrell, as Account Manager, was responsible for the due implementation of the transaction in accordance with the decision of the Lending Credit Committee.() He shared this duty with Mr Wedd() who must also accept joint responsibility for the departures to which I have referred and for the lack of relevant documentation. I am of the opinion that these officers did not exercise proper care and diligence, in that they failed to ensure that the transaction was implemented consistently with the terms of the Bank's approval of the loan.

11.4.4 HINDSIGHT OVERVIEW

No Hindsight Overview was undertaken in relation to this loan because the Rural division in Retail and Business Banking did not adopt this procedure until May 1990.()

11.4.5 ADVANCE OF FUNDS

I am of the opinion that the decision on the part of the Bank officers to advance funds to Collinsville Stud was imprudent for the following reasons:

(a) The transaction was not implemented consistently with the terms of the loan approval in that a decision was made shortly before settlement by Mr Farrell to place the $2.0M overdraft facility in the name of Collinsville Stud Pty Ltd instead of in the name of Ambia Pty Ltd, as approved by the Lending Credit Committee. This decision was beyond his delegated lending authority and was never formally ratified by either the Lending Credit Committee or the Board Sub-Committee.

This change is reflected only in Mr Farrell's letter to the Directors of Collinsville Stud of 1 September 1989() and in a pro forma Application for Advance/Review signed by Mr Wedd and dated 25 August 1989 in which it is recorded that the $2.0M overdraft facility to be opened in the name Collinsville Stud Pty Ltd has been approved "as portion of $32.0M facilities approved for Ambia P/L by Board Sub-Committee on 20/7/89". The facility agreement executed between the Bank and Collinsville Stud was not amended to reflect this re-arrangement. The Investigation was informed that the change in the overdraft arrangements came about at the request of Collinsville Stud directors who wanted the overdraft to be in the name of Collinsville Stud Pty Ltd. They therefore requested Mr Wedd to create the trading account in the name of Collinsville Stud Pty Ltd.() Mr Farrell accepted responsibility for this change in the arrangements and for the absence of documents.()

I am satisfied that this departure was made for good reason, after consultation with the Bank's solicitors, and that it did not involve any immediate prejudice to the Bank and, for that reason, did not need to be referred back to the Lending Credit Committee.() However, whilst the change in arrangements itself did not involve any prejudice to the Bank, it did involve a difficulty with securities at a later stage when the overdraft increased beyond its approved limit, as I shall show.

(b) Monies were advanced whilst conditions of the loan approval were unsatisfied. The letter of offer from the Bank to Mr Garnett required, amongst other things, the following items as security:

(i) Keyman Insurance;

(ii) Insurance over all assets used as security, including livestock;

(iii) First Registered Mortgage Debenture over the assets of Ambia Pty Ltd and Merino Management Limited;

(iv) First Registered Mortgage over the land owned by Collinsville Stud and Merino Management Pty Ltd; and

(v) First Registered Stock Mortgage over all stocks carrying Collinsville Stud and Glenroy brands on land owned by the Collinsville Stud Group.

The letter of offer required that all the items requested as security be obtained prior to settlement of funds. At settlement on 31 August 1989, however, not all security and documentation matters outlined in the letter of offer had been finalised.

First, variations occurred between the security required by the letter of offer and the security which was actually obtained, without the necessary approval. Details of this are set out in Section 11.4.3 of this Chapter.

Secondly, the following items were outstanding when the funds were advanced:

(i) Keyman Insurance; and

(ii) Insurance over livestock.

Obtaining Keyman Insurance was a specific requirement of the Lending Credit Committee, no doubt on the basis that Collinsville Stud operations were directly dependent on the skills and expertise of Mr Garnett. The insurance was not obtained, however, until 11 January 1990, almost five months after the date of settlement. This was a direct departure from the Bank's procedures and could have materially and adversely affected the value of the Bank's security and the ability of the Bank to realise its security promptly() had Mr Garnett died or been disabled prior to the Keyman Insurance being obtained.

As I have indicated, the Lending Credit Committee merely resolved that Keyman Insurance be effected "in an appropriate amount". The Investigation was informed that the discussion at the Lending Credit Committee was in terms that the sum insured should be in the range of $1.0M or $2.0M.() I am satisfied that it was the responsibility of Mr Ottaway and Mr Farrell to fix the appropriate amount. The amount was not fixed prior to settlement. Neither Mr Ottaway nor Mr Farrell could recall authorising completion of the advance in the absence of the Keyman Insurance. Again, this is a matter which should have been referred back to the Lending Credit Committee. A condition imposed by the Lending Credit Committee could be dispensed with only by a resolution of the Committee.() There is no contemporary documentation in the Bank's files indicating who authorised settlement in the absence of the insurance and for what reasons.

The Bank produced to the Investigation a review by its Lending Examiner of the settlement of the Collinsville Stud loan. The review by the Lending Examiner would appear to have been carried out on 9 January 1990. The Examiner drew attention to the fact that the Bank was not holding "insurance on all major improvements and debenture items" and that the Keyman Insurance had not been obtained.()

The absence of documentation on this topic is most irregular() and most unsatisfactory. The Investigation was informed that some delay occurred in implementing the Keyman Insurance because of Mr Garnett's absence from Australia from time to time in the second half of 1989 and on account of some difficulty in arranging medical examinations and insurance on the most favourable terms. The Investigation was further informed that Bank officers believed that a cover note had been procured in favour of the Bank.() No such cover note has been produced to the Investigation by the Bank. In addition, as of 4 January 1990, the Bank had not received any evidence that the borrower had effected insurance over structural improvements.() Again, the Investigation has not been able to ascertain who, on the part of the Bank, authorised settlement in the absence of proper insurance. Mr Hutchinson denied dispensing with these two conditions.()

The insurance over the livestock was not obtained before the Bank appointed its Receivers and Managers. On 19 July 1989, Mr Powell, on behalf of Collinsville Stud, informed Mr Hutchinson by fax of the insurance arrangements of the Collinsville Stud Group. The insurance related to improvements, semen straws, office equipment, fleet motor vehicle and public liability. The letter concluded that "it has not been our policy to insure livestock, except where in transit or owned jointly with third parties".() The Bank was therefore on notice prior to the advance of funds and indeed prior to the meeting of the Board Sub-Committee on 20 July 1989 that part of the Bank's proposed security was uninsured and would remain uninsured unless the Bank took positive steps.

Mr Farrell was principally responsible for initiation and settlement of the Collinsville Stud transaction. I am of the opinion, that he failed to comply with the Bank's policies and procedures in that he should have ensured, but failed to ensure, before the Bank's funds were advanced, that all the items required as security had been obtained and all conditions of the loan approval satisfied. The Bank's policies required that all assets taken as security that were in danger of loss were to be insured and an appropriate cover note or policy held prior to settlement. This policy was not adhered to in the case of Collinsville Stud.

I do accept that the principal risks in relation to which livestock insurance was prudent were the risks of theft and of death or injury by fire or disease. These risks were reduced in the case of Collinsville Stud livestock for the reason that stock was held on a number of properties, and not in a single location. Nevertheless, there were good grounds for insuring, at the very least, the premier merino rams held by Collinsville Stud. Mr Wedd and Mr Hutchinson have informed the Investigation that they acted on the view that livestock insurance was not required and had been dispensed with by the Lending Credit Committee.() That recollection is at odds with the terms of the Bank's Letter of Offer of facilities. In addition, there is no record of the Lending Credit Committee having formally resolved to dispense with livestock insurance, either on 20 July 1989 or subsequently. Nevertheless, I have formed a favourable view of the credit of Mr Wedd and Mr Hutchinson and I accept their assertion. It is, however, regrettable, that the lending proposal of 18 July 1989 did not explicitly address the question of livestock insurance and that the minutes and formal resolution of the Lending Credit Committee did not explicitly deal with the topic, given that, on the evidence of Mr Wedd and Mr Hutchinson, a lending policy of the Bank was to be departed from. I add that no material loss has been sustained by the Bank by virtue of this departure.

(c) At draw down, funds were disbursed contrary to the terms of the approval. Approval was obtained to provide Collinsville Stud with $32.0M to be utilised as follows:

(i) $30.0M to discharge the Elders Rural Finance debt; and

(ii) $2.0M as working capital.

On settlement, however, the funds were paid as follows:

(i) $31.68M to Elders Rural Finance (more particularly, $30.812M to Elders Rural Finance and $0.88M to Elders Trustee and Executor Co, whose role is not disclosed by the papers);

(ii) $0.043M for legal fees of the solicitors for the Bank (Baker O'Loughlin) and of Finlaysons (acting for Elders Rural Finance); and

(iii) $0.277M to Collinsville Stud.

No direction of the borrower as to this apportionment of funds was found on the Bank's file. However, the Bank's solicitors did procure and retain a direction in writing from the borrower as to the disbursement of the loan proceeds.() The apportionment was not in accordance with the approved submission. It was not ratified by the Lending Credit Committee or the Board Sub-Committee. No explanation for the change (including the indebtedness to Elders Trustee) was found on the Bank's file. The fact that a higher amount was payable to Elders Rural Finance indicated possibly an obvious understatement of Collinsville Stud's indebtedness to that company or a recent default in making an interest payment. It should have caused Bank officers to make an inquiry as to what had occasioned the increase in the debt.() No inquiry is recorded. The apportionment at settlement directly reduced the amount available for working capital. A reasonable and prudent banker would have recognised that this would put an immediate strain on day to day operations and would create a situation where the overdraft limit was likely to be exceeded. A prudent banker would, at the least, have made appropriate inquiries prior to allowing draw down of the facility. Mr Hutchinson informed the Investigation that he was not involved in settlement of the transaction but that if he had been he would not have been put on inquiry by the increase in the debt payable to Elders Rural Finance, given that Elders Rural Finance had provided a full cheque account facility to Collinsville Stud and given the delay in the settlement of the transaction() and the irregular nature of payments and receipts of primary producers.() Nevertheless, given the small amount remaining for payment to Collinsville Stud, I am of the opinion that, in authorising settlement, Mr Farrell and Mr Wedd did not exercise proper care and diligence. Inquiries should have been made by Bank officers of Collinsville Stud as to the increase in monies payable to Elders Rural Finance. Such inquiries may well have disclosed that, since approximately March 1989, Collinsville Stud had been operating outside the terms of the facilities provided by Elders Rural Finance. That may have led the Bank to re-assess its security position.

Mr Wedd, in conjunction with Mr Farrell, was charged with the due implementation of settlement.

Those officers failed to discharge their duties to the Bank in that:

(a) they failed to ensure that Keyman Insurance was effected;

(b) they failed to ensure that an enforceable obligation to inject equity was imposed on the borrower;

(c) they failed to make inquiry as to the reason for the increased payment to Elders Rural Finance at settlement; and

(d) they failed to ensure that appropriate documentation was created and placed on the Bank's files.

11.4.6 MANAGEMENT OF FACILITY

The Investigation has been informed that Retail and Business Banking was, in 1989 and 1990, structured in such a way that management of the Collinsville Stud facility was the joint responsibility of a number of Bank staff, including Mr Ottaway, Mr Farrell (until his resignation in November 1989), Mr Hutchinson and Mr Wedd. Mr Wedd ceased to have an active involvement with the transaction in June 1990 but resumed involvement in January 1991.() Mr Ottaway was made redundant in November 1990. In my opinion, the sharing of responsibility and day to day supervision of an account as complex as Collinsville Stud was not satisfactory. As a corporate entity, the Bank did not make available resources adequate to the management of the account. The sharing of responsibility and day to day supervision was a most unsatisfactory feature of management of the account. The lack of specific account management responsibility was a reflection of the structure of Retail and Business Banking at the time. This feature of Retail and Business Banking was a reason, as I have said, why the loan should not have been approved for management in Business Banking.

Mr Wedd gave the Investigation the following information as to the allocation of management responsibility:

"At the time of settlement until approximately March 1990 accounts managed by the Rural Unit were all listed on a single report without specific account manager identification. At that time the Unit comprised a Manager (Darriel Hutchinson) and two Rural Lending Managers. Mr Wedd was one of the rural lending managers.

During this period Mr Wedd assisted with the account management of the Collinsville Group, but it was only for four weeks from September to October 1990 while Mr Hutchinson was on leave that Mr Wedd assumed sole account management responsibility.

From March 1991 accounts under Unit management were assigned to separate portfolios. The Collinsville Group was included in the account set under the management of Mr Hutchinson. Mr Wedd continued to provide clerical support and to be involved in some meetings with the client.

Upon Mr Hutchinson being transferred to another Section of the Bank in January 1991, account management of the Collinsville Group was transferred into Mr Wedd's portfolio." ()

Shortly after January 1991, the responsibility for account management decisions was vested in a different division of the Bank, with Mr Wedd, once again, providing support.

Mr Hutchinson's submission as to allocation of responsibility was the following:

"At the time of settlement of the Collinsville facility in July 1989, Mr Hutchinson's position in State Bank was District Rural & Commercial Manager. Mr Hutchinson was assisted by two Rural Lending Managers, one of whom was Mike Wedd. There was no specific Account Manager and all facilities were managed on a team basis.

On 30 April 1990, a new extended Rural Unit was formed and this operated separately from Business Banking. The Rural Unit was headed by Senior Manager, Pieter Boschma. ...

At this stage, those rural connections managed from the new Rural Unit were allocated to various people with the Collinsville Group coming under Mr Hutchinson's management.

Mike Wedd took over management of the Collinsville Group only during Mr Hutchinson's absence on annual leave from 24 September 1990 to 22 October 1990 but did assist regularly on a needs basis as there were many occasions where Mr Hutchinson was away in the rural areas for days at a time and decisions needed to be made by higher levels. Conversely, there were accounts managed by other members of the team which came under Mr Hutchinson's control when other bank officers were absent in the country."()

In mid-December 1990, Mr Hutchinson was appointed to the position of District Manager, South East and Western Victoria, based out of Adelaide. From that time he assumed dual responsibilities, as Mr Hutchinson readied himself for transfer to his new duties.

In addition, during the period from September to January 1991, many discussions were held with Mr Hutchinson's superior Pieter Boschma on the Collinsville Group facilities and how they should be handled. None of these conversations were documented.

On 1 February 1991 Mr Hutchinson was transferred to his new duties.

I am of the opinion that the management of the loan was deficient in the following respects:

The Equity Injection:

(a) The quasi equity contemplated by the Ayers Finniss Information Memorandum was not procured. The Bank's Letter of Offer() contemplated repayment of the $8.0M bridging loan by the end of November. There is no record in writing of an enquiry by the Bank of Collinsville Stud or of Ayers Finniss on this topic until 15 November 1989.() However, the Investigation was informed that some three or four meetings occurred between Bank staff and officers of Ayers Finniss in the period from settlement to the end of November. Only one of those meetings has been recorded by the Bank.()

(b) After 20 July 1989, the Collinsville Stud Board decided to depart from the spirit of the original proposal to the Bank. In particular, the Board decided first, that equity was preferred to a mezzanine debt arrangement because it would reduce cash flow requirements and would result in a permanent injection of non-debt capital. Secondly, the Board decided to seek $15.0M rather than the $8.0-10.0M which had been previously contemplated.() Attempts to raise equity in this varied form failed. On 24 November 1989, Bank staff were told that the equity raising endeavour had failed. Ayers Finniss then put a varied proposal to the Bank.()

(c) In consequence, on 5 December 1989, Mr Hutchinson and Mr Ottaway submitted a proposal to the Lending Credit Committee and the Board Sub-Committee for approval of a restructure of the Collinsville Stud facilities.() The Lending Credit Committee approved the proposal. The substance of the proposal was that the mooted $8.0M injection of equity be replaced by a guarantee to be given by the Bank itself in support of a convertible note issue to raise $15.0M with a coupon rate of 8 per cent over 5 years. The proposal again relied upon projected figures as to income and expenses and not on actual figures. The proposal contemplated that the Bank's exposure was to remain at $32.0M. It noted that the Bank's guarantee could be called up only at the end of its 5 year term or upon liquidation. No contingency plan to deal with the state of affairs which would exist if the note issue failed appeared in the proposal.

(d) The proposal by Mr Hutchinson and Mr Ottaway was approved at a Board Sub-Committee meeting held on 7 December 1989 comprising Mr Simmons, Mr Clark and Mr Matthews.() It was confirmed by the Board on 21 December 1989.()

(e) It is difficult to understand why this proposal was put to and favoured by the Lending Credit Committee. If the proposal had been implemented, as the Bank had resolved, it would have locked in the Bank's exposure at $32.0M. It was based on profit figures showing losses for each of the three trading years ending 30 June 1989. For the rest, it was based on projection only. It did nothing to reduce the borrowers' interest commitment in the short term and it could have put the Bank in the position of a secondary obligor of a business whose current profitability was at best, as the Bank knew, merely marginal.()

(f) The Lending Credit Committee had, as I have said, considered and approved this guarantee proposal on 5 December 1989, subject to further details of the Convertible Note Issue and the impact of the guarantee being provided to the satisfaction of the Chairman of the Lending Credit Committee (Mr Matthews) and the General Manager, Personal and Business Banking (Mr Ottaway).() The restructure proposal to the Lending Credit Committee was prepared, recommended and signed by Mr Wedd, Mr Hutchinson and Mr Starr. A discussion paper attached to the submission to the Lending Credit Committee (which probably emanated from Ayers Finniss but which is not referred to in the text of the restructure proposal) noted a decline in the wool industry in general. The discussion paper was not attached to the proposal submitted to the Board for its approval, nor was its substance set out in the minute to the Board.() In addition, I am not satisfied that the discussion paper was attached to the papers forwarded to the Board Sub-Committee.

The discussion paper noted that Ayers Finniss and representatives of Day Cutten Ltd had approached a number of interstate institutions which had expressed a lack of interest in an investment in Collinsville Stud on the following grounds:

(i) there was a perception amongst institutional investors, mainly due to poor press coverage, that the wool industry may be in for difficult times in the next 12 months or so;

(ii) the investment was to be a minority interest in a non-listed company;

(iii) agriculture investments were preferred to be made directly by many of the institutions; and

(iv) Collinsville Stud profit projections for 1990 showed considerable growth on those of 1989 and therefore some doubt as to achievability was expressed.

The discussion paper also indicated that the attaining of equity, even with an overseas investor, was likely to be a long process and unlikely to be successful in the short term. Despite this, the December proposal to the Lending Credit Committee generally contained the same information as was set out in the original lending proposal of July 1989(). The only substantial difference was that the December lending proposal recorded scepticism as to the Collinsville Stud profit projections for 1990 and following years, that scepticism having been expressed by institutions approached to take up equity in Collinsville Stud. In addition, the supporting papers showed a profit healthier than those set out in the July submission. No working papers in the possession of the Bank justified that healthier profit.

While the Bank would earn a fee for provision of the guarantee, it is difficult to perceive in this rearrangement any real and immediate benefit to the Bank commensurate with the risk it undertook.

When the affairs of the Collinsville Stud Group were before the Lending Credit Committee at meeting 91/89 on 5 December 1989, that Committee seems to have been aware that the Keyman Insurance for which it had stipulated on 20 July 1989 had not been taken out: the minutes for the meeting record that "it was agreed that Keyman Insurance was necessary as detailed in the proposal and that other issues contained in the decision were appropriate".

That meeting of 5 December 1989 nevertheless approved, as I have said, the proposal to issue a $15.0M guarantee to support a Convertible Note Issue subject to further details on the notes issue and the impact of the guarantee being provided to the satisfaction of the Chairman of the Lending Credit Committee and the General Manager, Personal and Business Banking. (Details were supplied by Ayers Finniss on 13 December 1989 and noted and approved by Mr Matthews and Mr Ottaway on the same day). Both officers were also to be satisfied that provision had been made for independent advice to be available to those taking up Ambia Pty Ltd's convertible notes if required. Members of the Committee declared themselves satisfied at the December meeting that the future projections attached to Mr Wedd's proposal adequately demonstrated the serviceability of the debt.

The minutes of this meeting do not record that proper regard was paid to the interests of the Bank. The Lending Credit Committee approved the forwarding of the proposal to the Board. As appears below, the guarantee proposal, whilst approved by the Board, was not implemented. The proposal was very favourable to the borrower. No consideration was given to seeking top-up security from the borrower in the form of additional guarantees.()

By the beginning of December 1989, it was clear to Mr Hutchinson at least that this particular transaction was troublesome to the Bank.() As of the beginning of December, the Bank had a potentially non-performing loan on its books. Nevertheless, the Bank did not expressly contemplate contractual arrangements actually obliging Collinsville Stud to seek capital in the form of Convertible Notes nor did the December lending proposal embody a contingency plan against the possibility of the Convertible Note Issue being a failure. The proposal did not remind either the Lending Credit Committee or the Board Sub-Committee and the subsequent proposal to the Board did not advise the Board that, without equity, Collinsville Stud was not a viable trading operation. No updated financial information was obtained from the borrower, for example, its actual trading performance to 30 June 1989. The December lending proposal was based largely on figures from the initial Ayers Finniss Memorandum.

(g) It is not clear that the Board Sub-Committee was told of the content of the Ayers Finniss discussion paper produced to the Bank in November, and in particular that the equity raising was (in the opinion of Ayers Finniss) unlikely to be successful in the short term.()

I am satisfied that the approval of the Board Sub-Committee to this proposal was procured by an inaccurate and misleading proposal. The proposal() to the Board Sub-Committee did not disclose:

(i) the fact that Collinsville Stud had exceeded its overdraft limit in September 1989;

(ii) that Collinsville Stud could not service the existing level of debt out of cash flow;

(iii) that Ayers Finniss had not been able to obtain the $8.0M quasi equity referred to in the original lending proposal; and

(iv) recent developments in the wool industry.() In particular, the proposal (page 5) relied upon an outdated report from Mr Krause, which the authors of the proposal knew to be outdated.() I am satisfied that both the Lending Credit Committee and the Board Sub-Committee were entitled to assume that information put before it as emanating from Mr Krause was current information.()

Again, the Bank did not seek from Ayers Finniss any guarantee or commitment or form of underwriting for the Convertible Note Issue. As a consequence, the Bank had no assurance that its level of exposure would in fact be reduced to a level which the borrower could service.

In addition, at page 4 of the proposal to the Lending Credit Committee and Board Sub-Committee, there appeared a summary of profit and loss for the years ending 1987-1994 inclusive. The figures set out in relation to 1989 as to income and operating profit and/or operating loss were in fact projected only as, of course, were the figures for subsequent years. Despite that the proposal was prepared some five months after the close of the 1989 financial year, the Bank did not insist on production of actual profit and loss information for the purpose of preparing this proposal. In my opinion, that was unsatisfactory. The minutes of the Lending Credit Committee do not disclose that it was informed that Ayers Finniss had failed in its search for equity.

(h) The Bank's papers as produced to the Investigation, indicate that insufficient attention was paid to the contemplated equity injection not only in the months after the loan was drawn down but also in the period after 4 January 1990, after the account became irregular. The Bank's officers were content to accept vague assurances (generally oral) from officers of the borrowing companies, as to potential investors, and, did not insist on the production of express direct evidence of proposals from equity participants, until it was quite clear that the borrowing companies were insolvent and accordingly most unlikely to attract an equity injection. Nor did the Bank directly involve itself, until December 1990, in the contemplated equity raising or create an appropriate contractual mechanism under which it could directly monitor progress in the equity raising.() This was one manifestation of the Bank's indecision and of the inexperience of its officers.

Early in February 1990, doubt and indecision gripped the Bank. Bank officers were unsure as to the appropriate course to take with a view to extricating the Bank from its difficulty. As of 4 January 1990, as I shall show, the loan was irregular. It remained irregular thereafter. The Bank knew that Collinsville Stud was unable to repay the loan. The Bank, knowing that the account was problematic, acted as if it were powerless and without remedy. There was no discussion at Lending Credit Committee level at its meeting of 30 January 1990 (when the Committee was considering an application for an increase in the level of the facility, to which meeting I refer in greater detail in Appendix B of this part of this Report) of seeking additional guarantees or top up security, of a contingency plan should the Convertible Note Issue referred to below fail, of the imposition of deadlines on the borrower as to equity raising or sale of assets, of the direct involvement in the Bank in the equity raising and its marketing, or of the creation of a contractual mechanism to enable the Bank to monitor the activities of Collinsville Stud and of Ayers Finniss in the direction of equity raising. Each of these matters should have been discussed at Lending Credit Committee level on 30 January 1990 but were not.()

From February until mid June 1990, Mr Ottaway was not giving adequate direction to his subordinates. Throughout this period, management of the account was indecisive and ineffectual. In September 1990, Collinsville Stud retained Prudential Bache to sell Collinsville Stud. It appears from the Bank's file that a copy of an Information Memorandum prepared by Prudential Bache was forwarded to the Bank early in November.() However, the Bank had no contact with Prudential Bache direct until Mr Masters flew to Melbourne in December 1990.() Until that time, the Bank was receiving information from Collinsville Stud representatives, rather than from Prudential Bache, as to progress in the marketing of Collinsville Stud. When the Group Manager, Credit Recovery, became involved in supervising the Collinsville Stud account, the need for the Bank to intervene directly in selling efforts was immediately recognised.()

Irregularities in Account Management

(a) The overdraft first became irregular on 3 January 1990 when cheques presented overdrew the borrower's working account by a sum $0.426M in excess of the approved limit of $2.0M. Further cheques presented on 8 January took the excess to $0.8M. These cheques were honoured by Mr Wedd. In honouring the cheques, Mr Wedd acted outside his Delegated Lending Authority. However, he did so in very difficult circumstances where, for the reason that his immediate supervisors were on annual leave, necessary authorities could not be obtained.() I do not criticise Mr Wedd for honouring the cheques. For the purpose, among other things, of regularising Mr Wedd's conduct, a submission was prepared by Mr Richter, Trainee Commercial Lending Analyst, supported and recommended by Mr Hutchinson, Mr Wedd and Mr Pfeiffer, for presentation to the Lending Credit Committee on 30 January 1990, for an increase in the facility to $34.708M.()

The Lending Credit Committee were aware by virtue of this and previous proposals that:

(i) the borrower needed equity funding to enable it to carry the Bank's debt;

(ii) the overdraft limit had already been exceeded; and

(iii) cash flow budgets provided by Collinsville Stud for the period to June 1990 showed an increasing cash shortfall for at least the next four months.

(b) On 7 December 1989, the same Board Sub-Committee as that referred to in Sub-Section (d) on Page 11-* had approved a new facility of $0.26M (as recommended by the Lending Credit Committee at its meeting number 88/89 on 21 November 1989) to enable the purchase of Collinsville Stud Ram "Goliath 20", by Collinsville Stud Pty Limited and one Andries Dutt T Pienaar, each of those to have a 50 per cent interest in the Stud Ram. The applicant for finance was Collinsville Stud Pty Limited. The loan was to be secured only by way of guarantee from the Directors of Ambia Pty Ltd.()

On the same day, the same Board Sub-Committee approved a new facility of $0.3M applied for by Collinsville Stud Pty Limited to enable the purchase of the Collinsville Stud Ram "JC & SS3", by Collinsville Stud Pty Limited and a third party (Mr Nitschke), each of those to have a 50 per cent interest in the Stud Ram. The loan was to be unsecured "however, substantial security is held for contingent advances made to companies controlled by both parties involved" (page 2 of the proposal to the Board Sub-Committee).()

The effects of these transactions were, first that a strain was placed on Collinsville Stud's cash flow and secondly that the Bank was simply financing the acquisition with its money, by an existing borrower, of livestock already secured to the Bank pursuant to the existing securities and was simply providing money to enable the dilution of its existing security.() The Board Sub-Committee did not direct its attention to this aspect of the transaction.() The Lending Credit Committee and Board Sub-Committee were motivated by a desire to get in business or enhance customer relations. Mr Nitschke was, of course, an existing Bank customer and Mr Dutt Pienaar was a South African. It is difficult to perceive in these transactions any benefit to the Bank.() Of further concern in relation to these funding arrangements was that, at least in the case of the Dutt Pienaar joint venture, the funding arrangement for the joint venture may have been arranged before the auction. The result of that may have been that bidding was not in fact on the terms held out to the marketplace. The arrangements may have created an uninformed market and may have distorted the public perception of the values of Collinsville Stud rams.()

(c) The Lending Credit Committee meeting of 30 January 1990 was informed that income was below budget projections and that expenses were greater than those projected. The Lending Credit Committee resolved that information be sought from Ayers Finniss as to progress in procuring equity and the likely date of introduction of it. The Committee further resolved that a meeting be convened between Mr Garnett and representatives of the Bank within the next few days. Members of the Committee agreed that the overdraft must be strictly controlled by the Bank in the interim in line with budget projections. (It was this proposition which generated great uncertainty, to which I shall refer.) The minutes of the meeting of the Committee() further record that "Committee recognised when the funding was first approved that the introduction of equity was necessary for the transaction to be bankable, and that because of the delay in obtaining equity participation, interest costs have had a severe impact on the ability of the company to trade profitably."

(d) The proposal before the Lending Credit Committee in January 1990() referred to a cash flow budget (Annexure B) and included (page 4) a summary of income for the period January 1990 to June 1990. The proposal noted that those figures were considered a little optimistic. Again, it was noted that reduction of the required excess in overdraft levels was dependent upon the successful sale of 40 recipient ewe lease units at $0.1M per unit. There was no proposal that the Bank take steps (by assignment, charge or otherwise) to ensure its immediate receipt of those monies on sales being effected. The sales were part of the tax minimisation scheme commented upon in the original Ayers Finniss Memorandum. The proposal also noted (page 6) that endeavours to place convertible notes on the market had failed and had been abandoned. Thus, the guarantee mooted in the December 1989 papers was not proceeded with. The proposal to the Lending Credit Committee referred to the projections of the Bank's rural economist as appended to the original Ayers Finniss Memorandum. No updating was sought of that outlook.

The same information on the wool industry as had appeared in the proposal of July 1989 was, in substance, recycled (page 6). Again, merely projected income figures for the year ending 30 June 1989 were set forth.()

(e) The Lending Credit Committee on 30 January 1990 deferred its decision on the proposal (to which I have referred in Sub-Section (a) on page 11-*) for an increase in the facility to $34.708M.() The effect of the decision to defer was unclear. There were three interpretations open. The first was that the application had been rejected, that the account was therefore irregular and that cheques drawn in excess of the approved limit should be dishonoured. The second was that there was simply a deferral of consideration of the proposal and that the Lending Credit Committee had impliedly directed a further submission to it within a reasonable time. The third interpretation was that, by implication, the Committee resolved to allow additional funding on a come and go basis to the extent of the Collinsville Stud cash flow budget shortfall. I shall deal below with the third of these interpretations. Irrespective of any ambiguity in its decision, it was clearly the expectation of the Committee that the account would be the subject of a further submission to it within a reasonable time. It did not direct that a further submission be made or that it be made within a specific time. The Committee did not have an account monitoring role.() I am satisfied that it was not the obligation of the Committee to direct a further submission within a specific period or to take an active role in relation to the account. It could not form a view, without a specific reasoned position paper, as to what should be done in relation to Collinsville Stud. It could not sensibly have rejected the submission outright and have required the Account Manager to commence dishonouring cheques without information as to the adverse consequences of doing so.() Equally, it could not prudently have accepted the submission, lacking as it did hard information as to the borrower's prospects.

(f) The vice of the decision of the Lending Credit Committee, however, was its ambiguity. The formal decision of the Committee was recorded simply as a deferral of the proposal.() However, in the concluding paragraph of the minutes of the meeting(), it is recorded:

"Members agreed that the overdraft must be strictly controlled by the Bank in line with budget projections in the interim."

Mr Wedd and Mr Hutchinson were present at the meeting on 30 January 1990. In the ordinary course, they would not have received the minutes of the Committee meeting. Rather, they would simply have received the formal notification of the decision that the proposal be deferred.() Mr Wedd and Mr Hutchinson have informed the Investigation that they took the view that they interpreted the resolution of the Lending Credit Committee, as expressed at the meeting, as authority to them to permit the overdraft to fluctuate in line with the cash flow budgets appended as Annexure B1 to the proposal to the Committee. Subsequently, Mr Wedd and Mr Hutchinson acted in accordance with that view. By contrast, certain members of the Lending Credit Committee informed the Investigation that they were of the view that the deferral of a decision on the proposal implied its rejection and that the decision conferred no authority on any officer of the Bank to permit the account to increase above $32.0M.()

(g) The deferral of a decision by Lending Credit Committee had the consequence that the overdraft could fluctuate in line with the cash flow budgets submitted by Collinsville Stud. The Committee did not, as it should have, expressly direct that the borrower's budget be scrutinised and pruned by the Bank. Nevertheless, I am satisfied that Mr Ottaway should have interpreted the views of the Committee as implicitly requiring that the Bank impose a tight discipline on Collinsville Stud's expenditure.() The level of expenses remained in the control of the borrower. This required Bank officers to monitor the forecast cash flow budget against actual receipts and payments.

As the overdraft was already significantly over the approved limit, on 15 March 1990, Mr Paddison, General Manager Australian Banking, authorised Mr Hutchinson to permit Collinsville Stud to continue to trade in line with cash flow budgets until a full submission could be made to the Lending Credit Committee. The overdraft was at this point over the approved limit by approximately $2.0M. This exceeded the delegated lending authorities of both Mr Paddison and Mr Hutchinson. This decision was not referred back to the Lending Credit Committee for approval. Mr Paddison, in this matter, acted outside his delegated lending authority. He failed to follow the Bank's procedure for authorisation of increases in facilities. However, he, along with Mr Hutchinson, had interpreted the decision of the Lending Credit Committee as implying that the facility could be permitted to rise to the levels shown in Annexure B1 to the submission and as not requiring that cheques presented in excess of the approved level be dishonoured.() This interpretation was, in the context, quite reasonable.()

The direction and authority given on 15 March 1990 to Mr Hutchinson by Mr Paddison contemplated an additional submission to the Lending Credit Committee. Strictly speaking, such a submission should have been lodged by those managing the account in February 1990.() As I have said, the submission was not in fact prepared until 2 August 1990.

Another consequence of the deferral by the Lending Credit Committee of the application for increase in the overdraft limit was the ultimate granting of a $7.0M Commercial Bill in favour of Collinsville Stud Pty Limited, which bill was unsecured. Subsequent to the deferral by the Lending Credit Committee of its decision, interest and expenditure increased the overdraft account from $2.7M as of 1 January 1990 to $7.0M by 1 August 1990. Interest accounted for some $3.5M of this increase. A Commercial Bill was then raised in the name of Collinsville Stud Pty Ltd on 1 August 1990 to replace the overdraft.()

Notwithstanding the known increases in the Bank's exposure in relation to the overdraft, no information was given to or inquiry made of the Legal department of the need to review the security for the loan to Collinsville Stud Pty Ltd or to ensure that the documents were appropriately stamped. This was a breach of the Bank's policies and procedures. It indicates the unsatisfactory features of joint management of a complex account such as Collinsville Stud and the imprudence of committing it to Retail and Business Banking.

(h) Given the Committee's decision, it fell to Mr Ottaway and the account managers to bring forward, within a reasonable time, which in my opinion would be one month, a further submission to the Committee.() As it turned out, no such submission was produced until 2 August 1990.() By failing to ensure that the account was the subject of a further submission to the Committee well before the end of June 1990, Mr Ottaway failed to discharge his duties with that degree of skill and competence which would reasonably be expected from a person occupying his position. Mr Ottaway was aware in January 1990 that the wool industry was in decline and that the proposal for equity funding had, by that stage, been abandoned by Collinsville Stud. Part of the sub-stratum on which the loan was made had thus collapsed. The Bank's exposure was 25 per cent in excess of the figure which, in July 1989, was contemplated for January 1990. The position was one requiring immediate and decisive action. The indecision and inactivity of the Bank's officers is inexplicable.

According to Mr Ottaway, the result of the decision of Lending Credit Committee was something that had never occurred in the Bank before in his experience. An account was running and was being managed without any formal sanction. Mr Ottaway was aware that the Lending Credit Committee would not approve the increase in funding needed to regularise the account. He was apprehensive even in January 1990 that the Bank might make a significant loss on the loan.() Mr Ottaway was deterred from considering an immediate sale of Collinsville Stud because he apprehended that overt action by the Bank pursuant to its securities would immediately depreciate the value of the name of Collinsville Stud and would be counterproductive. However, he appears not to have given any consideration to the seeking of top-up security, such as additional guarantees, nor to the creation of a mechanism to involve the Bank directly in equity raising attempts by Collinsville Stud. He was unable to formulate a contingency plan should the Convertible Note Issue not go ahead or should Collinsville Stud be unable to sell part of Mr Garnett's equity.() He did not impose a sufficiently tight financial control over the borrower. In these respects, he did not adhere to the resolution of the Lending Credit Committee of 30 January 1990.

(i) Monitoring by Mr Hutchinson of the cash flow forecast against actual receipts and payments continued through February and March.() No evidence has been found on any of the Bank's files or produced to the Investigation by the Bank that monitoring of actual results occurred for April, May or June. Mr Hutchinson informed the Investigation that he had carried out this monitoring() and I accept his evidence notwithstanding the lack of documentation. In February, the budget blew out by $0.303M.() No pruning of the budget was carried out by the Bank in February or March. The excess in March was $0.241M.()

(j) On 23 July 1990, by letter to Mr Garnett(), Mr Paddison proposed a reduction on the margin for the Commercial Bill Acceptance from 1.25 per cent to 0.5 per cent and conversion of the $7.0M overdraft facility to a Commercial Bill Acceptance and remission of interest penalty charges. The proposal was subject to satisfactory agreement between the borrower and General Manager, Retail Banking, as to equity raising or sale of assets. The rate reductions were suggested to Mr Paddison by memorandum from Mr Ottaway.() Due to the problems experienced with the facility, it would have been prudent banking practice to have increased the interest rate to adjust for the increase in risk, even were the interest merely to have been capitalised if, in the assessment of the Bank, there was a prospect of recovering the interest. If there was no such prospect, then consideration should have been given in July 1990 to making a provision in relation to the loan. In the circumstances as explained to the Investigation,() the interest rate concession to the borrower should, have been followed by a recommendation for a provision by those managing the account.

(k) On 31 July 1990, a further meeting was held between representatives of the Bank, including Mr Ottaway, and Mr Veitch, on behalf of Collinsville Stud. At that meeting, Mr Ottaway reiterated that sale of Collinsville Stud must occur within 6 to 12 months. Mr Wedd and Mr Hutchinson were then directed by Mr Ottaway to formalise arrangements through the Lending Credit Committee. It was agreed that the overdraft would be transferred to Commercial Bill immediately.()

On 1 August 1990, Mr Ottaway accordingly authorised the conversion of $7.0M of the Collinsville Stud Pty Ltd overdraft into a Commercial Bill Acceptance in favour of Collinsville Stud Pty Ltd as foreshadowed in Mr Paddison's letter of 23 July 1990 and as agreed with Mr Veitch on 31 July 1990. The conversion was communicated to Collinsville Study on 2 August 1990.() The reason for conversion of the $7.0M of the overdraft into a Commercial Bill Acceptance was, as I have said, to give some interest rate relief to Collinsville Stud.() This decision was referred to the Lending Credit Committee for ratification and authorisation on 2 August 1990 (unsuccessfully) and on 16 August 1990, when an increase in facilities to $37.9M was approved.()

However, no information was given to the Legal department with a view to ensuring an upgrading of the relevant security. It should be noted that the security for the overdraft was a guarantee given by various parties, including Mr Garnett, Ambia Pty Ltd and six other companies in the Collinsville Stud Group. This guarantee secures only $2.0M and one year's interest on the overdraft, together with costs and fees. No security was held or taken in respect of the Commercial Bill Acceptance for $7.0M. The Collinsville Stud facility was limited to $32.0M. The Rural Banking Unit was aware of these problems by 11 September 1990 at the latest.

In authorising the grant of the Commercial Bill Acceptance referred to above without the authority of the Lending Credit Committee and in failing to ensure that security was taken for it, Mr Ottaway exceeded his delegated lending authority, acted in an imprudent manner, and did not exercise the ordinary degree of skill and competence which would reasonably be expected from a person occupying his position. In saying this, I am mindful that the grant of the facility did not in fact increase the amount of monies advanced by the Bank to Collinsville Stud and I am satisfied that Mr Ottaway relied, and reasonably relied, on subordinate officers to take the practical steps required to procure proper authorisation by the Lending Credit Committee of the variation in the facilities. Nevertheless, in my opinion, Mr Ottaway should not have authorised the rearrangement of facilities without having first obtained Lending Credit Committee authority.

On 2 August 1990, as directed by Mr Ottaway, Mr Wedd and Mr Hutchinson submitted a proposal to the Lending Credit Committee for increased facilities for Collinsville Stud.() They recommended that the Lending Credit Committee recommend to the Board Sub-Committee that the $7.0M increase in facilities to a total of $39.0M, hitherto irregular and unapproved, be ratified. The recommendation noted that Collinsville Stud was unable to meet interest from cash flow. It also noted the downturn in sales of embryo model packages. The proposal was expressed on the footing that the Bank would not suffer any loss if equity of $20.0M could be found within 12 months expiring on 30 June 1991. No additional security was suggested in relation to the proposed increase in facility levels. The proposal was rejected by the Committee for reasons including the reason that the Committee formed the view that account management were not adopting a realistic management approach and were not properly monitoring the account.() I adopt that view. The submission to the Committee did not adequately address the safety of the loan from the Bank's point of view.() While the proposal held out to the Committee the possibility of finding equity within 12 months, Mr Wedd and Mr Hutchinson were of the view that an equity placement was unlikely.() Indeed, Mr Ottaway expected the proposal to be rejected.() That being so, the proposal of 2 August 1990 was imbalanced and misleading.

(l) As I have said, there is no suggestion in the Bank's papers relating to the period from 1 July 1990 to October 1990, when concessions were being extended to the borrower, of seeking additional support by way of directors' guarantees or a guarantee from Mrs Garnett, in consideration of permitting the company to trade and to increase its indebtedness to the Bank. In failing to seek additional support for the debt, the Bank's officers acted imprudently. In my opinion, the Bank should, at the lending stage, at the point of approval of the restructure in December 1989, at the time of issue of the $7.0M Commercial Bill Acceptance, and at the time of extending the time within which its debt was to be reduced by sale of assets, as proposed in its letter of 21 June 1990, have sought co-directors' guarantee and a guarantee from Mrs Garnett, as a condition of the Bank's acceptance of proposals from Collinsville Stud.() The matter of additional guarantees was raised by the Bank's Group Manager, Credit Recovery, Mr Lockwood, on 13 December 1990.

For the reasons given above and on the basis of the findings which I have set out and the documents and other evidence to which I have referred, I am of the opinion:

(a) that Mr Ottaway, in permitting the account to remain irregular between 30 January 1990 and 16 August 1990, did not exercise proper care and diligence in the management of the Collinsville Stud account; and

(b) that Mr Ottaway, Mr Hutchinson and Mr Wedd did not exercise proper care and diligence in the management of the Collinsville Stud account in that they failed to consult with the Bank's Legal department on the need to arrange any or any adequate security for the Commercial Bill Acceptance granted to Collinsville Stud Pty Ltd on 1 August 1990.

Indecisive Management

(a) In the wake of the Lending Credit Committee decision of 30 January 1990, Mr Ottaway and others met with management of Collinsville Stud on 5 February 1990. There was a need on this occasion for a firm and decisive direction to be given to the borrower by Mr Ottaway. In particular, Mr Ottaway should have indicated to the borrower that the Bank expected that Mr Garnett would dispose either of assets of Collinsville Stud or of a majority of his equity in the business within a defined time. By contrast, he merely invited the management of Collinsville Stud to consider a sale of assets. At the same time, Mr Ottaway should have created an arrangement under which the Bank could directly (albeit covertly) implicate itself in a sell-down of assets; and Mr Ottaway should have created a mechanism under which the Bank, either through its officers or an independent investigating accountant, could have scrutinised the borrower's budget with a view to pruning expenses. In the case of a borrower such as Collinsville Stud, there is little a credit provider can do in relation to income of a borrower in difficult economic circumstances. However, its expenses can be controlled and should have been sought to be more strictly controlled by Mr Ottaway. As it turned out, it was not until virtually the end of 1990() that Bank officers took control of cash outflows, as a result of a direction from Mr Masters on 19 December 1990(), after Mr Ottaway ceased to be in charge of Collinsville Stud. A real and systematic attempt was then made by the Bank to prune back Collinsville Stud's expenses.

At the meeting on 5 February 1990, Mr Ottaway was told about the discussions then occurring between Collinsville Stud and a publicly listed company (to which I shall refer as ABC Ltd) with a view to a merger between those two companies. Mr Garnett informed Mr Ottaway that he was seeking merely to sell-down a minority interest in Collinsville Stud. The only record produced by the Bank to the Investigation of this meeting() does not disclose that Mr Ottaway gave any direction whatsoever to Collinsville Stud in relation to budgetary control. Nor do the Bank's files indicate what, if any, contact was made between Bank representatives and Ayers Finniss employees at this time, as requested by the Lending Credit Committee of 30 January 1990.

Any request made by Mr Ottaway of Collinsville Stud on 5 February 1990, that it rein in its expenses produced no results. In the forthcoming months, the budget continued to blow out. The meeting on 5 February 1990 was the occasion when decisive action may have mitigated the Bank's loss. Mr Ottaway did not, I am satisfied, in sufficiently forceful terms, require Collinsville Stud to reduce its budget or any items within the budget. Neither he, nor other Bank officers took sufficient steps to ensure that requests by the Bank for reductions in outlays were taken seriously. In the months between February 1990 and December 1990, the Bank was funding a salary of $0.24M to Mr Garnett (together with superannuation benefits), funding extensive overseas travel by him, funding the lease of four non-farm vehicles made available for use for company executives, funding the ownership and leasing of land which was surplus to the borrower's requirements, allowing directors' fees to be drawn, paying for the leasing of serviced offices in Adelaide and so forth. Mr Ottaway should have caused these outgoings to have been eliminated early in 1990. Instead, he failed to be sufficiently firm with the borrower, thus permitting the debt to increase unnecessarily.() Equally, Mr Ottaway considered it inappropriate to involve himself in meetings between ABC Ltd and Mr Garnett.() Mr Garnett had decided in February that no Australian investors should be approached by Ayers Finniss until July 1990.() Thus, the talks with ABC Ltd were the sole avenue open for injection of non-debt equity in the following months.

On 15 March 1990, a meeting was held between Mr Hamilton, Mr Paddison and Mr Hutchinson, at which the position of the Collinsville Stud loan was discussed. The meeting occurred in Mr Hamilton's office. It was an informal meeting, that is, it did not constitute a meeting of a particular committee of the Bank. It was arranged by Mr Ottaway and was preceded by a memorandum of 12 March 1990 from Mr Hutchinson to Mr Ottaway. That memorandum noted that the operating account of Collinsville Stud had been irregular since 28 December 1989, due largely to the fact that sales of rams were at about 25 per cent of projected levels. It noted that the prolonged interest commitment of Collinsville Stud was adversely impacting on the future viability of the group. The question to be determined at the meeting was whether Collinsville Stud should be allowed to continue to trade in line with the cash flow forecasts until a full submission could be prepared for the Lending Credit Committee. A major portion of the cash flow in the period to June 1990 was to be received from the embryo transfer package.

Unbeknown to other employees of the Bank and unbeknown to employees of Ayers Finniss, Mr Hamilton had been participating at the discussions between ABC Ltd and Mr Garnett. Mr Hamilton did not on 15 March 1990 or any later occasion disclose his involvement in those discussions with ABC Ltd or his discussions late in 1988 with other institutions approached by Mr Garnett for the purpose of raising equity.() Nor did Mr Hamilton disclose to an employee of the Bank or to an employee of Ayers Finniss a view which he formed late in 1989 that in order to raise equity, Mr Garnett would have to shed at least 50 per cent of his interest in Collinsville Stud.()

At the meeting on 15 March 1990, Mr Hamilton explained the leasing and transfer package and its tax advantages and stated that, based upon sales in the previous year, the budgeted income of $4.8M could be achieved. The topic of the ABC Ltd merger talks was raised by Mr Hutchinson in terms that they had some prospects of success. In the course of those negotiations, Mr Garnett was attempting to persuade ABC Ltd to take up a minority position in Collinsville Stud. Officers of the Bank apart from Mr Hamilton had the expectation, justified or not, that those negotiations had prospects of success. Mr Hamilton, by contrast, had formed the view late in 1989 that Mr Garnett had no practical prospect of marketing a mere minority interest in Collinsville Stud, whether to ABC Ltd or otherwise.() He must have been aware that the negotiations with ABC Ltd were going to flounder. He did not disclose that fact to Mr Hutchinson or to Mr Paddison at the March meeting.() It is a distinct possibility that, had Mr Paddison known in March that the ABC Ltd merger talks were going to fail, as they did in May, he may well have taken more decisive action in March and may have been able to mitigate the loss ultimately sustained by the Bank. The inference is open to be drawn that Mr Hutchinson's assessment that the ABC Ltd merger talks had prospects of success, an assessment not displaced by Mr Hamilton, had a direct bearing on the decision made by Mr Paddison to allow Collinsville Stud to continue to trade in line with the cash flow budget.

(b) On 31 May 1990, Mr Hutchinson and Mr Wedd met with Collinsville Stud principals. At the meeting, they were told() first that merger negotiations between the principals of Collinsville Stud and ABC Ltd had been terminated; that Ayers Finniss had been approached a second time to seek an equity injection into Collinsville Stud; and that the selling of leasing packages had been deferred. At the meeting, there was reference to "the present crisis in the wool industry".() A meeting was later arranged between Collinsville Stud principals and Mr Ottaway for 5 June 1990, to discuss further options. Apart from attending Collinsville Stud's field day on 22 March 1990, Mr Ottaway would appear not to have intervened in relation to account management in the period between 5 February 1990 and 5 June 1990.

It was clear in June 1990, both to the borrower and to the Bank, that it was going to prove impossible for Mr Garnett to sell a minority interest in the Collinsville Stud operation. The choice for the Bank was to direct either a sale of the majority interest or a sale of assets. Mr Ottaway's view at this stage was that the sale of the operation as a going concern was not a practical possibility because sale would have resulted in a heavy discount of values.()

(c) On 5 June 1990, Mr Ottaway, Mr Hutchinson and Mr Wedd met again with principals of Collinsville Stud. On that occasion, the Bank officers were informed by Mr Garnett that even he acknowledged that "no-one wants to put equity into a private company to a minority position". Wool industry problems were discussed. It was disclosed by Mr Garnett that embryo marketing had been adversely effected by bad publicity associated with the decline in the wool market. At the meeting, Mr Garnett suggested that the Bank take up an equity position of 70 per cent in Collinsville Stud. Mr Wedd's Diary Note of this meeting() discloses that Mr Ottaway informed Mr Garnett that Mr Hamilton as Chief of Subsidiaries within the Bank would be involved and that the Bank would consider the equity proposal "but will drive a hard bargain". There were then further discussions about Collinsville Stud's budget.

By his Diary Note dated 5 June 1990(), for the attention of Mr Paddison, Mr Hamilton and for noting by Mr Clark, among others, Mr Ottaway reported on the meeting held on 5 June.

Mr Ottaway had decided to involve Mr Hamilton in the decision-making process as early as March 1990.() The note asserted that it had become evident that the core cash flows of the business were insufficient to fund the existing burden of debt.() It summarised the position as follows():

"(i) We have a non-accrual debt of $38.0M.

(ii) We have no avenue for recovery from cash flow.

(iii) We cannot anticipate a third party minority equity participant and even then the cash flows may be insufficient for sustained ability to service at current interest rates.

(iv) On the face of it, we should serve demand and seek to have the directors arrange sale of the company on the assumption that an at worst realisation [sic] we will clear our position or effect sale as mortgagee in possession."

The Diary Note recommended against sale. It invited the Bank to consider converting debt to a 70 per cent interest in the company. It accepted Management's valuation of Collinsville Stud at $60.0M.

It was quite extraordinary that Mr Ottaway would consider a proposal under which Mr Garnett would retain 30 per cent equity in Collinsville Stud, given the impact which Collinsville Stud's diminished cash flow had on its value and marketability.()

The Diary Note continued() to observe that:

. the present position is not sustainable;

. the company has to have equity to survive;

. time is of the essence; and

. the matter must be dealt with urgently and decisively, with a view to a decision by the Bank's Board at its June meeting.

At about the time of the meeting on 5 June 1990, the Bank was provided by Collinsville Stud with a document described as a position paper in which Collinsville Stud offered a 70 per cent equity position in Collinsville Stud to the Bank in exchange for extinction of the indebtedness of the Collinsville Stud Group to the Bank.

(d) A strategy meeting was held between officers of the Bank and employees of Ayers Finniss on 15 June 1990.() It considered Mr Ottaway's Diary Note of 5 June 1990.() Mr Paddison directed at the conclusion of the meeting that Collinsville Stud be advised that they must find a buyer for the entire stud operation within two months and that, if definite progress had not been made by 21 August 1990, the Bank would commence legal action to recover loans outstanding.() Mr Paddison rejected the debt for equity proposal favoured by Mr Ottaway.

(e) At the strategy meeting on 15 June 1990, Mr Paddison decided that a sale of the assets of Collinsville Stud as a going concern should be directed.() That decision was reflected in a letter found on the Bank's file prepared for signature by Mr Ottaway.() The draft was probably prepared by Mr Paddison.() However, by letter of 21 June 1990 to Mr Garnett(), Mr Ottaway merely reported to Mr Garnett that the Bank was insisting on a sale by him of a majority interest in Collinsville Stud. The sale of such majority position was to be such that the debt of Collinsville Stud to the Bank was cleared or reduced to a figure no greater than $10.0M. A period of grace was extended to 21 August 1990. This letter did not reflect the decision of the strategy meeting or the direction given by Mr Paddison. In the meantime, there had been no further communication between Mr Paddison and Mr Ottaway. The letter of 21 June 1990 was handed to Mr Garnett by Mr Ottaway at a meeting on 21 June 1990, that meeting having been resolved upon at the strategy meeting of 15 June 1990.() Mr Paddison also met representatives of Collinsville Stud on 21 June 1990.()

(f) On 18 June 1990, Mr Boschma (Senior Manager, Rural Banking Unit) by memorandum to Mr Ottaway() sought reconsideration of the decision on 15 June 1990 and instead suggested that the Bank convert 50 per cent of its debt into equity in the form of convertible redeemable preference shares. This memorandum from Mr Boschma was a reflection of an attitude in the Bank that nothing should be done by the Bank which would tarnish its public image and impede its attempts to increase its business in the mid north of South Australia. Mr Ottaway was not influenced by Mr Boschma's memorandum but was certainly influenced by notions of the Bank's image.() He was also troubled (and reasonably troubled) by the possibility that, on it becoming known that the Bank was intending to force a sale of Collinsville Stud, its value would thereby depreciate substantially.() He favoured the proposition that the Bank take an equity position in Collinsville Stud as suggested by Mr Garnett. He continued to accept that the assets of Collinsville Stud were fairly valued at $60.0M. He did not seek external advice on the merits of Collinsville Stud selling off parcels of land which might have been surplus to its requirements. (The Bank has not produced a valuation of semen and livestock which might have justified the valuation of $60.0M to which I have referred.() The Dalgety's valuation was procured in February 1990() but not then made available to the Bank.() The Bank has not produced a more recent valuation.)

(g) Ultimately, the 21 August 1990 deadline set in Mr Ottaway's letter of 21 June 1990 was relaxed and extended on a number of occasions. Collinsville Stud retained Prudential Bache to assist in sale of Collinsville Stud.() From late June until Mr Masters took over supervision of the account, the borrower was not receiving clear and unequivocal statements from the Bank as to what the Bank required. This partly resulted from Mr Ottaway's indecision and partly from a personality conflict between Mr Ottaway and Mr Paddison to which I refer below.() In the period from mid-June to late August, Mr Paddison was himself beset by conflicting objectives(), was uncertain how best to extricate the Bank from the loan and was unwilling directly to involve himself in management of the Collinsville Stud loan.

At this stage, Mr Ottaway, too, had conflicting goals. He was duty bound to protect the Bank but he was conscious of a need to protect the Bank's image. He was motivated by a desire not to impede the development of the Bank's Rural Lending Unit.() Irrespective of this, it was, in my opinion, imprudent on the part of Mr Ottaway to have acted as he did in relation to a sell-down of Mr Garnett's interest in Collinsville Stud. I accept that it was prudent for Prudential Bache to be retained in connection with the equity raising, as Ayers Finniss was not capable of raising money or of marketing Collinsville Stud abroad.() However, it was unwise in my opinion on the part of Mr Ottaway to leave Mr Garnett in charge of equity raising and sale efforts. Mr Garnett, by July 1990, probably had no equity in Collinsville Stud. There was a risk that he would market it on unrealistic terms and conditions. Mr Ottaway was still treating Mr Garnett with a considerable degree of deference.() Even throughout July 1990, he refrained from directing Mr Garnett to dispose of parcels of land, such as Hillside Lorraine and Koonoona, which were surplus to Collinsville Stud's requirements. He had a preference for foreclosure on the Bank's mortgage rather than sale in the conditions prevailing in 1990.() He was accepting the unrealistic values assigned to Collinsville Stud by Mr Garnett and for all he knew permitting Mr Garnett to market Collinsville Stud at those unrealistic values.() The cut off date for sale was ultimately extended by Mr Ottaway until after the Adelaide ram sales.() Whilst I accept that this was a reasonable decision, there was no reason why, in July 1990, the Bank could not and should not have set up some mechanism so that sale would have occurred immediately after the ram sales.() In fairness to Mr Ottaway, I do add that he was at all material times General Manager of the largest operational division in the Bank and that he did not have immediate operational responsibility for conduct and management of the Collinsville account. The operational conduct of the account rested with Mr Wedd and Mr Hutchinson from time to time and of necessity Mr Ottaway must have relied upon his subordinates for information and advice as to the proper conduct of the Collinsville account.

At a meeting on 31 July 1990 between Bank staff and Mr Veitch, further concessions were extended to the borrower and the time for sale was extended until 30 March 1991.() At the meeting on 31 July 1990, Mr Ottaway reiterated that the Bank had granted a term (recorded incorrectly in Exhibit 20 as "a minimum term") of six months for Collinsville Stud to arrange sale of at least a substantial portion of equity in Ambia Pty Ltd and stated that the Bank required such sale to be effected within 12 months. The Bank officers present were told by Mr Veitch that Ambia Pty Ltd was preparing a submission for discussions with merchant bankers having overseas connections, with a view to attracting foreign investment. Cash flow budgets were discussed indicating that the debt would increase to $40.7M by 1 June 1991 and then reduce, depending on the success of the embryo model investment packages.

In the period between January 1990 and September 1990 the Bank's management of this facility was characterised, as I have said, by doubt and indecision. The Bank at no stage acted to enforce its securities in the conventional way of exercising a power of sale. Nor did it direct the proprietor, Mr Garnett, to effect a sale of all or part of his assets. Nor did it formally direct him to sell down his equity interest in the business. The letter of 21 June 1990 from Mr Ottaway to Mr Garnett, to which I have referred, did not in my opinion amount to a formal notice. In any event, that letter was withdrawn and the Bank allowed Mr Garnett and his co-directors to remain in control of negotiations for the sale of the property and of a minority interest in Collinsville Stud without directly monitoring his marketing efforts, without ascertaining the terms and conditions on which he was seeking to sell and without imposing strict deadlines on Mr Garnett. This was imprudent.()

11.4.7 MANAGEMENT OF NON-PERFORMING FACILITY

I am of the opinion that the management of the facility granted to Collinsville Stud was deficient in the following respects after it became non-performing in January 1990.

(a) It was the strict policy of the Bank in 1990 to classify any loans under which either interest payments or principal repayments were overdue by greater than 30 days but less than 90 days as "non-performing" and those overdue by greater than 90 days as "non-accrual". This policy was operative in Retail Banking from 1988 but was not strictly adhered to.() It was not adhered to in the case of the Collinsville Stud loan. This was an unwarranted departure from established policy and, in my view, a serious matter.

(b) Collinsville Stud's overdraft limit was exceeded in January 1990 as a result largely of the debiting of Commercial Bill Acceptance interest. It remained in excess of the approved limit thereafter. In accordance with the Bank's policy, the loan to Collinsville Stud should have been classified as non-performing in February 1990 and as non-accrual in April or May 1990.

(c) At its meeting on 7 August 1990 (meeting 65/90) the Lending Credit Committee considered the proposal() for approval for an increase in facilities from $32.7M to $39.7M (No other action whatsoever, apart from that increase and regularisation of the Commercial Bill Acceptance was proposed.) The Committee was clearly dissatisfied with the quality of the proposal put to it. Equally, Mr Paddison was extremely concerned as to the quality of the proposal. He expressed his concern in a confidential memorandum of 7 August to Mr Ottaway.() Mr Paddison noted that, although the proposal to the Committee was supported by Mr Ottaway, it had not been signed by Mr Ottaway and showed "little evidence" of his involvement with it. The memorandum from Mr Paddison, criticised Mr Ottaway and the author of the proposal, for what was said to be the inadequate attention addressed to the level to which the Bank should become involved in a sale of assets and equity in Collinsville Stud, and it criticised the lack of detailed analysis of the borrower's valuations of assets, and the lack of any analysis at all as to whether salaries, in particular that paid to Mr Garnett, were reasonable.

In the same memorandum, Mr Paddison referred to a recommendation which he had received from Mr Ottaway to the effect that part only of the Collinsville Stud account be treated as non-accrual. Mr Paddison rejected that proposal as simply smacking of the avoidance of reality. (In his response dated 9 August 1990 to Mr Paddison's memorandum of 7 August, Mr Ottaway confessed to some confusion about the non-accrual question.) The memorandum to which Mr Paddison referred was a confidential memorandum of 6 July 1990 from Mr Ottaway. It is of crucial importance in understanding why the Collinsville Stud account was not treated as non-accrual earlier than 21 August 1990 and for that reason I set it out in full.

"NON-ACCRUAL STATUS

By the definition adopted in Retail Banking this account is clearly non-accrual.

By my understanding of the definition used in Corporate (i.e. a judgment on the risk of loss), it is probably not non-accrual.

As this account will now impact on the portfolio for which Des [ie Mr Masters] is to become responsible, he should probably be consulted for a view.

Bear in mind that the significant impact of the Collinsville balance when added to the existing retail non-accrual balance (a doubling of figures) will attract the attention of a wide audience of people. I do not suggest this is improper, but it does mean that a lot of people in the Bank will be talking about Collinsville being "in trouble" and I am not sure that this is desirable if it is only an opinion that determines whether it is non-accrual or not.

MATTERS OF CONCERN

Yes. The state of this account is a primary concern for the Bank at this time, and will remain so until we can achieve a sale of equity to reduce the debt to manageable proportions."

(Mr Ottaway's memorandum of 6 July 1990 was in turn in response to a memorandum from Mr Paddison seeking a formal recommendation on the treatment of the Collinsville Stud loan with respect to its classification of non-accrual and whether it was an item of concern which should be reported to the Board in accordance with the Group Managing Director's recent memorandum on that subject.)

By memorandum of 25 July 1990, Mr Paddison rejected Mr Ottaway's memorandum of 6 July 1990 as unsatisfactory. He sought a specific recommendation from Mr Ottaway as to treating Collinsville Stud as a non-accrual loan. In turn, Mr Ottaway responded by memorandum of 27 July 1990. In that memorandum, Mr Ottaway contemplated that the account would remain irregular. He recommended that the overdraft account be treated as non-accrual (that is to say, the reduced overdraft of $2.0M then being arranged with Collinsville Stud), following the restructure of the facility (that is, after the conversion of $5.0M from overdraft facility to Commercial Bill Acceptance). By memorandum of 1 August 1990 to Mr Paddison, Mr Ottaway asserted that, in anticipation of Lending Credit Committee approval of the restructure, the Collinsville Stud loan could be "excluded as a non-accrual". I do accept that throughout this period, Mr Ottaway was confused as to what constituted a non-accrual loan in the context of corporate accounts. He understood the definition of a non-accrual account as being subjective and not objective. I also accept that at about this time, he made inquiries within Corporate Banking as to whether the account should be classified as non-accrual and that he was satisfied (by his interpretation of information from Corporate Banking) that the account was not required to be treated as non-accrual.()

(d) The Lending Credit Committee's decision on 7 August 1990 on the proposal of 2 August 1990 was that it was inappropriate to continue the outlined level of capital expenditure in the current financial situation and considered that an external manager should be installed to protect the Bank's interests. The proposal was deferred pending a full and detailed assessment of the borrower. The Committee deferred the proposal subject to:

. a full assessment of the value of the business;

. a recommendation to the Committee in regard to the transfer of the account to non-accrual status;

. an assessment by management as to the potential for principal loss and expected provisioning requirements such as considered appropriate; and

. presentation of monthly reports to the General Manager, Retail Banking as to the status of the transaction.()

(e) The recommendation to the Lending Credit Committee as to transfer of the account to non-accrual status, as contemplated and required by the Committee's decision of 7 August, was not in fact prepared until 16 August 1990. I find that in the circumstances that delay was reasonable.() That recommendation was considered by the Lending Credit Committee on 21 August 1990.

(f) At its meeting on 21 August 1990, the Lending Credit Committee recorded a recommendation to the Board Sub-Committee that Collinsville Stud be classified as non-accrual.() The Committee had before it a proposal from the Rural Banking Unit() that there be a $5.9M increase in facilities from $32.7M to $38.6M. The Rural Banking Unit reported that the borrower was unable to meet interest from cash flow and was unable to service a debt in excess of $20.0M. The proposal referred to a real estate valuation which had been conducted in May 1990 by the Bank's valuer and to a livestock valuation carried out in February 1990 "prior to the drop in wool values" [page 6 of the Proposal].() It proposed pruning of Collinsville Stud's expenses and a sale of surplus assets. The recorded purposes of the proposal were first, to formalise the present excess by converting $7.0M to Commercial Bill Acceptance maturing on 31 December 1990 and retaining a maximum fully overdrawn limit of $0.9M to cover working capital requirements; and secondly, to recommend the transfer of the whole of the Collinsville Stud debt to non-accrual status from 1 July 1990. The Committee resolved that the Bank should assume control of Collinsville Stud "if an aggressive sale program was not established by 31 October 1990".

(g) The Committee recommended to the Board Sub-Committee for approval the $5.9M increase in facilities, the proposed action plan and the transfer of the whole debt to non-accrual status as of 1 July 1990. The result was expressed to be that, while interest charges would be applied, a total of $2.7M, representing interest payments for the 6 months to 31 December 1990, would not be brought to account by the Bank in its profit and loss account. No recommendation was made for provisioning. Despite the terms of the Committee's decision of 7 August 1990, neither the authors of the second proposal (who were of the view that a provision should be considered()) nor the Committee itself expressly adverted to the topic of a provision.() The Committee may have formed the view that a provision at that stage would have been premature.() The minutes do not indicate any discussion on this topic. It is odd that the Lending Credit Committee made a recommendation to the Board Sub-Committee in relation to transfer of the debt to non-accrual status. Such a matter was not required to go to the Board Sub-Committee, whose function was solely that of approving loans. There is no trace of this recommendation having gone to a Board Sub-Committee on any of the topics dealt with in the framework of the Committee's decision.() The Committee also resolved that the Bank should not direct a sale of Collinsville Stud until after the major ram sales, expected in September and October.

(h) 23 August 1990 was the date of the meeting of the Board at which the Bank's 1990 annual accounts were due to be and were presented.() Collinsville Stud was not listed in the schedule of non-accrual loans which was before the Board at its August meeting. The Board had before it minutes of the Lending Credit Committee for July but not those for August.() The recommendation and minutes of the Lending Credit Committee could have been presented at the Board meeting held on 23 August 1990 as a late paper.() (The Board was not in fact advised about the state of the Collinsville Stud account until the meeting of 27 September 1990.) In addition, it was abundantly clear by virtue of the decision of the Lending Credit Committee of 7 August 1990 that the Collinsville Stud loan would be made non-accrual in the immediate future. That fact should have been relayed to the Board on or before 23 August 1990.

In the Chairman's report to the Governor of South Australia of 23 August 1990(), the Bank reported a group profit of $24.1M in the year ending 30 June 1990. The report recited "a strict policy that any accounts on which payments are overdue by 90 days or more are automatically classified as non-accrual". At balance date, non-accrual loans totalled an "unacceptable" $635.2M (pages 1-2). The same information appears at page 21 of the published Annual Report. If provisioning had been made in the 1989-90 accounts for a loss on the Collinsville Stud loan, the Bank's reported profit of $24.0M for the year ended 30 June 1990 would have been reduced. It is to be noted that the estimated loss on the Collinsville Stud account as at 31 March 1991, some nine months later, was $25.0M.

The Bank's provisioning will be considered in a subsequent report and because of this it is not appropriate that I make any comment on this matter in this Chapter.

I further note that, in a memorandum from Group Finance and Administration to the Board dated 23 August 1990, in relation to the 1990 annual accounts, Mr Sibert, Mr Hall and Mr Copley reported:

"all loans, advances and receivables have been examined by the relevant Branch Manager, Lending Manager or Committee. The results of this assessment have been reviewed by the Lending Credit Committee, Executive Committee, Subsidiary Boards and the Directors in accordance with Group policy. We are satisfied that the review has been properly and effectively carried out. All Bad Debts identified by the relevant officers have been written off in accordance with Board and Lending Credit Committee policies."

In addition, the same memorandum asserted:

"No circumstances have arisen since balance date which will:

(a) render inadequate the Provision for Doubtful Debts or the amount written off as Bad Debts;

(b) render misleading the values attributed to Assets or any other item in the accounts;

(c) have a material affect on the results of 1989-90.

In my opinion, given the refusal of Mr Ottaway to treat the Collinsville Stud debt as non-accrual, the recommendation of the Lending Credit Committee of 21 August, and the fact that Collinsville Stud was not listed in the Non-performing and Doubtful Accounts report for July 1990, those assertions were (unbeknown to the authors) inaccurate and misleading.

I am satisfied that Bank policy as to the declaration of loans as non-accrual was not adhered to in the case of the Collinsville Stud borrowings and that this involved quite deliberate conduct on the part of Mr Ottaway.

Mr Ottaway informed the Investigation that he resisted, in the first half of 1990, adherence to the non-accrual policy which I have described. He resisted it because no systems were in place in Retail Banking to manage or control non-accrual accounts until July or August 1990. His perception was that to treat an account as non-accrual would, in the absence of an appropriate system, have alerted the customer to the fact that the Bank was not debiting interest and would have made it more difficult for the Bank to manage the Collinsville Stud account.() This was a quite legitimate concern. Mr Ottaway did agree in giving his evidence that the loan should, in terms of the Bank's policy, have been treated as a non-accrual loan early in April 1990.() The opposition which Mr Ottaway expressed to automatic treatment of accounts as non-accrual in retail banking was not something which he kept secret. It was an element of a continuing dispute and difference which he had with Mr Paddison.()

Mr Ottaway is not recorded as having been present at the Board meeting on 23 August 1990. However, Mr Hamilton and Mr Paddison were recorded as being present. Mr Paddison was aware that Collinsville Stud had been declared non-accrual. He had an opportunity to inform the Board that Collinsville Stud had been declared non-accrual. However, I am satisfied that the Chairman of the Board did not ask those present whether there were any non-accrual loans not listed on the schedule of non-accrual loans tabled at the meeting which ought to be declared.() It is not clear whether Mr Paddison spoke in relation to Collinsville Stud at the meeting of 23 August 1990.()

The failure of the Board to be informed of the Lending Credit Committee recommendation to classify Collinsville Stud as non-accrual deprived the Board of critical information relating to the assessment of adequate provisioning for losses at the time of finalising the annual accounts for the year ended 30 June 1990. The fact that pertinent information was withheld from the Board really arises, however, from the failure of Mr Ottaway in June and July 1990 to accept that the Collinsville Stud account should be treated as non-accrual rather than from events in August 1990.

In relation to the Collinsville Stud account, the Account Manager in May and June 1990 and thereafter should have completed an irregularity return. That return would, in the ordinary course, have gone to the General Manager (Mr Ottaway). The return would then have resulted in a submission to the Lending Credit Committee which, at quarterly meetings, considered non-accrual loans. The Bank has not produced to the Investigation any irregularity return or similar document in which it was reported that the Collinsville Stud account was non-accrual()and I am satisfied that the account was not in fact reported as non-accrual until August 1990, when it was so reported as a result of the direction of the Lending Credit Committee at its meeting on 7 August 1990. It is abundantly clear that the Collinsville Stud account should have been declared non-accrual in June. First, the ABC Ltd merger talks had been called off, thus creating a situation where there was, in the short term, no prospect of an injection of non-debt capital into Collinsville Stud. Secondly, the sale of the embryo leasing packages had been deferred. The result of that was that Collinsville Stud was deprived of some $4.0M in projected income, that income to have fallen due in April or May 1990. Thus, by 1 June 1990, the perspective had changed radically from that which was open in early February 1990.() There was then no prospect at all of the facility being regularised by the debtor. Rather than treat the account as non-accrual, Mr Ottaway decided that an approach should be made to the Lending Credit Committee for an increase in the facility limit. In fact, Mr Ottaway, by his Diary Note of 5 June 1990() accepted that the debt was then non-accrual. Mr Ottaway, as the line executive responsible for the Collinsville Stud account, must accept responsibility for the failure on the part of the Bank to treat the loan as non-accrual during the month of June 1990.()

I am satisfied that the Board had no notice of Mr Ottaway's incorrect interpretation of the policy of the Bank as to treatment of non-accrual loans.

I have not been able to ascertain whether as early as June 1990 the Bank should have been considering a provision against Collinsville Stud in June 1990. At one stage in his evidence, Mr Ottaway implied that he believed in March 1990 that the Bank might suffer a loss on Collinsville Stud.() Mr Ottaway agreed that provisioning was probably a consideration in June 1990.() I am satisfied that provisioning was not considered because an appropriate recommendation was not made by Retail Banking to the Lending Credit Committee in June 1990 that the account be treated as non-accrual.

(j) While responsibility for the failure of the Bank in the 1989-1990 year to treat the Collinsville Stud loan as non-accrual rests with Mr Ottaway, I have also been troubled by other aspects of the Bank's procedures for relaying information to the Board. On 27 June 1990, Mr Paddison presented to the Bank Board the Group Managing Director's Overview Report in respect of the month of May.() It included mention of the Collinsville Stud Board's inability to attract equity investors and to meet their "full interest commitments" and of the suggestion that the Bank itself take an equity position that would "warehouse" the facility until an improved market for sale of Collinsville Stud could be realised. It also indicated that the Collinsville Stud Board had been advised that suggestion was unacceptable and that Collinsville Stud directors recognised that a major interest in their company had to be sold within the next six to twelve months. Total exposure was said to be $38.0M.

The Overview Report, Board Paper 90/153, was considered at the meeting of the Board of Directors on 28 June 1990. It was probably handed to Board members on the day of the meeting. Mr Paddison attended the meeting. This was the first Overview Report which Mr Paddison had prepared. It was prepared by him in the absence on leave of Mr Clark. The Overview Report had recently been required by Mr Simmons, Chairman of the Board, for the purpose of obtaining from the Managing Director of the Bank a written report on the major problems of the Bank.()

The May Overview failed to inform the Board of the following aspects of the Collinsville Stud facilities, all of which were known at the time by the Bank's senior officers including Mr Ottaway and Mr Paddison:

. that the account had been in serious problems since January 1990;

. that Collinsville Stud had inadequate cash flow to service its debt and that this problem had existed since inception of the debt;

. that the transaction may result in a bad debt;

. that difficulties were being encountered in marketing the secured assets;

. that the security position of the Bank had changed in that the overdraft exposure had increased from $2.0M to $7.0M without review or extension of the security documents or the appropriate approval from the Lending Credit Committee; and

. that senior officers considered the position unsustainable.

The overview was further misleading in its context. It refers explicitly on the same page to a loan to a named customer of the Bank other than Collinsville Stud as a loan which may result in a loss to the Bank in a specific sum. The possibility of loss is not adverted to in the note on Collinsville Stud. Secondly, the overview asserted that Collinsville Stud was "unable to meet their full interest commitments"; in fact, as Mr Paddison knew at that stage, Collinsville Stud was not meeting any of its interest commitments to the Bank. Thirdly, the overview did not disclose that the account had been irregular since 4 January 1990 or that the exposure was $6.0M over the approved level. Finally, it did not refer to Mr Paddison's decision on 15 June 1990 that the operation should be sold. Mr Paddison did agree that the Board should have been told, first that Collinsville Stud was not meeting any of its commitments to the Bank and, secondly, that Collinsville Stud was not able to service its debt out of its own cash flow, quite apart from its commitments to the Bank.()

Mr Paddison informed the Investigation that, in presenting the Overview to the Board, these matters were disclosed.() However, that was not the recollection of Mr Simmons.() The minutes of the Board meeting do not disclose whether there was any oral submission by Mr Paddison, whether there was any discussion of the Report and, if so, the terms of that discussion. Each of the matters referred to above should have been disclosed in the written Overview itself. The June meeting was held at a time when both the Board and management would or should have been considering the question of provisions for bad debts and the appropriate accounting treatment of non-accrual loans. In fairness to Mr Paddison, Collinsville Stud is listed in the Overview under the heading "Major Credit Concerns". That was some notice to the Board that the account was problematic. In addition, Mr Paddison gave evidence to the Investigation that this was the first Overview Report that he had prepared. Prior to this report, the Group Managing Director's Overview did not deal with major credit concerns. Mr Paddison was cautious about departing excessively from the style of overview adopted by Mr Clark.() Mr Paddison has also informed the Investigation that, prior to June 1990, the Managing Director's overview was merely a brief document intended to stimulate discussion at Board meetings and was used as such. In his assessment, it would have been inconsistent with the scope and purpose of the overview to have included detailed comment about the Collinsville account. Mr Paddison had not been given to understand that the Board expected detailed information in relation to credit management and provisioning via the Overview Report. In addition, it is true to say that there were established procedures within the Bank, albeit procedures not adequately adhered to in all circumstances, extrinsic to the Overview Report, calculated to bring to the attention of the Board information about accounts in relation to which provisions were required. Mr Paddison has also informed the Investigation that he was under considerable pressure at this time in that he was both acting as Managing Director of the Bank and discharging the duties of his own office; in addition, he was implementing a major review of Beneficial Finance at the request of the Chairman of the Bank Board. In those circumstances, he has informed the Investigation that he had very little time for detailed investigation of facts contained in the Overview.()

I accept these explanations and, for that reason, I have not in my formal conclusions recommended further investigation or administrative action in relation to the Overview Report. I also accept that Mr Paddison did not, in presenting the Overview, deliberately withhold information from the Board and that he had reason to believe that members of the Board or some of them had a fairly detailed knowledge of the operations of Collinsville and of problems besetting it. In addition, I am not satisfied that the inaccuracies in the Overview Report deflected the Board from making a decision which it would otherwise have made in the circumstances.

(j) Despite the recommendation of the Lending Credit Committee on 21 August 1990 that the Collinsville Stud loan be treated as non-accrual, the Non-Performing and Doubtful Accounts Report tabled at the August meeting() did not include reference to Collinsville Stud. At the meeting on 2 August 1990, Mr Paddison reported on major exposures in his area and, according to the minutes, informed the Board that there was a strong potential for non-accruals to increase significantly by the end of December 1990.() There was, however, no express reference to Collinsville Stud, so far as the minutes reveal. Therefore, whilst senior officers in the Bank were aware of the serious position of the Collinsville Stud facility, material information relevant to the Board's duty to ensure that the Bank's annual accounts reflected a true and fair view of the Bank's affairs and position was withheld from the Board. Mr Paddison accepted that he did not tell the Board that the Collinsville Stud account had been declared to be non-accrual and did not alert the Board that it had been so declared, notwithstanding its absence from the report to which I have referred. Mr Paddison explained to the Investigation that he did not notice the absence of Collinsville Stud from that report and said that if he had noticed it, he would have brought it to the attention of the Board. I accept that in the circumstances, Mr Paddison was guilty of no deliberate non-disclosure of information to the Board.() The Investigation was informed that, as of August 1990, the process of data gathering connected with preparation of non-accrual accounts and the relaying of information to the Board was controlled by cut off dates. Equally, the Non-performing and Doubtful Accounts Report was a relatively new concept and there may have been procedural inadequacies in the manner with which it was presented to the Board.

(k) Collinsville Stud had been brought to the attention of the Board as a "Non-Performing Asset" at its meeting on 26 July 1990. It was not listed as a non-accrual account in the report to the Board from Group Risk Management of 23 July 1990, tabled at that meeting, but was listed at page 2 as one of a number of non-performing assets "which require close monitoring". The minutes of the Board meeting do not disclose specific discussion of

Collinsville Stud.() As of 23 August 1990, therefore, the Board was aware that Collinsville Stud was a non-performing asset. But it had not been told and was not told on that day that the Collinsville Stud loan was non-accrual or that a provision should be considered.

(l) The matter of the Collinsville Stud facility was next brought to the attention of the Board on 27 September 1990. On that day, the Board considered a report from Retail Banking.() I have not been able to ascertain why this report was produced for the Board. It may have had its origin in the decision of the Lending Credit Committee of 21 August 1990 that the increase in Collinsville Stud facilities be referred to a Board Sub-Committee. I exclude this as a possibility because there is no evidence of a Board Sub-Committee dealing with that matter. According to Mr Ottaway, the report was put before the Board merely as an information paper at the request of the Chief Executive Officer for the purpose simply of providing an outline of events relevant to the Collinsville Stud account.() On balance, and in the light of the contents of the report and for other reasons which I mention, I find that the report was put before the Board for no good purpose and as part of an exercise of sharing responsibility for an account which had been completely mismanaged. The report was in an unusual format.() It contained a lengthy (albeit incomplete and incorrect) diary of events. It exceeded the two page ceiling on Board papers fixed by Mr Clark. It had been discussed between Mr Ottaway and Mr Clark prior to being presented to the Board and it underwent a number of revisions as a result of discussions between Mr Ottaway and Mr Clark before reaching the Board.() I am satisfied that Mr Hutchinson was instructed by Mr Ottaway to commence preparation of the report at a meeting on 27 August 1990 and that Mr Ottaway gave Mr Hutchinson directions as to what the report was to contain.() Mr Ottaway, by contrast, thought that the report had originated in a request by the Board arising from information in the Operating Review(), although he did say that it may have arisen from a comment of Mr Clark at a Board Sub-Committee.

I find, however, that the report was put before the Board for no legitimate purpose. It contains no distinct recommendation. It was not a credit paper. It proposes no action requiring the attention or confirmation of the Board. It does not suggest provisioning in a particular sum or the writing off of a bad debt despite that, on the worst case sketched by the report, a provision should have been considered. It was a report of a kind not usually put before the Bank Board. According to page 1, it is merely a report for noting. By this date, the Collinsville Stud account had been declared non-accrual and was listed in the Non-Performing Debts Report for August.()

The Investigation received conflicting evidence as to the tenor of the Board discussion of this report. Mr Ottaway's recollection was that the Board endorsed management of the account.() Mr Ottaway has also informed the Investigation that one of the Board members commented on the serious difficulties being experienced by the wool industry generally and remarked that those difficulties were becoming more widespread. Mr Ottaway's recollection was that he discussed with the Board directions being taken to achieve a sale of Collinsville Stud, including Mr Garnett's involvement in the intended sale. According to Mr Ottaway, the Board (or at least one member of it) indicated that the steps proposed by Mr Ottaway were appropriate and, in the result, the paper was "noted".() By contrast, Mr Simmons doubted that this was likely to have occurred.() There is no evidence that the Board, in retrospect, discussed the need to have made a provision for loss in the Bank's accounts at 30 June 1990. The minutes of the meeting of 20 September 1990(), do not assist me in resolving this conflict in the evidence. The minute of the discussion of Mr Ottaway's paper() is unintelligible and does not record any discussion whatsoever of the paper by the directors. The minutes simply record that the report was noted.

(m) The Collinsville Stud account was also considered by the Lending Credit Committee meeting 1/91 on 8 January 1991. The proposal there considered by the Committee was the noting of the current position in relation to the facility and approval for the continued honouring of drawings against the facility. The proposal was approved "subject to the payment of excesses being made within very tight guidelines and monitored by General

Manager, SA Corporate and Commercial Banking." At meeting 2/91 on 16 January 1990, provisioning of $20.0M was approved by the Lending Credit Committee.

For the reasons given above and on the basis of the findings which I have set out and the documents and other evidence to which I have referred, I am of the opinion:

(a) that Mr Ottaway did not exercise proper care and diligence in the management of the Collinsville Stud account; and

(b) that the failure by Mr Ottaway properly to interpret and apply the strict policy of the Bank as to the recognition of non-accrual loans created a situation where the Board was deprived of material information relevant to the accuracy of the 1990 Annual Report.

11.4.8 CREDIT INSPECTION

The credit inspection procedure was introduced at the Bank during August 1990. No credit inspection was carried out on Collinsville Stud prior to the loan being classified as non-accrual in September 1990.

 

11.5 OTHER MATTERS IDENTIFIED IN THE INVESTIGATION

 

11.5.1 DISCLOSURE OF CONFLICTS OF INTEREST

In the course of the Investigation, I have identified matters that have persuaded me that the Bank's procedures for recording and monitoring the financial interests of senior executives in transactions were, in 1989 and 1990, wholly inadequate. I am satisfied that none of the Bank officers interviewed by the Investigation and none of the Bank officers involved in the Collinsville Stud transaction or in managing the facility were affected by a conflict of interest. However, it is important in the case of a publicly owned institution that officers not merely be free of conflicting interests but that they be seen to be free of material interest in transactions entered into by the Bank, particularly where they become irregular. In particular, possible conflicts of interest and breaches of duty on the part of Mr Hamilton in his dealings with the Bank and Elders Rural Finance were investigated. They demonstrate that the Bank must adopt and monitor more formal guidelines on pecuniary interests. In the period between 1988 and 1990 inclusive, the Bank had no written procedures relating to disclosure by senior executives of material interests in loans and other transactions entered into between the Bank and its customers.()

(a) In November 1988, whilst Mr Hamilton was employed by Elders Rural Finance, Collinsville Stud arranged finance from Elders Rural Finance for the purchase of the Koonoona property. The purchase (from Gary Radford) included land known as Old Koonoona which Collinsville Stud had, unbeknown to Elders Rural Finance, agreed to acquire in trust for Mr Hamilton. At settlement on 20 December 1988, some 3700 acres of Koonoona were, by arrangement between Mr Garnett and Mr Hamilton, transferred into the names of Colac Pty Ltd, Trustee of the Hamilton Family Trust Settlement (No 2), as to part, and into the name of Marika Pty Ltd, another Hamilton trustee company, as to the balance.

(b) In December 1988, Mr Hamilton borrowed $0.8M from the Bank to finance the purchase of his companies' portion of the land at Koonoona, the purchase of 3,000 recipient ewes from Collinsville Stud and the renovation of the homestead at Koonoona. An overdraft was also approved. Mr Farrell acted as the Account Manager.() Mr Hamilton entered into an agreement with Collinsville Stud to run 6,000 recipient ewes on this land as part of the embryo transfer program. Collinsville Stud was to pay to the Hamilton entities agistment and pregnancy fees, rates, taxes and running expenses. The precise amount of the fees was agreed to fluctuate according to the number of embryo packages sold by Collinsville Stud. As it turned out, Collinsville Stud leased most of Koonoona from Colac Pty Ltd and was, at all material times, paying rent in approximately the sum $4,800 per month to Colac Pty Ltd. Mr Hamilton and Mr Garnett had been on friendly terms for some years.

(c) As I have stated in Section 11.4.1(b)(ix), in January 1989, Mr Lawson, the Managing Director of Elders Rural Finance reviewed the Collinsville Stud account. He determined that the cash flow forecasts were unrealistic. Elders Rural Finance later resolved to serve notice of default and to call the loan in. Mr Hamilton was aware by virtue of his friendship with Mr Garnett that, in early April 1989, Elders Rural Finance was putting pressure on Collinsville Stud to repay or substantially reduce the indebtedness of Collinsville Stud to Elders Rural Finance.()

(d) Between November 1988 and April 1989, Mr Garnett had attempted, with assistance from Mr Hamilton, to interest a number of State Government departments and the State Government Insurance Commission in putting funds into Collinsville Stud in the form of equity. These endeavours were unsuccessful. At the time of the purchases by Collinsville Stud, Colac Pty Ltd and Marika Pty Ltd, Mr Hamilton was Managing Director of Elders Pastoral. On 3 January 1989, he became an employee of Elders Finance Group. In November 1988, Mr Hamilton was appointed Treasurer Elect of Elders IXL, a position in Melbourne. Prior to that, he had been Managing Director of Elders Pastoral for Australia. He ceased active duties for Elders Rural Finance in April or May 1989.

(e) On 19 May 1989, before Mr Hamilton joined the Bank, a meeting was held between Mr Hamilton, Mr Garnett, Mr Farrell, Mr Hutchinson and Mr Wedd to discuss a proposal for the refinancing by the Bank of the Elders Rural Finance facility. Both at this and at the subsequent meeting on 2 June 1989, Mr Hamilton was known to officers of the Bank to be, and he permitted himself to be held out as, an officer of Elders Rural Finance. His attendance at those meetings must have been perplexing for officers of the Bank who were present for Elders Rural Finance was, at that stage, the largest creditor of Collinsville Stud, the creditor which Collinsville Stud was seeking to repay with the assistance of the Bank. In addition, it was Mr Hamilton who had made the first approach on behalf of Collinsville Stud to the Bank (through Mr Farrell). It must certainly have struck the Bank officers concerned as unusual for Mr Hamilton to have been involved in the initial loan discussions.

At about the same time, Mr Hamilton and Mr Clark met and discussed the recruitment of Mr Hamilton by the Bank. Mr Hamilton disclosed to Mr Clark his leasing arrangement with Mr Garnett.()

(f) On 29 May 1989, before the second meeting between officers of the Bank and representatives of Collinsville Stud, Mr Clark sent a Letter of Offer to Mr Hamilton to join the Bank with effect from 1 July 1989 as Chief Manager, Group Planning and Subsidiaries. The offer was accepted almost immediately thereafter. Mr Hamilton commenced duties with the Bank on 3 July 1989. On 26 July 1989, Mr Hamilton was appointed to the Board of Ayers Finniss Limited Securities Ltd and Ayers Finniss Holdings Ltd. On 17 November 1989 (after a re-arrangement of the Ayers Finniss companies) he was appointed to the Board of Ayers Finniss Ltd. He held those positions until 14 March 1991.

(g) Apart from his involvement at the meetings on 19 May and 2 June 1989, Mr Hamilton did not, because of his association with Mr Garnett, become directly involved in any of the decision making processes of the Bank in relation to the loan application.

(h) Mr Hamilton knew at all material times of the Bank's desire to increase its lending portfolio in the rural sector.() His association with senior officers of the Bank, through negotiation of employment with the Bank and the earlier financing of his loan, would have enabled him to advise of the opportunity to secure the Collinsville Stud account. If the matter is looked at objectively, Mr Hamilton had an incentive to introduce the business to the Bank because his company (Colac Pty Ltd) was receiving rental from Collinsville Stud, which was, in 1988 and 1989, dependent upon external financial support. The Elders Rural Finance loan had to be repaid. The application for the loan to Collinsville Stud was at a very early stage on 3 July 1989 when Mr Hamilton commenced employment at the Bank. As of the meeting on 2 June 1989 at Collinsville Stud, Mr Hamilton was aware that he would be becoming a senior officer of the Bank in the near future. Mr Hamilton knew, when he joined the Bank, a number of facts not known to Bank officers and to employees of Ayers Finniss, namely:

(i) that Elders Rural Finance had been putting pressure on Collinsville Stud for several months to repay or substantially reduce its debt; and

(ii) that approaches had been made unsuccessfully by Collinsville Stud to the State Government Insurance Commission and South Australian Government departments in 1988 and early 1989 for equity injections.

(i) Mr Hamilton's evidence was that he was not aware that these matters were not disclosed to officers of the Bank at the meetings on 19 May 1989 and 2 June 1989, which Mr Hamilton attended, or otherwise, and that he was not aware of the reason given by Collinsville Stud to Bank staff as to the rearrangement of finance facilities.() I have referred already to the conflicting evidence on this topic.

(j) The involvement by Mr Hamilton in the consultative processes of the Bank on and after 15 March 1990, when he attended the meeting referred to in Section 11.4.6, has occasioned me disquiet, for the following reasons. First, he had (but had not disclosed to Mr Paddison or to Mr Ottaway) a material interest in the continued support of Collinsville Stud by the Bank. At all times while the Bank loan was on foot, Mr Hamilton's family interests had leased to Collinsville Stud part of the Koonoona property. The rental payable was approximately $4,800 per month. The only source of the rental after January 1990 was monies being provided by the Bank to Collinsville Stud pursuant to the escalating ceiling on its advances. Thus, Mr Hamilton was directly profiting from the Bank's continued support of Collinsville Stud. Payments to the Hamilton interests by the Bank on account of Collinsville Stud did not come to the knowledge of Mr Hutchinson until 20 November 1990.() They were not disclosed by Mr Hamilton at the meeting on 15 March 1990. Payments were stopped in January 1991. Secondly, Mr Hamilton had, from January 1990, (but did not disclose to the Bank) a further business association with Mr Garnett. In addition to the association arising from the purchase and leasing transactions involving Koonoona, Mr Hamilton and Mr Garnett were co-directors of a company called Burra Development Pty Limited, which operated the Kooringa Hotel at Burra from 19 March 1990. Mr Hamilton was, from 15 January 1990, registered jointly with a company called Sidekick Pty Limited and four others of a one sixth share in the land on which the hotel was erected. Sidekick Pty Ltd was owned and controlled by Mr and Mrs Garnett.

(k) Mr Hamilton was probably not required to disclose his interest in the continued viability of the Collinsville Stud operation to any officer of the Bank other than Mr Clark. He was not required by his contract of service not to participate in the merger discussions between ABC Ltd and Mr Garnett and he was not required by his contract of service to disclose to the Bank his full knowledge of the financial affairs of Mr Garnett or of dealings between Elders Rural Finance and Collinsville Stud. He was not required absolutely to refrain from participating in discussions between Bank officers in relation to management of the Collinsville Stud account. In my opinion, whilst I am not satisfied that Mr Hamilton was guilty of breach of duty to the Bank, his conduct has generated a certain amount of suspicion and disquiet. He should, in my opinion, have abstained from attending the meeting of 15 March 1990. He should not have attended the merger discussions with ABC Ltd without permission of the Bank. His presence at the meeting on 15 March 1990 may have lulled Mr Hutchinson into a false state of comfort as to the likely success of the merger negotiations. And, had those negotiations been fruitful, his attendance at discussions with the ABC Ltd could conceivably in certain events have embarrassed the Bank and was thus imprudent. The Bank should have adopted and should in the future adopt more strict and detailed guidelines as to the disclosure of pecuniary interests of senior executives and a protocol for the conduct of those senior executives in relation to the management of transactions between the Bank and its customers. In particular, the Bank should adopt guidelines which will ensure that officers making decisions in relation to transactions to which the Bank is or intends to become a party be aware of the direct and indirect pecuniary interests of senior executives in such transactions.

(l) In addition, Mr Shinkfield, of Ayers Finniss, had a conversation with Mr Hamilton about the Collinsville Stud transaction in February 1990. Mr Shinkfield approached Mr Hamilton about the ABC Ltd which, at that stage, was the only possible equity participant in Collinsville Stud. Mr Hamilton made a dismissive remark to Mr Shinkfield. Mr Hamilton deliberately did not disclose at any stage to Mr Shinkfield Mr Hamilton's knowledge of the approaches by Collinsville Stud to the State Government Insurance Commission and State Government departments.

(m) I am satisfied that, after the loan was approved, Mr Hamilton distanced himself from the decision-making of the Bank in relation to the account.() However, as I have found, Mr Hamilton did speak to Mr Matthews before the Lending Credit Committee meeting on 20 July 1989. Because of Mr Matthews' inability to recall that conversation, I have not been able to form a view as to precisely what Mr Hamilton communicated to Mr Matthews on that occasion and whether Mr Hamilton did disclose or should have disclosed to Mr Matthews the fact that Elders Rural Finance was putting pressure on Collinsville Stud to repay or substantially reduce the loan.()

Whilst Mr Hamilton gave evidence to me he did not, due to his having passed away in 1992, make any submissions in response to matters referred to in this Chapter.

11.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

As directed by Terms of Appointment A(a) to (f) (inclusive) and (h), C and D, I have investigated the circumstances that occurred over the period from May 1989 to March 1991 surrounding the loan facility granted to Collinsville Stud by the Bank. The engagement by the Bank in the Collinsville Stud transaction has resulted in material losses to the Bank and has resulted in the Bank holding significant assets which are non-performing.

In my opinion, the processes which led to the Bank engaging in the Collinsville Stud transaction were inappropriate, for the reasons which I have given.

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

11.6.1 TERMS OF APPOINTMENT A

(a) So far as concerns the "Initiation of the Facility", Mr D K Hutchinson, Mr M A Wedd and Mr J F Farrell did not exercise proper care and diligence in the preparation of the proposal submitted to the Lending Credit Committee in that:

(i) They compiled a lending proposal which was imbalanced, uncritical and likely to mislead, and which did not address the practical consequences of failure by Collinsville Stud to attract an equity injection.

(ii) Whilst they did not accept the information in the Ayers Finniss memorandum at face value in all respects, they failed to conduct an independent assessment of the cash flow projections for the years 1990 - 1994 as would be expected of a reasonable and prudent banker. Had they done so, they would have detected, in the memorandum, significant inconsistencies, errors and omissions.

(iii) They failed to conduct an analysis of key financial relationships in the projected balance sheets for the years 1990-1994 as would be expected of a reasonable and prudent banker. Had they done so they would have detected significant inconsistencies warning of financial weaknesses.

(iv) They did not make any inquiry as to Collinsville Stud's credit worthiness.

(b) So far as concerns the "Approval of the Facility", the Lending Credit Committee, comprising Mr G S Ottaway, Mr K S Matthews, Mr T L Mallett, Mr D C Masters and Mr R L Wright did not exercise proper care and diligence in approving the loan facility to Collinsville Stud and the Board Sub-Committee, comprising Mr A G Summers and Mr T M Clark did not adequately and properly direct and control the affairs, operations and transactions of the Bank in that:

(i) They permitted their enthusiasm for expansion of lending business to cloud their professional judgment.

(ii) They should have required further information and explanations covering deficiencies in the proposal.

(iii) They should not have approved the fifth component of the facility (the bridging loan) but, if disposed to approve the loan otherwise, should have approved it for settlement once $8.0M in non-debt capital had been injected into Collinsville Stud.

(c) So far as concerns the "Security of the Facility", Mr Farrell did not exercise proper care and diligence in that he permitted the loan to be settled whilst conditions of the Bank's approval were unsatisfied and permitted variations in the security arrangements which were not documented.

(d) So far as concerns the "Advance of Funds":

(i) Mr Ottaway and Mr Farrell did not exercise proper care and diligence in that:

. they failed to ensure that conditions of the loan specified by the Lending Credit Committee were complied with prior to advance of the funds; and

. Mr Farrell sanctioned a disbursement of the funds, contrary to that approved by the Lending Credit Committee, without ratification from that Committee or reference to the Legal department for advice on the security implications.

(ii) Mr Farrell did not exercise proper care and diligence in that he drew the letter of approval in a form that did not in clear terms require Collinsville Stud to obtain an equity injection.

(e) So far as concerns the "Management of the Facility", Mr G S Ottaway, Mr D K Hutchinson and Mr M A Wedd (in respect of those periods when Mr M A Wedd was involved in management of the account) did not exercise proper care and diligence in the management of the Collinsville Stud facility in that:

(i) They did not sufficiently monitor the attempts by Collinsville Stud to attract an equity injection.

(ii) They failed to advise Legal department of the increases in the facility to enable the necessary implications on security and stamp duty to be addressed.

(iii) Mr Ottaway failed to lay down a specific timetable for finalisation of the required equity funding or enforce the condition as to equity injection as a requirement for continuation of the facility and failed to impose a sufficiently strict discipline on Collinsville Stud's expenditures after 30 January 1990.

(iv) Mr Ottaway arranged an unauthorised extension of the facility without prior reference to the Lending Credit Committee.

(v) Mr D K Hutchinson and Mr G S Ottaway did not exercise proper care and diligence in preparation of their proposal to the Board Sub-Committee of 5 December 1989 in that the Board Sub-Committee proposal was inaccurate and misleading in that it did not disclose:

. the fact that Collinsville Stud had exceeded its overdraft limit in September 1989;

. that Collinsville Stud could not service the existing level of debt out of cash flow;

. that Ayers Finniss had not been able to obtain the $8.0M quasi equity referred to in the original lending proposal; and

. recent developments in the wool industry.()

(f) So far as concerns the "Management" of the Collinsville Stud facility when it ought, in terms of the Bank's procedures, to have been classified as non-performing and non-accrual:

(i) Mr Ottaway did not exercise proper care and diligence in the management of the Collinsville Stud facility in that he failed to take timely action to have the facility recognised as non-performing and non-accrual and failed to ensure that timely action was taken to refer the account to the Lending Credit Committee between 30 January 1990 and 2 August 1990.

(ii) The procedures, policies and practices of the Bank in 1990 for the identification of non-accrual loans in Retail Banking were not adequate nor were they properly interpreted and applied by Mr Ottaway.

(iii) Mr Ottaway failed to ensure that prompt action was taken in response to the resolution of the Lending Credit Committee on 7 August 1990 that an assessment be made as to the potential for principal loss and possible provisioning requirements.

11.6.2 TERM OF APPOINTMENT C

For the reasons which I have given, the operations, affairs and transactions of the Bank in reference to the Collinsville group of companies were not, in the respects to which I have referred, adequately and properly supervised, directed or controlled by the Board of Directors of the Bank or by the Chief Executive Officer of the Bank and the performance by Mr D K Hutchinson and Mr M A Wedd of their duties in relation to Collinsville Stud was not adequately directed or controlled by Mr Ottaway.

11.6.3 TERM OF APPOINTMENT D

For the reasons which I have given, the information and reports given by officers of the Bank to the Bank Board, as referred to in this Chapter, were not, in all the circumstances, timely, reliable or adequate, nor were they sufficient to enable the Board adequately to discharge its functions under the Act.

11.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

I recommend that each of the matters dealt with above should be the subject of administrative action within the Bank to ensure proper supervision and competence in understanding and executing the lending policies and procedures of the Bank.

 

11.8 APPENDICES

 

SUMMARY OF ABBREVIATIONS

OTHER

DRCM District Rural and Commercial Manager

RCM Rural and Commercial Manager

SMBB Senior Manager Business Banking

CMPBB Chief Manager Personal and Business Banking

SMBB Senior Manager Business Banking

CLA Commercial Lending Analyst

TCLA Trainee Commercial Lending Analyst

GMRB General Manager Retail Banking

GMSACCB General Manager SA Corporate and Commercial Banking

GMCR Group Manager Credit Recovery

LENDING FACILITIES

FOD Floating Over Draft

CBA Commercial Bill Acceptance

ENTITY

C Collinsville Stud Pty Ltd

A Ambia Pty Ltd

 

 

 

Appendix B

Summary of Movements in Facilities

Date Recommendation Facilities Details Fee

Structure

Entity Prepared

By

Supported and Recommended By LCC Sub Board Approval Board

Confirmation

    Type Amount ($)         Approved By Date Approved by Date  
18.07.89 Lending Credit Committee recommended to the Board Sub-Committee approval of a new facility of $32.0M FOD

CBA No 1

CBA No 2

CBA FT/FI

Bridging CBA

2.0

12.0

6.0

4.0

8.0

32.0

.Indicator Rate payable quarterly in arrears

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears.

.Cost of funds and PAR plus acceptance fee of 1.25%pa payable at rollover of Bills.

.Cost of funds and PAR plus acceptance fee of 1.75%pa payable at rollover of Bills

A

A

A

A

A

D K Hutchinson, DRCM

M A Wedd, RCM

J F Farrell, SMBB

V R Pfieffer, CMPBB

Approved #52/89

G S Ottaway

K S Matthews

T L Mallett

D C Masters

R L Wright

20.07.89 A G Summers

T M Clark

G S Ottaway

20.07.89 24.08.89
25.08.89 Allocation of Facilities $30.0M to Ambia Pty Ltd and $2.0M to Collinsville Stud Pty Ltd. FOD

CBA No 1

CBA No 2

CBA FT/FI

Bridging CBA

2.0

12.0

6.0

4.0

8.0

32.0

.Indicator Rate payable quarterly in arrears

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears.

.Cost of funds and PAR plus acceptance fee of 1.25%pa payable at rollover of Bills.

.Cost of funds and PAR plus acceptance fee of 1.75%pa payable at rollover of Bills

C

A

A

A

A

             
12.09.89 Temporary increase in FOD limit to $2.2M until 31.10.89. FOD

CBA No 1

CBA No 2

CBA FT/FI

Bridging CBA

2.2

12.0

6.0

4.0

8.0

32.2

.Indicator Rate payable quarterly in arrears.

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears.

.Cost of funds and PAR plus a margin of 1.25%pa payable quarterly in arrears.

.Cost of funds and PAR plus acceptance fee of 1.25%pa payable at rollover of Bills.

.Cost of funds and PAR plus acceptance fee of 1.75%pa payable at rollover of Bills.

.Establishment Fee $80,000 (0.25%pa)

C

A

A

A

A

K A Rae, CLA J F Farrell, SMBB          
05.12.89 Lending Credit Committee recommended to the Board Sub-Committee a change in the facilities. FOD

CBA No 1

CBA FT/FI

Guarantee

2.0

11.0

4.0

15.0

32.0

.Indicator Rate payable quarterly in arrears.

.Cost of funds and PAR plus a margin of 1.25%pa payable at rollover of Bills.

.Cost of funds and PAR plus acceptance fee of 1.25%pa payable quarterly in arrears.

.Initially 2.0%pa charged quarterly with annual reductions of 0.25% based on account performance.

C

A

A

A

M A Wedd, RCM D K Hutchinson, DRCM

B T Starr, SMBB

Approved #91/89

K S Matthews

D C Masters

J B Macky

P L Mullins

05.12.89 D W Simmons

T M Clark

K S Matthews

07.12.89 21.12.89
30.01.90 Lending Credit Committee recommend to the Board Sub- committee a temporary increase in overdraft of $2.0M to $4.0M. FOD

CBA

4.0

30.0

34.0

.Indicator Rate interest payable quarterly in arrears.

.Cost of funds plus a margin of 1.25%pa payable at rollover of Bills. Line Fee 0.25%pa payable on the full FOD limit.

.Establishment fee $1,000.

C

A

D Richter, TCLA M A Wedd, RCM

D K Hutchinson, DRCM

V R Pfieffer, CMPBB

Deferred #6/90

K S Matthews

J B Macky

G S Ottaway

D C Masters

R L Wright

P F Mullins

30.01.90      
02.08.90 Lending Credit Committee recommend to Board Sub-Committee approval of a $7.0M increase in facilities to $39.0M. FOD

CBA

CBA

CBA FT/FI

CBA FT/FI

2.0

7.0

18.0

4.0

8.0

39.0

.Indicator rate less 0.5%pa.

.Cost of funds and PAR plus acceptance fee of 0.5%pa.

.Cost of funds and PAR plus acceptance fee of 0.5%pa. Line fee of 0.25%pa on full limit.

C

C

A

A

A

M A Wedd, RCM

D K Hutchinson, DRCM

G S Ottaway, GMRB Deferred #65/90

T L Mallett

S G Paddison

D C Masters

P F Mullins

R L Wright

07.08.90      
16.08.90 Lending Credit Committee recommend to Board Sub-Committee approval of a $5.9M increase in facilities to $37.9M and transfer to non-accrual status as at 01.07.90. FOD

CBA

CBA

0.9

7.0

30.0

37.9

.Indicator rate less 0.5%pa.

.Cost of funds and PAR plus acceptance fee of 0.5%pa.

.Cost of funds and PAR plus acceptance fee of 0.5%pa.

C

C

A

M A Wedd, RCM

D K Hutchinson, DRCM

G S Ottaway, GMRB Approved #69/90

T L Mallett

S G Paddison

J B Macky

D C Masters

G S Ottaway

R L Wright

21.08.90 **    
18.09.90FOD

CBA

2.0

30.0

32.0

.Insufficient information on file C

A

M A Wedd, RCM

D K Hutchinson, DRCM

D C Masters, GMSACCB Not submitted to Lending Credit Committee.   Not submitted to Sub Board Committee.   27.09.90    
19.12.90 Report to Lending Credit Committee. Facilities approved $32.0M. Actual loan $39.0M. FOD

CBA

2.0

30.0

32.0

.Insufficient information on file. C

A

M A Wedd, RCM

D K Hutchinson, DRCM

D C Masters, GMSACCB Approved #1/91

S G Paddison

D C Masters

R L Wright

08.01.91      
7.01.91 Provision of $20.0M for Collinsville Stud, (no recommendation made).             Approved #2/91 17.01.91      
19.02.91 Report to Board. Facilities approved $32.0M.

Actual loan $39.0M.

FOD

CBA

2.0

30.0

32.0

.Insufficient information on file. C

A

M A Wedd, RCM

D Lockwood, GMCR

D C Masters, GMSACCB Approved #13/91

J B Macky

D C Masters

P F Mullins

R L Wright

22.02.91      

* Approved by Business Credit Committee, Meeting #220, 13.09.89

** Withdrawn by G S Ottaway

Appendix C

Chronology of Events
During the Life of the Loan

DATE CHRONOLOGY OF EVENTS

COLLINSVILLE STUD

19.05.89 Meeting held between Mr Garnett, Mr Hamilton, Mr Farrell, Mr Hutchinson and Mr Wedd to discuss proposal regarding refinance of Elders Rural Finance loan. (Per Mr Wedd's diary) in Mr Farrell's office.
02.06.89 Meeting between Mr Garnett, Mr Hamilton, Mr Farrell, Mr Hutchinson and Mr Wedd at the Collinsville property to show the Bank the operations of the Collinsville Stud. (Per Mr Wedd's diary)
22.06.89 Meeting held between Mr Farrell and Mr Hutchinson with Mr Hayes and Mr Shinkfield from Ayers Finniss to discuss the possibility of Ayers Finniss finding an investor to inject equity into the Collinsville Stud. (Per Mr Shinkfield's diary)
28.06.89 Mr Shinkfield met with Mr Garnett to discuss possible alternatives of raising equity.
01.07.89 Mr Hamilton joins Bank staff.
05.07.89 Ayers Finniss sent letter to Mr Garnett setting out terms and conditions of appointment of Ayers Finniss to structure a financing proposal involving debt and equity.
18.07.89 Business Banking Section (Mr Hutchison, Mr Wedd, Mr Farrell, Mr Pfeiffer) submitted a proposal to the Lending Credit Committee to approve a new $32.0M facility. The purpose of the facility was to refinance a $30.0M loan with Elders Rural Finance and to provide $2.0M working capital.
20.07.89 Submission to Lending Credit Committee approved subject to key man insurance to be arranged for Mr Garnett for an appropriate amount.
20.07.89 Submission to Board Sub-Committee approved subject to the conditions in the Lending Credit Committee approval being completed.
21.07.89 Letter of Offer of facilities set by Bank to Mr Garnett. Letter signed by Mr Farrell.
26.07.89 Letter of Offer signed by Mr Garnett and Mr Veitch.
02.08.89 Mr Ottaway proposal to Board for confirmation of Board Sub-Committee approval. Loan approved by Board.
31.08.89 Settlement of funds took place as follows:

· $31.68M to Elders Rural Finance finance;

· $0.043M for legal fees; and

· $0.277M to Collinsville Stud Pty Ltd

07.09.89 Adelaide Ram Sales
21.11.89 Lending Credit Committee approves Dutt Pienaar and Willogoleche Joint Venture funding.
24.11.89 Meeting Mr Hutchinson and Mr Ottaway regarding liquidity raising.
05.12.89 Submission to Lending Credit Committee to approve restructure of facilities in particular the conversion of $15.0M in commercial bills to the form of a Bank guarantee. The Bank guarantee was to support a convertible note issue to be arranged by Ayers Finniss to raise up to $15.0M to repay bank debt.
05.12.89 Submission was approved by the Lending Credit Committee, subject to:

· Independent advice being available to Ambia Pty Ltd.

· Provision of further details to the Chairman of Lending Credit Committee and the General Manager of Personal and Business Banking as to the convertible notes issue and the impact of the guarantee.

07.12.89 Submission approved by Board Sub-Committee (Mr Simmons, Mr Clark, Mr Matthews).
12.12.89 Proposal from Business Banking to Board for confirmation of restructure of debt.
03.01.90 Cheques presented overdrew the Collinsville Stud overdraft facility by $0.426M over the limit of $2.0M.

Contact with the company's new accountant Mr Gulliver revealed that they had not allowed for Commercial Bill interest of $0.702M debited on 28 December 1989. Details sought of income expected to place the account in order. Accountant was to advise in due course.

04.01.90 Letter from Mr Wedd to Mr Gulliver for copies of the following insurance policies, incorporating the Bank's name as mortgagee.

· Key man insurance over Mr Garnett.

· Insurance over all structural improvements on land held as security. (This was requested as a condition of the approval of the facilities by the Bank).

08.01.90 Further cheques presented increased excess to $0.8M. Following another call to the accountant, the Bank was advised by Mr Garnett, that a revised cash flow budget for the ensuing six months would be presented within a week.
15.01.90 Cash flow budget presented by the Collinsville Stud indicating increased funding requirements.
17.01.90 Memo sent by Mr Wedd to Chief Manager, Personal and Business Banking outlining the above events and requesting ratification of his decision not to dishonour cheques. This was approved.
19.01.90 Mr Wedd visited Collinsville Stud to discuss aspects of the cash flow budget and prospects for achievement of the projections.

Also discussed was renewed interest by ABC Ltd as possible equity partners in the Collinsville Stud.

30.01.90 Submission for increased funding to $34.0M deferred by Lending Credit Committee pending discussions with the Collinsville Stud Board to express the Bank's concern at their increasing exposure and viability. At this time the actual overdraft was $2.796M against an approved limit of $2.0M.
05.02.90 Mr Ottaway, Mr Hutchinson and Mr Wedd met with Mr Garnett and Mr Veitch. Budget variances were discussed and prospects for equity sale to ABC Ltd were reviewed. Mr Ottaway outlined the Bank's concerns and emphasised the need for the Collinsville Stud Directors to pursue the sale of equity as a matter of urgency.
06.02.90 Telephone call from Mr Veitch asking whether the Bank was interested in taking an interest in the Livestock Leasing Package.
07.03.90 Telephone call from Head Office branch. Overdraft $4.436M against an approved limit $2.0M. Looking for authorisation for further automatic periodical payment of $2,017.61. In absence of senior staff within Section, Mr K Rae, Commercial Lending Analyst authorised payment.
08.03.90 Meeting held at the Collinsville Stud office between Mr Hutchinson and Mr Veitch to compare February 1990 cash flow budget vs actuals and discuss predictions for March 1990.
12.03.90 Memo from Mr Hutchinson to Mr Ottaway advising details of meeting of 8 March 1990 between Mr Hutchinson and Mr Veitch.
15.03.90 Meeting arranged between Mr Hamilton, Mr Paddison and Mr Hutchinson to discuss cash flow budgets and excess on working account. Authorisation given to continue to pay in line with budget. New Lending Credit Committee submission to be prepared with the information supplied by the Collinsville Stud on proposed merger with ABC Ltd and other strategies to rectify debt level problems.
22.03.90 Mr Ottaway, Mr Hutchinson and Mr Wedd attended Collinsville Field Day.

Discussions held with Mr Garnett and Mr Veitch on outcome of ram sales and budget predictions.

05.04.90 Mr Veitch contacted Mr Hutchinson. Livestock Leasing Package leaflets printed and forwarded to McIntosh Hoare Govett in Melbourne for presentation to accountants as potential investors.
11.04.90 Mr Hutchinson rang accountant for Collinsville Stud regarding printout on March 1990 cash flow budget vs actual figures.
20.04.90 Cash flow budget for March received showing a negative variance of $0.241M in closing balance for budget versus actuals.
07.05.90 Mr Hutchinson rang Mr Veitch. He stated Mr Garnett would return from South Africa that week; ABC Ltd discussions continuing; Meetings between ABC Ltd and the Collinsville Stud Board arranged for 10 May 1990 and 16 May 1990 to discuss merger.
31.05.90 Meeting at Collinsville Stud with Mr Hutchinson, Mr Wedd and Mr Veitch. The Bank was advised that ABC Ltd merger talks had been called off. Selling of Leasing Packages deferred.
05.06.90 Meeting arranged between Collinsville Stud Board members and Mr Ottaway, Mr Hutchinson and Mr Wedd.

Livestock Leasing Packages not selling - no confidence by investors in industry for the short term.

Bank officers given information as to present financial status of the Collinsville Stud, the immediate prospects and recent decisions made by the Board in relation to the Collinsville Stud's future. Proposal put forward requesting the Bank to convert debt to equity position in the Collinsville Stud.

06.06.90 Memo to Mr Paddison and Mr Hamilton and for noting to Group Managing Director, from Mr Ottaway, advising details of meeting with the Collinsville Stud and noting:

"The present position is not sustainable. The company has to have equity to survive.

The dollars here are large and time is of the essence.

This matter must be dealt with urgently and decisively with a view to decision by the Bank's Board at its June meeting".

15.06.90 Strategy meeting on the Collinsville Stud attended by Mr Paddison, Mr Ottaway, Mr Hutchinson, Mr Boschma Senior Manager Rural Banking Unit and Ayers Finniss representatives, Mr Shinkfield and Mr Roff.

Decision made:

Collinsville Stud to be advised that the best alternative was to seek immediate sale of their assets through private treaty.

"If a sale could not be arranged by 21 August 1990, then the Bank would commence legal action to recover loans outstanding."

18.06.90 Memo to Mr Ottaway from Mr Boschma advising of possible alternative solution involving deferred sale through convertible equity.
21.06.90 Collinsville Stud advised in writing that debt to equity proposal not acceptable to Bank. Intimation that majority interest should be sold.
22.06.90 Mr Paddison met the Collinsville Stud Board and advised debt to equity proposal not acceptable to Bank. Livestock leasing packages withdrawn from sale.
03.07.90 Collinsville Stud advised Mr Paddison steps being taken to attract equity participation in Company. Meeting with South Australian Premier was being arranged to discuss areas of possible Government assistance.
03.07.90 Collinsville Stud provided the Bank with three year projection to 30 June 1993 on financial condition of Company.
04.07.90 Mr Paddison met with Collinsville Stud Board to discuss funding costs and matters raised on 3 July 1990.
05.07.90 Memo from Mr Paddison to Mr Ottaway requesting a recommendation about a reduction in interest rates for the Collinsville Stud. Mr Paddison meets Collinsville Board.
05.07.90 Memorandum from Mr Paddison to Mr Ottaway seeking formal recommendation on the treatment of Collinsville team.
06.07.90 Memorandum from Mr Ottaway to Mr Paddison on status of Collinsville loan.
11.07.90 Memo from Mr Boschma to Mr Ottaway advising that reduction in interest rate would save the Collinsville Stud $0.3175M.
17.07.90 Memorandum from Mr Ottaway to Mr Paddison in relation to conversion of overdraft to bills.
23.07.90 Mr Paddison met with Mr Garnett regarding time frames needed for equity placement - period of six months set and letter given re change in facilities and interest rates.
23.07.90 Letter from Mr Paddison to Mr Garnett.
31.07.90 Meeting arranged between Mr Veitch, Mr Ottaway, Mr Hutchinson and Mr Wedd. Discussions held on agreed time frame for equity placement, cash flow budget. Interim review on 30 September 1990.

$7.0M of present overdraft debt to be placed on commercial bills. Overdraft limit to be adjusted monthly in line with cash flow budget. Sale of equity must be finalised within 12 months.

01.08.90 Interest adjustment made to accounts.
02.08.90 Letter to Mr Gulliver from Mr Hutchinson confirming drawing of Commercial Bill - $7.0M credited to Collinsville Stud Account.
02.08.90 Letter prepared by Mr Hutchinson to General Manager Collinsville Stud confirming results of meeting held 1 August 1990.

· $7.0M of debt converted to commercial bill acceptance;

· $2.0M overdraft limit;

· Interim review 30 September 1990 and full review 31 December 1990; and

· Arrange for sale or equity raising now to be finalised within 12 months.

Letter forwarded to Mr Ottaway for comments before sending (but never sent original and envelope still on file).

02.08.90 Mr Wedd and Mr Hutchinson prepared a paper to Lending Credit Committee seeking Lending Credit Committee to recommend to Board Sub-Committee approval of a $7.0M increase in the facility. No mention was made of the fact that the $7.0M had already been loaned.
02.08.90 Collinsville Stud notified by Mr Hutchinson that net $7.0M proceeds of the Commercial Bill had been credited to the overdraft account.
03.08.90 Revised cash flow for 1990/91 received.
07.08.90 Lending Credit Committee deferred a decision to increase the facilities by $7.0M to $39.0M.
07.08.90 Memorandum from Mr Paddison to Mr Ottaway.
08.08.90 File note from Mr Boschma on warehousing of shares by converting debt into equity.
16.08.90 Mr Wedd and Mr Hutchinson prepared a paper for submission to Lending Credit Committee for Board Sub-Committee approval for additional funding of $5.9M and transfer of account to non-accrual status. Supported by Mr Ottaway.
17.08.90 Collinsville Stud seek information on financial capacity of potential equity takers.
21.08.90 Submission to Lending Credit Committee for Board Sub-Committee Approval for additional funding of $5.9M and transfer of account to non-accrual status as of 1 July 1990 approved.
23.08.90 Recommendation to Board from Group Finance and Administration that Annual Accounts for year ending 30 June 1990 be approved. Board passes Annual Accounts and submits report to the Governor.
27.08.90 Meeting held between Mr Garnett, Mr Veitch, Mr Ottaway, Mr Masters, Mr Hutchinson and Mr Wedd.

Discussions centred on outcome of Lending Credit Committee submission and measures required to restore the Collinsville Stud account to within approved facilities. Mention was made of potential United States of America equity participation.

Directors were advised to consider potential sale of assets to reduce debt level while negotiations take place on equity involvement.

09.90 Mr Masters takes over management of Collinsville Stud account.
03.09.90 Letter forwarded to Collinsville Stud by Mr Ottaway, advising Directors that evidence of firm arrangements for equity participation need to be supplied by 31 October 1990. If this was not achieved, the Collinsville Stud were to pursue sale of assets by 31 December 1990.

Should neither action be forthcoming, the Bank would move to act under its securities.

03.09.90 Mr Ottaway requested a report be prepared for the Board to cover:

· Diary of events;

· When irregular; and

· What action was taken.

07.09.90 Memo to Securities from Mr D Richter, Rural Lending Analyst requesting variation of amount of prospective liability to $41.0M and an acknowledgment by the Guarantors of the debt.
07.09.90 Details of Dubbo and Adelaide ram sales provided to the Bank. Total income $0.528M.
10.09.90 Collinsville Stud advised sales agency agreement with Prudential Bache available for the Bank's perusal.
11.09.90 Agreement perused by Mr Masters and Mr Hutchinson. Collinsville Stud advised the Bank was satisfied with the document.
11.09.90 Report to Board of Directors for noting prepared by Mr Hutchinson and to be presented by Mr Ottaway about the debt and possible course of action, with diary of events. This was not signed or presented.
18.09.90 Report to the Bank Board for noting prepared by Mr Hutchinson and to be presented by Mr Ottaway about the debt and possible course of action.
20.09.90 Memo to Legal department by Mr Genockey requesting preparation of acknowledgments from Guarantors of increase in liability.
21.09.90 Visit to Collinsville Stud by Mr Ottaway and Mr Masters.
24.09.90 Collinsville Stud requested to provide details of cash flow budget to actual comparisons.
25.09.90 Memo from Mr Richter to Credit Quality advising account has been converted to non-accrual as of 1 July 1990.
26.09.90 Memo to Security Liaison Officer from Legal department questioning as to why no approval for increase in overdraft facility had been sought.
01.10.90 Discussions with Mr Garnett at Collinsville Stud ewe and ram sales.
09.10.90 Call to Mr Veitch to ascertain information regarding their efforts to obtain equity participation and to request up to date income and expenditure figures.
10.10.90 File note by Mr Genockey as to why no approval for increase in overdraft facility had been sought.
12.10.90 Collinsville Stud advised Bank that Information Memorandum was complete subject to some minor amendments and provision of forward projections.
17.10.90 Meeting arranged between Mr Veitch, Mr Ottaway and Mr Wedd to discuss steps taken to sell equity and comparison of income and expenditure against budget forecasts for July, August and September 1990. Noted by Mr Masters.
29.10.90 Mr Hutchinson called Mr Veitch to get an update of steps taken to sell equity and performance of Group until 30 September 1990.
06.11.90 Mr Hutchinson called Mr Veitch to get an update of measures taken to sell equity and financial performance of the Group to 21 October 1990.
07.11.90 Letter from Mr Gulliver giving details of livestock sales to 30 September 1990.
11.90 Livestock sales for period ending 31 October 1990. October cash flow budget vs actual.
26.11.90 Meeting between Mr Masters, Mr Hutchinson, Mr Veitch, Mr Rundle, Mr Garnett and Mr Wedd to discuss actions for sale of Collinsville Stud.
28.11.90 Memo from Mr Hutchinson to Mr Kanleitner requesting reversal of previously debited Commercial Bill Acceptance interest to assist assessment of performance of the account.
03.12.90 Memo from Mr Wedd and Mr Hutchinson to General Manager requesting approval to continue to honour drawings.
04.12.90 Meeting with Mr Veitch and Mr Gulliver to discuss budget performance and future projection figures and further cost cutting measures.
07.12.90 Revised cash flow budget for 1990-1991, schedule of leases and sales report for the month of November received.
07.12.90 Lending Credit Committee deferred a decision to recommend to the Board Sub-Committee approval for a $7.0M increase in facility to $39.0M.
10.12.90 Letter from Mr Garnett to Mr Masters advising steps taken to find a buyer.
13.12.90 Memo from Mr Lockwood to Mr Masters advising on course of action to be followed.
14.12.90 Meeting held by Mr Masters with Prudential Bache to obtain an update on sale of the Collinsville Stud.
19.12.90 Report to Lending Credit Committee by Mr Wedd and Mr Hutchinson on current position, security values and request for approval to continue to honour drawings.
03.01.91 Meeting with Mr Veitch, Mr Masters, Mr Lockwood and Mr Wedd to discuss the attempts to sell the Collinsville Stud and to agree on expenditure cuts needed to reach a break even point.
08.01 - 16.01.91 Report to Lending Credit Committee by Mr Wedd and Mr Hutchinson on non-accrual status of account and requesting approval to continue to honour drawings was adopted. Various memos and file notes stopping periodical payments.
15.01.91 Lending Credit Committee approved a provision of $20.0M.
17.01.91 Meeting between Mr Garnett, Mr Veitch, Mr Masters and Mr Lockwood to discuss revised budget for six months ending 30 June 1991.
17.01.91 Memo to Mr Hutchinson from Mr P Matthews, Manager Commercial Credit Control advising specific provision was approved by Lending Credit Committee (meeting 2/91)for $20.0M.
24.01.91 Meeting between Mr Garnett, Mr Veitch, Mr Ninkov (Prudential Bache), Mr Masters and Mr Lockwood to get an update on sale. Russians considered to be the best candidate.
30.01.91 Briefing to the South Australian Premier on exposure.
11.02.91 Memo to Mr Lockwood, Group Manager Credit Recovery from Legal department discussing possible means of increasing security to cover increased loans.
19.02.91 Report to the Board from Mr Wedd, Mr Lockwood and Mr Masters, for noting in relation to status of the account.
22.02.91 Lending Credit Committee considers information paper. Informed that an interested buyer had "signed a Terms of Agreement to purchase 50% of the profits" for $25.0M. Considered that the proceeds of sale would enable the Bank to contain losses to $20.0M.
31.03.91 The Bank estimated a possible loss of $25.0M.
13.11.91 Receivers and Managers appointed by the Bank.