OTHER MATTERS CONSIDERED
DEALINGS BETWEEN THE STATE BANK
TABLE OF CONTENTS
26.1 THE CONDUCT OF MR T M
CLARK IN RELATION TO TRANSACTIONS INVOLVING THE BANK GROUP AND
26.1.2 BACKGROUND - THE NEW ZEALAND STEEL PURCHASE
26.2 THE PURCHASE OF OCEANIC
26.3 PURCHASE OF RECEIVABLES BY
THE BANK - 16 DECEMBER 1987
26.4 THE BANK'S EQUITICORP
ASSET PURCHASE FACILITY OF $100.0M
26.5 THE PURCHASE OF EQUITICORP
RECEIVABLES BY BENEFICIAL FINANCE
26.6 ASSESSMENT OF RELEVANT
26.7 CONFLICTS OF INTEREST
26.7.1 GENERAL COMMENT
26.7.2 SPECIFIC ACTION REQUIRED
26.7.3 OTHER RELEVANT CONSIDERATIONS
26.8 SOME CONFIRMATORY MATERIAL
26.8.1 THE BANK AND EXPOSURE TO EQUITICORP OF $200.0M - 1 JUNE
26.8.2 THE $10.0M `UNDERPINNING' BY BENEFICIAL FINANCE OF THE
BANK'S EXPOSURE TO EQUITICORP - 31 JANUARY 1989
26.8.3 THE $4.0M ACQUISITION OF MORTGAGE BONDS - 16 JANUARY 1989
26.10 REPORT IN ACCORDANCE WITH
TERMS OF APPOINTMENT
26.1 THE CONDUCT OF MR T M CLARK IN
RELATION TO TRANSACTIONS INVOLVING THE BANK GROUP AND EQUITICORP
In the course of the
Investigation, I have examined the relationship of the Bank
and Beneficial Finance with the Equiticorp Group of Companies
(as described hereunder). This relationship involved the Bank
and Beneficial Finance entering into certain transactions
with these companies during the period under review as part
of the Bank's commercial banking operations and as part of
the business activities of Beneficial Finance.
The Chapter refers to several
transactions involving the Bank Group and Equiticorp but
concentrates on two such transactions; the purchase by the
Bank of Oceanic Capital Corporation in March 1988, and
Beneficial Finance's purchase of receivables from the
Equiticorp Group in early 1988. To put those several
transactions into the appropriate context, the Chapter begins
with an explanation of a transaction that the Equiticorp
Group entered into in October 1987.
26.1.2 BACKGROUND - THE NEW
ZEALAND STEEL PURCHASE
The stock-market crash of 1987
occurred in the middle of October.
At about that time, the New
Zealand Government was the majority shareholder in New
Zealand Steel Ltd (it held about 89 per cent of the issued
shares), and was looking to sell its shareholding.
The New Zealand based
Equiticorp Group of Companies (`Equiticorp') through the
parent company, Equiticorp Holdings Ltd ("Equiticorp
Holdings"), was run by a Board of Directors whose
chairman was Mr A R Hawkins, and which included Mr T M Clark.
The latter had been a director for some years, and continued
so until his resignation in July 1988. He and Mr Hawkins had
previously had business associations, and were also
co-directors of Equiticorp (Tasman) Ltd. Mr Hawkins has
recently been convicted in New Zealand of a number of counts
of dishonesty in relation to the affairs of Equiticorp.
Equiticorp Holdings and the Bank had an ongoing business
relationship since 1985.
On 19 October 1987,
Equiticorp Holdings agreed with the New Zealand Government to
purchase that Government's 89 per cent shareholding stake in
New Zealand Steel Ltd.
The total consideration for
this acquisition of shares was $NZ 327.0M ("The New
Zealand Steel Purchase"). The $NZ 327.0M consideration
due to the New Zealand Government was to be satisfied by an
issue of 92.9M Equiticorp Holdings shares.
On the same date, Buttle
Wilson Limited, an Auckland stockbroker, agreed with the New
Zealand Government that it would purchase or would procure a
purchaser for the 92.9M Equiticorp Holdings shares, that the
Government was to receive in exchange for its 89 per cent
shareholding in New Zealand Steel Ltd, on or before 20 March
The guaranteed price, as
explained hereunder, payable to the New Zealand Government
for its 92.9M Equiticorp Holdings share was $NZ 327.0M ($NZ
3.52 per share).
Also on 19 October 1987, a
further agreement was entered into between Equiticorp
Holdings, two companies controlled by Mr Hawkins named
Ararimu Holdings Limited and Richardson Camway Limited, and
Buttle Wilson Limited (the "Take-out Agreement").
Pursuant to the Take-out
Agreement, Ararimu Holdings Limited and Richardson Camway
Limited agreed to use their best endeavours to fulfil Buttle
Wilson's obligations to the New Zealand Government to find a
purchaser for the 92.9M Equiticorp Holdings shares. A further
condition of the Take-out Agreement was that, in the event
that Ararimu Holdings Limited and/or Richardson Camway
Limited were unable to find or procure a purchaser, then they
themselves would purchase the shares at the agreed price of
It was also agreed between
the parties to the Take-out Agreement that, in the event of
Mr Hawkins' companies acquiring the Equiticorp Holdings
shareholding, then Equiticorp Holdings, or companies within
that Group, would lend the necessary funds to the
Mr Hawkins controlled companies to finance the $NZ
327.0M share acquisition.
When the sharemarket crash
occurred, the market value of the Equiticorp Holdings shares
fell immediately, to close to $NZ 1.00 thus creating a
situation whereby, pursuant to arrangements in place, the
purchaser was committed to paying an amount 3.27 times the
current market value of each share.
During November 1987,
Equiticorp Holdings made a full take-over bid for New Zealand
Steel Ltd and between 20 January 1988 and 20 March 1988
acquired the eleven per cent balance of New Zealand Steel Ltd
shares formerly held by the public.
On 16 March 1988, Buttle
Wilson Ltd advised the New Zealand Government that it had
procured Ararimu Investments Four Limited to purchase the
92.9M Equiticorp Holdings shares under the terms of the
Ararimu Investments Four
Limited was a company owned as to 80 per cent by the Ararimu
Trust, 10 per cent by Richardson Camway Limited, and 10 per
cent by Mr Hawkins.
Between 17 and 21 March 1988,
Ararimu Investments Four Ltd purchased the Equiticorp
Holdings shares by paying $NZ 327.0M to the New Zealand
The funding for this share
acquisition was provided by Elders Merchant Finance Limited
(New Zealand) to extent of $NZ 105.0M. The remaining $NZ
222.0M was paid by various companies within the Equiticorp
The payments totalling $NZ
222.0M from the Equiticorp Group were made during the period
between 24 February 1988 and 14 March 1988.
At the time of the New Zealand
Steel Purchase, New Zealand Steel Ltd had important financing
arrangements with several Japanese banks. The facilities
provided to New Zealand Steel Ltd by those banks were based
on their assessment of the degree of credit risk associated
with the facilities: New Zealand Steel Ltd was, for the
purpose of the arrangements, deemed by the banks to be a
`sovereign risk', because it had the backing of the New
The take-over by Equiticorp
Holdings, however, divested the New Zealand Government of all
its holdings in New Zealand Steel Ltd, and thus terminated
its backing. The Japanese banking interests thereupon
declared the risk to be no longer a sovereign risk, but a
`corporate risk', that rested solely on the credit-worthiness
of New Zealand Steel Ltd, and its principal shareholders.
They withdrew their lines of credit to New Zealand Steel Ltd.
The effect of the
withdrawal was that New Zealand Steel Ltd, now owned by
Equiticorp Holdings, was in pressing need of `working
capital' and `liquidity' support, which imposed a burden on
it quite independently of the consequences of the funding of
the $NZ 220.0M purchase of Equiticorp Holdings shares by
Ararimu Investments Four Limited.
The minutes of the directors'
meeting of Equiticorp Holdings held in Auckland, New Zealand,
on 27 October 1987, indicate that details relating to the
share acquisition of New Zealand Steel Ltd were discussed by
the directors present at that meeting. The minutes show Mr
Clark as being present. The directors' minutes and relevant
Board Papers (copies obtained from the Statutory Manager of
Equiticorp Holdings) make certain references to this
transaction. In particular the minutes state:-
submitted to Directors recording the proposed acquisition
of all the share capital of New Zealand Steel. The
following documents were tabled:
A. An Agreement
dated 19 October 1987 between the Company and the
Minister of Trade and Industry, David Francis Caygill
for the sale of the Crown Shares in New Zealand
B. A draft document
relating to the formal take-over offer pursuant to
Section 4(1) of the Companies Amendment Act 1963.
C. A Deed dated 19
October between Buddle Wilson Limited and the Company
That the Execution
under Seal by the Company of the documents referred to in
A and C above be ratified and the execution on behalf of
the company of the document referred to in B above,
essentially upon the terms and conditions of the document
produced at the meeting, be approved." ()
It should be noted that the
New Zealand Court, in the proceedings referred to earlier in
relation to Mr Hawkins, found that an explanation of the Deed
referred to in C above was deliberately omitted from the
Mr Clark would for the reasons
stated hereunder have been aware, as a consequence of his
attendance at a Directors meeting of Equiticorp Holdings held
on 30 November 1987, that the Equiticorp Group was facing
liquidity problems as a result of the New Zealand Steel Ltd
Mention of the impending
liquidity problem was made in Board Papers for that meeting
under the heading "Comments on Cash Flow and
Borrowings" where it is stated:
8. It is presently
anticipated that three quarters of the public
shareholding in New Zealand Steel will be settled by
way of cash with $16M being payable in the last week
of December and the balance in early February.
9. New Zealand
Steel have a facility with Mitsubishi Bank (Hong
Kong) of US$50M which is due for repayment in
December and they have also received formal
notification from Mitsubishi Bank (Europe) that a
further facility of US$50M is repayable under the
change of ownership clause, which gave the Bank the
right to call the loan in the Crown's shareholding of
New Zealand Steel reduced below 51%. At this stage
New Zealand Steel will have no available undrawn
facilities to meet these repayments and hence the
need for Equiticorp to plan for the funding of these
10. Our cash flow
forecast also includes a worst case scenario with
regards to the placement of EHL shares by Buttle
Wilson whereby we may be required to fund a shortfall
on 20 March 1988.
Also included in
our cash flow are various possible additional cash
flows which are currently being pursued. In addition
to those listed several other initiatives are being
pursued which will all help to fund the large
deficits showing through to March 1988. Obviously
the major issues to be solved are:
of New Zealand Steel cash shortfall.
of Aurora purchase to Chase on 15 January 1988.
of New Zealand Steel payment on 20 March
The same Board Papers under
the heading "Group Investments Cash Flow"
shows an anticipated outflow in March 1988 of $NZ 327.0M.()
It is clear from the New
Zealand Court finding that Mr Hawkins failed to keep the
Equiticorp Holdings Board fully informed apart from those
matters referred to above.
For the reasons stated in
this Chapter, however, it is impossible to resist the
inference that the liquidity problems then facing Equiticorp
Holdings were associated with the events leading to
several of the Bank's transactions examined below.
It will be convenient to
examine the course of transactions that followed, disengaged
from the main question of whether Mr Clark caused or
contributed to the transactions with intent to achieve the
In March 1988, Mr Clark, as
well as being a director of long standing on the Equiticorp
Holdings Board, had also been Chief Executive Officer and
Managing Director of the Bank Board since 1 July 1984. It has
been pointed out by Mr Clark, and in evidence given to the
Royal Commission, that his appointment to the Equiticorp
Holdings Board was discussed by the Bank Board and approved.
It appears that the Bank considered it good for the Bank to
have this outside connection. As a director of the Bank
Board, Mr Clark absented himself from meetings related to
Equiticorp Holdings advances.()
As matters fell out, liquid
finance was, by the end of March 1988, provided by the Bank
to Equiticorp Holdings, in particular through two major
transactions - the purchase by Beneficial Finance (a 100 per
cent owned member of the Bank Group) of Equiticorp Holdings
receivables, and the purchase by the Bank of Oceanic Capital
Corporation Ltd ("Oceanic Capital Corporation) - the
latter on 24 March 1988, four days after the day for
settlement of the cash payment of the New Zealand Steel
Purchase; the Premier's approval for the Oceanic Capital
Corporation purchase was given on 30 March 1988.
What appears to me to be
significant about these two purchases is not so much that
they were made, or that they represented the part
implementation of the Bank's strategy to expand into New
Zealand, but how the deals came to be made, and when they
were made, including, the circumstances associated with the
payment to the Equiticorp Group of Companies.
26.2 THE PURCHASE OF OCEANIC CAPITAL
Oceanic Capital Corporation
was the parent company of the Oceanic Capital Corporation
Group. The business of the Group comprised life insurance in
Australia and New Zealand, funds management (of about
$329.0M), a small general insurance operation, and a majority
interest in a credit card services company.
At material times, APA
Holdings Ltd ("APA Holdings"), a company owned by
Mr G Carter, held 100 per cent of the Oceanic Capital
Corporation share capital. APA Holdings had originally
planned to make a public float of Oceanic Capital Corporation
by December 1987, but the share market crash induced APA
Holdings to offer it for sale privately. The acquisition of
Oceanic Capital Corporation is examined in Chapter 17 - "Case
Study in Acquisition Management: The Oceanic Capital
The first move towards
purchase of Oceanic Capital Corporation by the Bank was made
by Mr Clark, who introduced the subject of the acquisition
personally in that he referred information from Mr P Johnston
of Campbell Capital Ltd to Mr J B Macky to follow up. Mr
Clark subsequently had discussions with Mr Carter in relation
to salary packages for senior executives of Oceanic Capital
Corporation. On 16 December 1987, Equiticorp (Tasman) Ltd
(one of the Equiticorp Group) forwarded, to the Bank,
valuation reports on Oceanic Capital Corporation Management
Rights and APA Holdings Life Assurance (subsidiaries of
Oceanic Capital Corporation and APA Holdings respectively).
The covering letter, signed by the Managing Director of
Equiticorp (Tasman) Ltd, referred to earlier telephone
discussions, and was addressed to Mr Clark.
Mr Clark has confirmed that he
"would have been aware", at the time of the
negotiations for Oceanic Capital Corporation, that Equiticorp
had a loan facility in place with the owner of Oceanic
Capital Corporation (ie APA Holdings). In his written
submission to me dated 29 January 1992, Mr Clark also advised
board approval of such a facility was invariably based on
a detailed submission which I would have seen.
Further, the monthly Equiticorp board reports included
regular reporting of the status of Equiticorp loan
When Mr Johnston rang
me to say that Oceanic was for sale I would have been
aware at that time of the Equiticorp/APA facility."
Mr Clark was aware that
Equiticorp's loan was secured, and it is likely that he was
also aware that that security was by way of a charge over APA
Holdings shares in APA Life Assurance Ltd. This company
eventually formed part of Oceanic Capital Corporation.
Bank management investigated
the proposed acquisition, and, on 17 February 1988, sought
approval in principle from the Board to enter into
negotiations to acquire Oceanic Capital Corporation. The
submission in support proposed: that the acquisition would be
subject to independent valuation; that Accountants should
make a detailed examination of Oceanic Capital Corporation's
records; and that the price should be subject to "due
diligence", adjusted, if necessary, according to the
results of that process. I am satisfied that Mr Clark
participated in the meeting; he told the Royal Commission
that he had no input into the Board Paper but in any event,
he was accustomed to vetting all documents going to the Board
and supporting their contents.()
The Board gave the approval
sought, subject to the further condition that there should be
a satisfactory independent valuation by consulting Actuaries
and Accountants. Minutes of the meeting made no mention of
the examination of records by Accountants alone or to due
diligence, and did not record the Board as specifying whether
due diligence should take place before or after the
Mr R G Pitcher (from Peat
Marwick, advisers to the Bank on finance and accounting) has
revealed to the Inquiry that, at some stage, a decision had
been made, somewhere in the Bank's organisation, to offer
$55.0M for Oceanic Capital Corporation.
On 25 February 1988, the Board
met again and formally approved the $55.0M offer, subject to
the conditions particularised at its meeting of 17 February.
It also stipulated that the sum of $10.0M be held, `in
escrow'. Had that stipulation been complied with, then that
$10.0M sum (as part of the price) would be paid only after
the report of the consulting Actuaries and Accountants was
found to be satisfactory.
The offer was made but was, on
5 March, rejected by APA Holdings.
One should here interpose
the comment that the one entity directly or indirectly
concerned in the foregoing negotiations which was, at that
point, under pressure to see the deal concluded without loss
of time was Equiticorp Holdings. For Equiticorp Holdings,
the day of cash settlement for the New Zealand Steel Purchase
was approaching; it so happened that, at all material times,
the Equiticorp Group, was a secured creditor of APA Holdings
and would receive much needed funds on the sale of the
Oceanic Capital Corporation shares and the concurrent
repayment of the debt due by its shareholder APA Holdings. It
was very much in Equiticorp Holding's interest for the debt
owing by APA Holdings to be repaid on the due date, but this
was most unlikely to happen if APA Holdings did not promptly
accept the bank's offer.
On 15 March 1988, APA Holdings
asserted to the Bank that an offer from another bidder was in
the process of being formalised, invited the Bank to
reconsider its offer, and proposed that negotiations should
be continued in Adelaide.
A week later, negotiations
were re-opened, with the Bank's offer now standing,
surprisingly, at a higher, rather than a lower, figure -
$60.0M (with only $2.0M held in escrow). Mr Clark said in
evidence that he had no role in the re-opening of the
negotiations, nor in the reduction of the escrow amount(),
although as I have noted earlier, the Board Paper which went
to the Board would have been vetted and supported by him.
Heads of Agreement were thereupon entered into between the
Bank and APA Holdings for the purchase at that figure. On
24 March, a recommendation for the purchase of Oceanic
Capital Corporation went to the Board, which approved it.
The Premier approved the
purchase on 30 March 1988.
The agreement for the sale of
Oceanic Capital Corporation identified Equiticorp Holdings
Group Limited as a secured creditor of APA Holdings, and as a
direct beneficiary of the proceeds of sale; APA Holdings was
promptly paid by the Bank, and the Equiticorp Group, received
the $A 27.0M outstanding under its loan as part of the
settlement of the purchase of Oceanic Capital
In his written submission of
29 January 1992, Mr Clark says:
"It seems (with
respect) that any suggested conflict is technical - so
long as the State Bank Board was aware of the material
facts. In this connection, the relevant
material fact was that (the owner of Oceanic Capital) was
obliged to repay a substantial debt in March 1988, which
it was unable to do without selling assets of one sort or
another. That fact was clearly and fully
disclosed to the State Bank Board.
State Bank Board Paper
88/31 includes the following comments:
(a) At page 2:
"Unity Corporation must sell Oceanic as it
requires funds to meet debt commitments. A firm
agreement is sought by the end of February".
(b) At page 5:
"... Unity Corporation are (sic) in urgent need
(c) At page 6:
"... indications (are) that Unity Corporation
wish to have a contract to sell the company by the
end of February ...".
State Bank Board Paper
88/83 includes the following comment:
(a) At page 2: "APA
has a time pressure as it has debts outstanding
requiring settlement by the end of March".[Emphasis
The Bank Board would have been
aware of these facts having regard to the contents of the
Board Papers referred to above. The point, in my view, is
that the Bank Board (apart from Mr Clark) did not know that
the substantial debt (nearly half of the purchase price) was
payable to the Equiticorp Group.
As indicated above, this
transaction is examined in detail in Chapter 17 - "Case
Study in Acquisition Management: The Oceanic Capital
Corporation" of this Report.
26.3 PURCHASE OF RECEIVABLES BY THE BANK
- 16 DECEMBER 1987
On 25 June 1987 the Board of
Directors of the Bank confirmed a round robin decision, made
by the directors over the period 30 May to 1 June 1987, to
approve a $200.0M commercial bill facility to Equiticorp
(Tasman) Ltd, Equiticorp (Tasman) Ltd being a subsidiary
company of Equiticorp Holdings. The purpose of this facility
was to fund a proposed acquisition of the shareholding of
Monier Ltd (Monier).
This Board approval was made
notwithstanding that the Reserve Bank of Australia
("Reserve Bank") counselled strongly against it.
This matter is referred to later in this Chapter in Section
26.8.1 and is also discussed in Chapter 15 - "The
Relationship with the Reserve Bank of Australia" of
The directors of the Bank who
were present at this meeting on 25 June 1987 were as follows:
(a) Mr L Barrett;
(b) Mr D W Simmons;
(c) Mr R D E Bakewell;
(d) Mrs M V Byrne;
(e) Mr R E Hartley;
(f) Mr W F Nankivell;
(g) Mr R P Searcy;
(h) Mr A G Summers; and
(i) Mr T M Clark.
Subsequent to the Board
granting approval for this facility the Bank reduced its
exposure to $65.0M by selling down portion of the facility to
Elders Finance and Investment Co Ltd, First Chicago Australia
Ltd, and BBL Australia Ltd. On 13 November 1987, Equiticorp
(Tasman) Ltd advised the Bank that it would not be proceeding
with the Monier bid and would no longer require the facility.
A short time later Equiticorp
(Tasman) Ltd advised the Bank that it had extended its offer
for Monier until 21 December 1987 and requested that the Bank
reinstate $50.0M of the previous $65.0M facility for a term
of thirty days from 21 December 1987. This request was
approved in principle by a round robin of directors on 14
December and confirmed at a meeting of the Board on 17
December 1987. This approval gave the Bank an existing limit
exposure of $155.0M to the Equiticorp Group at this date.
By 11 December 1987 Equiticorp
(Tasman) Ltd had acquired approximately forty eight per cent
of the shares of Monier.
At this date, Equiticorp
(Tasman) Ltd agreed with a United Kingdom based company
called Redland PLC (Redland) to purchase that company's fifty
per cent shareholding in Monier at an all up cost of $650.0M.
A condition of the agreement
between the two companies was that Redland would in turn
purchase the Monier roofing tile operations from Monier for
$314.0M made up of $298.0M cash and $16.0M by way of
assumption of debt. The two transactions were to occur
The Bank's Board Papers
indicate "The $650.0M will be raised by ETL as
[insert table here
The share acquisition
proceeded with the drawdown of funds taking place on 21
On 15 January 1988 Equiticorp
(Tasman) Ltd utilised the $298.0M cash received from the sale
of Monier's roofing operations to retire debt owing to the
Bank of New Zealand and Equiticorp Australia.
On this same date, $15.0M of
an approved and committed Bank facility for Equiticorp
Australia Ltd ("Equiticorp Australia") was
transferred to the facility of a wholly owned subsidiary of
Equiticorp (Tasman) Ltd named URUZ Pty Ltd (URUZ). The effect
of this transfer was to reduce the limit of the Bank Facility
of Equiticorp Australia to $35.0M and increase the Bank
Facility limit of URUZ to $65.0M.
Prior to this transfer URUZ
was $15.0M in excess of its facility limits. On 28 January
1988 the Board of Directors of the Bank approved an extension
of the $65.0M facility to 30 June 1988. This action was taken
on the basis that it did not increase the Bank's exposure to
the Equiticorp Group, nor, prejudice the Bank's security
At 20 January 1988 the Bank
had an exposure of $172.1M to the Equiticorp Group.
At their meeting on 17
December 1987, the Board also confirmed a round robin
decision of 14 December 1987 for the Bank to purchase a
portfolio of loan receivables from Equiticorp Australia for
an amount of $150.0M.
The Board Paper recommending
that the Board of Directors confirm their round robin
approval of 14 December 1987 stated, inter alia:
- "EAL will apply
the proceeds of the sale of this asset to an intercompany
loan to ETL.
- ETL will in turn use
this loan to assist with the purchase of Redland PLC's
shareholding in Monier Limited ("Monier");
- The agreement between
ETL and Redland PLC is irrevocable and requires ETL to
sell the Monier roofing tile operations to Redland for
consideration of AUD $315.0M. The two transactions will
- Once these funds are
released ETL will repay EAL which will in turn repurchase
the loan receivables from the Bank in terms of a Put
option between EAL and the Bank".()
The minutes recording the
meeting of the Bank's Board of Directors on the 17 December
1987 show the following directors as being present:
(a) Mr L Barrett;
(b) Mr D W Simmons;
(c) MR R D E Bakewell;
(d) Mrs M V Byrne;
(e) Mr R E Hartley;
(f) Mr W F Nankivell;
(g) Mr R P Searcy;
(h) Mr A G Summers; and
(i) Mr T M Clark.
The minutes also indicate that
Mr Clark declared an interest in the proposal as a director
of Equiticorp Australia and was absent whilst this matter was
discussed by the Board.
Following the repayment by
Equiticorp (Tasman) Ltd of the $150.0M loan to Equiticorp
Australia on 15 January 1988, Equiticorp Australia
repurchased its asset portfolio of receivables from the Bank
for $150.0M plus an incremental amount of approximately
I am of the opinion, that the
`purchase' and `sale' of these receivables by the Bank,
within less than a month, was merely a mechanism whereby the
Bank granted a loan facility to fund Equiticorp (Tasman)
Ltd's share acquisition of Monier. It is my view that the
loan was structured in this manner to circumvent the Reserve
Bank's large exposure prudential recommendations and to avoid
repetition of the objections and criticisms expressed by the
Reserve Bank in June 1987 when the Equiticorp request for a
$200.0M facility was first proposed. There is no evidence to
suggest that the Board was a party to structuring the loan in
the way outlined above or for the purposes suggested.
Any involvement by the Reserve
Bank at this stage could have, at the very least, caused
delay to the availability of the funding to Equiticorp
(Tasman) Ltd and prevented the share acquisition of Monier
proceeding as planned.
The timing in this transaction
was crucial. On 13 November 1987 Equiticorp (Tasman) Ltd had
advised the Bank that it was no longer proceeding with the
share acquisition of Monier and would no longer require the
funding previously negotiated in June 1987 for that purpose.
By 27 November 1987 Equiticorp
(Tasman) Ltd had changed its mind and advised the Bank that
its intentions were to proceed with the share acquisition and
extended their offer to Monier shareholders to 21 December
1987. On 14 December 1987 the Directors gave a round robin
approval for the facility of $50.0M and to purchase the
portfolio of receivables to the value of $150.0M from
Equiticorp Australia. The Board met on 17 December 1987 and
confirmed their decision of 14 December 1987. Clearly, the
four day period between 17 December 1987, (being the date the
Board confirmed the decisions to re-instate the $50.0M
facility, and to purchase the receivables), and 21 December
1987 (the date the offer closed, and the date the actual draw
down of $150.0M took place), did not allow for any delays as
a consequence of issues being raised by the Reserve Bank.
The same Board members were
present at the meetings on 25 June 1987 and 17 December 1987.
I have discussed the Reserve Bank relationship aspect of this
matter in Chapter 15 - "The Relationship with the
Reserve Bank of Australia".
26.4 THE BANK'S EQUITICORP ASSET
PURCHASE FACILITY OF $100.0M
On 21 January 1988, Equiticorp
Australia Limited (EAL) formally requested that the Bank
provide a $100.0M standby sale and buy back of receivables
arrangement. It was intended that the mechanics and
documentation of this facility would be similar to the
December 1987 transaction between the Bank and Equiticorp
(Tasman) Ltd, described above in Section 26.3.
The Facility was requested for
the period ended 29 June 1988. It was anticipated that the
facility would be available during this period provided that
the purchase of receivables would not extend beyond thirty
days and that a guaranteed take-out was in place beforehand.
The approach to the Bank for
this facility was a consequence of the liquidity problems
that the Equiticorp Group was experiencing at this time.
These liquidity problems were a result of the withdrawal of
funding lines to New Zealand Steel Ltd due to the change of
ownership.() The Equiticorp Group were currently
negotiating with the Mitsubishi Bank and the Bank of New
Zealand for replacement facilities for New Zealand Steel.
They were seeking, however, the additional comfort of knowing
that they could sell portion of their receivables portfolio
at short notice to reliquefy.
A submission to this effect to
the Lending Credit Committee was prepared and recommended by
Mr R C Norris, Senior Manager, Corporate Banking and
supported by Mr D C Masters, Chief Manager, Corporate
Banking. The submission was dated 21 January 1988.
This submission stated inter
arrangement to purchase the asset portfolio will be on
the basis that it is non-recourse to EAL. There is
therefore no exposure to the Equiticorp
The submission also stated
that Equiticorp Australia had identified $75.0M in take-out
funding that would be available within the Group by February
The Lending Credit Committee,
at its meeting on 27 January 1988, approved the standby
facility, and, on that date, made a recommendation to the
Board of Directors that they approve the arrangement. At a
meeting of the Board of Directors, on 28 January 1988, the
Bank's Board approved the Lending Credit Committee's
No mention was made in the
papers submitted to the Lending Credit Committee or to
members of the Board of legal advice, previously received
from the Bank's external solicitors, that was relevant to
this matter. The Bank's external Solicitors expressed serious
concerns regarding the Bank's position at the time of the
$150.0M receivables purchase in December 1987. I am not aware
of any evidence which would indicate that these legal
concerns were advised to Board members.
These legal concerns have been
detailed in Chapter 15 - "The Relationship with the
Reserve Bank of Australia" of this Report.
By an internal memorandum
dated 1 February 1988 an officer from the Bank's Legal
department expressed his concerns to Mr S M Pyper, Manager
New Zealand, Corporate Accounts regarding the $100.0M standby
sale and buyback of receivables arrangement.
On 2 February 1988, Mr Pyper
wrote a paper to Mr Masters expressing his concerns.
In particular some of the
concerns expressed in his paper were:
"1. The documents
prepared for the initial transaction were prepared on a
`one-off' basis and may not be suitable for the proposed
2. The proposed
arrangement raises further difficulties other than
proposed by the initial transaction because of the longer
3. The proposal appears
more like a loan than the initial transaction and when
looked at together with that proposal, a loan is the most
likely result. Hence the RBA requirements may be of
Mr Pyper concluded in his
paper dated 2 February 1988 by stating:
"It is felt that
because of the Bank's significant exposure to the
Equiticorp Group, the fact that if the facility was
deemed a loan, we would be in excess of our prudential
limit, and the relationship of the Bank's Managing
Director as a Director of Equiticorp and a number of its
subsidiaries, participation further in this transaction
places the Bank in a precarious position".()
Coincidently, on 2 February
1988 a policy paper from the Reserve Bank was received by the
Bank which amongst other things covered Asset Sales and
Repurchase Agreements. The Reserve Bank paper confirmed that,
in the circumstances of the transaction now being considered,
if the Bank proceeded with the `standby sale and buy back
facility' it would be required to record the exposure against
the Equiticorp Group, at least for measuring capital adequacy
By letter dated 4 February
1988 Mr G S Ottaway, General Manager, Corporate and
International Banking advised Equiticorp Australia that the
Bank would not proceed with the Asset Purchase Facility.
The reasons for the Bank
rejecting the request of the standby facilities were stated
in this letter to be:
implications, in addition to advice received from the
Reserve Bank of Australia on 2 February 1987, (Regarding
the Bank's treatment of the exposure under the proposal)
preclude the Bank from entering into the
A paper dated 5 February 1988
prepared by Mr Pyper was submitted by Mr Norris to the
Lending Credit Committee reversing the Board's decision on 28
January 1988 to approve the provision of a standby facility.
The paper quoted the fact that
detailed investigations into the practical and legal aspects
had established that this facility, if granted, would be
considered as exposure to the Equiticorp Group and
consequently the Bank rejected the proposed facility.
The Lending Credit Committee
at its meeting on 9 February 1988 noted the cancellation of
the facility. There is no evidence that management's decision
to reverse the Board approval was advised to the Board.
26.5 THE PURCHASE OF EQUITICORP
RECEIVABLES BY BENEFICIAL FINANCE
During the period January to
March (inclusive) 1988, Beneficial Finance negotiated for the
acquisition of, and acquired, five portfolios of receivables,
comprising loans from various Equiticorp companies: four
portfolios related to Australian receivables, and one to New
The circumstances of, and
leading up to, these acquisitions, and the respective
performances of the portfolios acquired, will be examined at
length in a later Report. Several facts can be said to have
(a) Mr J A Baker was,
throughout, Managing Director of Beneficial Finance, and
Mr Clark was, as well as being Managing Director of the
Bank and Director of Equiticorp, also a director of
(b) The acquisitions were
carried through by using two subsidiaries - namely,
Dynour Pty Ltd and Gaimop Pty Ltd - of a Beneficial
Finance off-balance sheet company, Kabani Pty Ltd.
(c) The Beneficial Finance
Board did not, formally, approve any of the transactions,
but for reasons that will be detailed by me in a later
Report, I am satisfied that the Beneficial Finance Board
understood what was being done. They were negotiated and
concluded by Management of Beneficial Finance, under the
direction of Mr Baker.
(d) The portfolios were,
from a purely commercial point of view, acquired rapidly,
and in successive and overlapping transactions.
(e) In the acquisition of
the second tranche of receivables in New Zealand, the
funding for which was provided by the Bank of New Zealand
(to Ravlick() Ltd), the Bank gave a guarantee
for $NZ 20.0M in favour of the Bank of New Zealand;
Beneficial Finance provided similar additional security
to the Bank of New Zealand in the sum of $NZ 30.0M. Such
generous participation by the Bank was, in the
(f) The Beneficial Finance
Board resolved to lend moneys to companies associated
with Beneficial Finance to enable the acquisition of the
Equiticorp receivables to take place; the amounts the
subjects of the resolution were [$49.0M and $64.0M].
Minutes of the meeting at which these resolutions were
passed indicated that they were held on 5 January 1988.
Only two directors ie Mr L Barrett and Mr Baker were
stated as present together with Mr B D Barton the Company
Secretary of Beneficial Finance. According to the
evidence of Mr Baker, no actual meeting ever took place.
They were referred to as paper meetings. This subject
will be dealt with in more detail in my report on the
affairs of Beneficial Finance.
(g) In October 1987, Mr
Clark (then a director of Beneficial Finance and
Equiticorp) spoke to Mr Baker about the possibility of
acquiring the receivable portfolios.
(h) The acquisitions of
the Australian and New Zealand receivables, which were
concluded before the end of March 1988, resulted in the
injection into Equiticorp of a substantial volume of
liquid funds, which I may safely place at something in
excess of [$NZ 220.0M].
26.6 ASSESSMENT OF RELEVANT FACTORS
The Oceanic Capital
Corporation purchase and the Equiticorp Receivables purchase
cannot be considered separately. Time, circumstances,
protagonists, and outcome, unite to proclaim the
improbability that they were simply parallel, but
independent, commercial transactions, which did not share a
(a) In each case, the
deals were pursued and concluded after the stock market
crash had left Equiticorp facing the possibility of
financial difficulties if it did not access liquid funds,
sufficient to meet, before 20 March 1988, the
requirements of the Take-out Agreement made on 19 October
(b) In each case, Mr Clark
had been responsible for introducing the proposed deal -
in the case of Oceanic Capital Corporation, to the Bank,
and in the case of the Equiticorp Receivables, to Mr
Baker, Managing Director of Beneficial Finance.
(c) Mr Clark was, at
material times, Managing Director of the Bank, and
director of Beneficial Finance and of Equiticorp. He was
a business associate of Mr Hawkins, who was Chairman of
Directors of Equiticorp, Mr Hawkins being heavily
interested in meeting the burden of debt created by the
Take-out Agreement made on 19 October 1987.
(d) The deals, together,
divested and invested an amount in excess of two hundred
million dollars. Quite apart from the foregoing
directorships which Mr Clark held, he was Chief Executive
Officer of the Bank. I accept, whenever it is relevant,
that, for the record, Mr Clark declared his interests,
and did not overtly press for negotiations to progress to
a timely end; he told me in evidence that he was not
fully aware of each deal's progress() but it
is, to my mind, impossible to suppose that he did not,
nevertheless, keep himself reasonably aware of what was
happening as each deal proceeded to its conclusion, and
of what that conclusion with all its consequences and
implications would be. The awareness and burden of
conflicts of interest must have been apparent to him in
that, as a director of Equiticorp, he was aware, through
attendance at Board meetings, of the affairs of that
company and its financial position, and as a director and
the Managing Director of the State Bank and a director of
Beneficial Finance of the need for lending policies to be
In the Oceanic Capital
Corporation deal, so far as records reveal, the important
conditions that the Bank Board, at its meeting 25
February 1988, required to be fulfilled before the
acquisition could be approved, were not thereafter
adverted to: in the Equiticorp Receivables deal the
Beneficial Finance Management, led, I am satisfied, by Mr
Baker, carried through the hasty series of acquisitions
without the participation of the Beneficial Finance
Board, and involving `paper meetings'.
(e) Notwithstanding Mr
Clark's denial in this regard(), in my
opinion, he had a motive to relieve the financial burden
on Equiticorp, founded on his position as a director and
(f) Finally, there is
the question of time. In the setting of all other acts,
events, and circumstances, it must be a significant
coincidence that negotiations examined above led to the
consummation of both deals so close to the day of cash
settlement of the New Zealand deal more especially having
regard to the otherwise inexplicable haste with which the
26.7 CONFLICTS OF INTEREST
26.7.1 GENERAL COMMENT
The duty of a director to
avoid a conflict of interest is one of the duties that arises
from his fiduciary position.
A conflict of interest is
disclosed where a person, in circumstances where he is
obliged to discharge a duty or exercise a power in order to
serve the interests of one party, finds that he cannot do so
without, at the same time, acting, or running an applicable
risk of acting, contrary to the interests of a second party
whose interests he is likewise obliged to serve.
All fiduciaries are under a
duty to avoid conflict of interest situations.
This means that they must not
allow a situation to develop where their duties to the person
for whose benefit they act and their personal interests are,
or may be, in conflict.
The obligation to avoid
conflict of interests aims to prevent directors improperly
making a profit from their office. It goes further than this,
and prevents directors from putting themselves in a position
where it appears that they may act in their own interests.
It is necessary to review the
relationship between the purchaser and the vendor for
potential conflicts of interests to ensure that any potential
relationship did not jeopardise an objective assessment of
The fundamental due diligence
procedures considered necessary to review potential conflicts
in the matters that have been discussed in this Chapter would
include an examination and assessment of the following:
(a) The vendor's reasons
for selling the portfolio.
(b) The existence of any
common associations or relationships between the vendor
and purchaser which should be taken to account during the
due diligence examination.
(c) The other interests in
the transaction which could generate potential conflicts
The Managing Director of the
Bank, Mr Clark, who was also a director of Beneficial
Finance, was the person who introduced the proposal to
acquire the receivables from the Equiticorp Group. At this
point in time, Mr Clark was a director of the New Zealand
company, Equiticorp Holdings Ltd, being the parent company of
the vendor companies. It was, therefore, relevant to the due
diligence assignment to identify all potential conflicts of
interest in the transaction to ensure that the Beneficial
Finance Board was aware of all conflicts of interest and
confirm that actual conflicts of interest did not jeopardise
the assessment of the risks and benefits of the acquisition
for the Bank and Beneficial Finance.
26.7.2 SPECIFIC ACTION REQUIRED
The specific due diligence
procedures required to ensure that any potential conflicts of
interest between the purchaser and the vendor did not
jeopardise an objective assessment of the transaction can be
summarised as follows:
(a) Details of any
transactions by the vendor which may be relevant to show
the vendor's reasons for disposing of the receivables.
In particular, the
Equiticorp Group's vulnerability as a consequence of the
October 1987 share market crash and Equiticorp Holdings
Ltd acquisition of New Zealand Steel Ltd from the New
The market price of the
Equiticorp Holdings Ltd shares immediately prior to the
October 1987 share market crash was approximately $NZ
3.50 per share. Immediately post crash the share market
price was approximately $NZ 1.00 per share.
Equiticorp Holdings Ltd's
eventual failure was contributed to by the share market
crash in October 1987. In January 1989, the Equiticorp
Group had collapsed and statutory managers were appointed
to administer the affairs of the New Zealand Holding
Company and official liquidators were appointed to wind
up the affairs of the Australian companies within the
At the time of the share
market crash in October 1987, Equiticorp Holdings had
agreed to purchase a company called New Zealand Steel Ltd
from the New Zealand Government which held approximately
80-90 per cent of the issued share capital.
purchased New Zealand Steel Ltd from the Government for a
consideration of $NZ 327.0M.
settled the purchase of New Zealand Steel Ltd shares by
exchanging Equiticorp Holdings shares. There was also
Underwriting Agreements attached to the transaction.
In March 1988, the New
Zealand Government exercised its Underwriting Agreement
over the New Zealand Steel Ltd shares, thus forcing their
purchase at $NZ 3.52 at a time when the market price of
the shares was $NZ 1.10. The Chairman of the Board of
Directors of Equiticorp Holdings Ltd was Mr Hawkins.
Mr Hawkins' companies had
a Take-out Agreement with the Underwriter in respect of
this acquisition and accordingly was required to pay $NZ
327.0M to the Government.
This payment was achieved
by Mr Hawkin's company, Ararimu Investments Four Ltd
borrowing $NZ 222.0M from Equiticorp and $NZ 105.0M from
another financier. It would appear that the non-executive
directors of Equiticorp were unaware of this. The effect
of these borrowings from the Equiticorp Group was to
create a severe liquidity position.
In December 1987, the
State Bank partially funded Equiticorp (Tasman) Ltd
acquisition of Monier. The State Bank provided $200.0M of
the $650.0M total consideration, Equiticorp (Tasman) Ltd
being part of the Equiticorp Group.
To provide this funding on
16 December 1987, the State Bank purchased receivables to
the value of $150.0M from Equiticorp Australia.
Equiticorp Australia on-loaned the $150.0M to Equiticorp
On 15 January 1988,
Equiticorp (Tasman) Ltd repaid the $150.0M to Equiticorp
On the same day,
Equiticorp Australia pursuant to a Put Option repurchased
the $150.0M worth of receivables.
The balance of $50.0M was
an outstanding loan to the Bank.
15 January 1988 was also
the date that Beneficial Finance settled the acquisition
of the South Australian receivables for $47.0M.
Directors of Equiticorp
(Tasman) Ltd, at the date of this transaction, included
Mr Hawkins and Mr Clark.
The supplementary Board
Papers of the Bank show that Mr Clark declared an
interest in this proposal when it was recommended to the
Board of Directors and abstained from voting on the
Board's recommendations. Those papers related to
Equiticorp's cash flow problem.
Whilst it is acknowledged
that certain of these events were subsequent to the
period January 1988 to March 1988, being the dates the
Australian and New Zealand receivables were acquired,
prudent enquiries at the time of the transactions would
have established material facts relevant for
consideration by the Beneficial Finance Board in their
(b) All associations
including common directorships and shareholdings between
the vendor and the purchaser should be identified so as
to ensure that all interests are adequately disclosed.
Mr Clark had been a
director of the New Zealand company Equiticorp Holdings
Ltd for some years and remained so until his resignation
in July 1988. Mr Clark had previously had a business
association with the Chairman of the Equiticorp Holdings
Board of Directors, Mr Hawkins.
A reference to the
Directors' Minutes of Equiticorp Holdings during the
relevant period of October 1987 to March 1988 shows Mr
Clark in attendance at the following meetings:
(i) 27 October 1987;
(ii) 30 November 1987;
(iii) 25 January 1988;
(iv) 29 February 1988;
(v) 28 March 1988.
Mr Clark's shareholding in
the New Zealand company increased over the years, mainly
as a result of new share issues. From early 1988, through
to September 1988, when he disposed of his shareholdings
he had approximately 0.5M shares and 0.32M options.
(c) Any assessments of the
transaction should be considered to determine whether
they relied upon the opinions of parties who potentially
have a conflict of interest.
26.7.3 OTHER RELEVANT
(a) Neither Mr Baker nor
any other member of the Beneficial Finance due diligence
review team investigated the extent of other transactions
between the vendor and any of the member entities of the
State Bank Group.
(b) Mr Clark advised the
Beneficial Finance Board of his conflict of interest at
its meeting on 10 February 1988. There is no evidence
that he participated in decisions in relation to the
acquisition.() The minutes of the Beneficial
Finance Board do not record Mr Clark's participation in
regard to the discussion covering the portfolios.
Mr Baker has stated that
he was aware of Mr Clark's relationship with the vendor.
He has also stated that he was not put under pressure of
any nature by Mr Clark to settle the transaction.()
The source through which
the South Australian transaction was introduced to
Beneficial Finance was noted in Mr Baker's letter to the
Beneficial Finance Board of 29 or 30 December 1987 as
being Mr Clark.
Mr Baker was unable to
recall whether the other transactions were introduced to
the Beneficial Finance Group by Mr Clark or through
direct contact from Equiticorp as part of an ongoing
(c) No evidence was
presented to the Investigation which indicated that
Beneficial Finance relied upon any opinions from Mr Clark
in considering the transaction. Mr Baker stated that with
regard to each of these transactions:
"... Tim Clark
certainly never put me under pressure. He would have
known it was going on, would have been interested in
the progress with it, but I can't remember him
pushing me to settle anything anytime." ()
26.8 SOME CONFIRMATORY MATERIAL
Three other transactions are
also relevant in this context.
The first established a
setting favourable to the future promotion of commerce
between the Bank and Equiticorp, and exemplified the
managements willingness to proceed with a large exposure to
Equiticorp in defiance of authorative advice - from the
Reserve Bank - to the contrary.
The second and third
transactions illustrate the dominating influence of Mr Clark
within the State Bank Group, and casts, retrospectively, some
light on the ways and means available to him to promote that
26.8.1 THE BANK AND EXPOSURE TO
EQUITICORP OF $200.0M - 1 JUNE 1987
Towards the end of May 1987,
market manoeuvres for the take-over of Monier were in
progress. Equiticorp wished to make a bid for Monier, and
looked to the Bank to ensure it had the funds to do so.
On 29 May 1987 (a Friday),
Equiticorp put to the Bank a request for a large loan
facility. This was immediately referred to the Bank's Lending
Credit Committee ("Lending Credit Committee"). That
Committee worked over the weekend on a draft of the terms and
conditions on which the Bank would provide the facility
sought. Time was of the essence because Equiticorp, for
tactical reasons, wished to announce its take-over bid in the
press as soon as possible. (The announcement was, in fact,
made at midday on 2 June 1987.)
On Monday, 1 June 1987, Mr K S
Matthews, armed with terms and conditions approved by the
Lending Credit Committee and by a round robin of at least six
of the Bank's nine directors, went to Sydney and held a
conference with Messrs Brady, Pierson, and Fitzgibbon, all of
the Reserve Bank.
Mr Brady's immediate response
was that, on prudential grounds, he had considerable
reservations about the proposed exposure, though he had no
adverse criticism to make of its commercial viability.
The meeting broke off to
enable Mr Brady to consult his colleagues in the Reserve
Just after noon, Mr Brady
informed Mr Matthews that he had conferred with his
colleagues and that Reserve Bank counselled strongly against
the Bank's entering into the transaction. His reasons (which
he repeated, unmodified, by letter on the same day) were
(a) The exposure was too
large for the Bank's present capital base.
(b) The Bank already had
several commitments in excess of thirty per cent of its
(c) There was no assured
program to reduce the exposure, by sell-down, sale of
assets, or the like, within a very short period.
(d) There was some
awkwardness in a situation where a senior executive of a
bank [Mr T M Clark] was associated, at Board level, with
the borrowing company. That in no way reflected on the
person involved, but rather was a matter of possible
Notwithstanding the strongly
expressed Reserve Bank misgivings, the Bank's offer was made
on the same day. The Chief Manager, International Banking (Mr
T L Mallett), wrote to the Managing Director Equiticorp
(Tasman) Ltd (to which the facility was formally to be
provided) that a facility of $200.0M was approved by the Bank
on the terms and conditions contained in his letter. It is to
be observed that, amongst several other conditions, the
principal security was to be provided by Monier script
purchased; and that the actual loan (over and above a
bridging sum of $35.0M provided by the Bank) would not
proceed as offered, that is, on a syndicated basis, until
Equiticorp (Tasman) Ltd had gained, or was entitled to, 50
per cent or over of the Monier shares. The Bank added, that
if that control were not obtained, and the syndicated
facility were not required, the funding for shares acquired
in Monier would be subject to negotiation, to suit all
parties. The offer was immediately and unconditionally
accepted. Let it here be stated, for the record, that Mr
Clark duly declared his interest; as he did on other
occasions; the material before me does not suggest that, with
respect to this transaction, he did anything untoward to
promote the approval of the facility.
There was, and has been, a
disposition, on the part of some senior management, to regard
this whole deal ($35.0M apart) as not amounting to a true
exposure, because the offer from the Bank contained
conditions to be met by Equiticorp; they prefer to call it
`an undertaking'. This, to my mind, does not stand close
scrutiny. The offer conveyed by the letter of 1 June 1987 was
not a conditional offer; it comprised a set of terms which
were to be fulfilled if the offer was accepted; those terms
were accepted as a whole and unconditionally. The test is
this: if Equiticorp (Tasman) Ltd had duly purchased the
necessary shares, but before that purchase the Bank had
unilaterally gone back on its word, would the Bank have been
still bound to provide the facility? In my opinion, it would.
The correct analysis of the deal is that once Equiticorp
(Tasman) Ltd performed its part, the Bank was bound to
perform its part. This, in my opinion, was an exposure, in
plain banking terms, to a limit of $200.0M.
How then do the protagonists
of this transaction stand in relation to the New Zealand
Steel Purchase and the transactions that it set in train?
Even though the June 1987 facility was, in the event, not
called on by Equiticorp, the proposal for the Bank to grant
the facility had gone through. In short, the Bank's
Management had taken a position that was contrary to the
counsel of the Reserve Bank. It is, of course, plain that the
Commonwealth legislation setting up, and conferring powers
on, the Reserve Bank did not, in point of law, authorise it
to control the Bank, as the Bank was a State instrumentality.
This matter is fully discussed in Chapter 15 - "The
Relationship with the Reserve Bank of Australia"
where the relationship of the State Bank and the Reserve Bank
of Australia is examined. But the Bank had, speaking
generally, undertaken to co-operate with the Reserve Bank,
though it reserved to itself power to differ from its advice
in particular cases.
The Bank had in this matter,
notwithstanding the advice of senior Reserve Bank officers
that these were issues of concern (as discussed in Chapter 15
referred to above), rejected the Reserve Bank advice in
favour of its client Equiticorp; this act of rejection, in a
deal of such potential consequence to the Bank, served, in my
opinion, strongly to confirm the banker-customer relationship
between the Bank and the Equiticorp Group. The Equiticorp
Group had established itself, in testing conditions, as a
welcome and well-served customer. The Bank had knowingly
supported the proposed facility notwithstanding the
`awkwardness' of Mr Clark's situation.
26.8.2 THE $10.0M
`UNDERPINNING' BY BENEFICIAL FINANCE OF THE BANK'S EXPOSURE TO
EQUITICORP - 31 JANUARY 1989
On 13 January 1989, the Bank's
exposure to Equiticorp stood at $54.0M (comprising bill
acceptances, $5.0M of which were underpinned by the R&I
Bank of Western Australia). This exposure had been
substantial since 1984; on 22 December 1987 the actual
exposure stood at $147.0M, with a limit of $225.5M. (This
omits consideration of the Receivables deal discussed
earlier.) It had been clear to Mr Clark for some time (and
probably to senior management in the Bank as well) that
Equiticorp was experiencing financial difficulties. Mr Clark
had remained a director of Equiticorp till 29 July 1988, and
the majority of loan approvals to the Group occurred while he
was still a director of Equiticorp.
Mr Clark, late in 1988,
approached Mr Baker with the request that, for a fee of 1 per
cent, that is $0.1M, Beneficial Finance should agree to
underpin the Bank exposure to Equiticorp to the extent of
The Beneficial Finance
Executive Committee objected to the proposal, but Mr Baker
put it to them that any resultant loss by Beneficial Finance
could be claimed as a tax deduction, and that Mr Clark had
undertaken that the Bank would restore Beneficial Finance's
profit if a loss actually occurred. The Executive reluctantly
consented, persuaded, in part, by the $0.1M fee.
The transaction was concluded
by letter (General Manager, Corporate Banking, to Mr Baker,
Managing Director, Beneficial Finance, of 13 January 1989);
Beneficial Finance's acceptance appears at the foot of the
There was no sensible
commercial reason for the transaction. (The claimed tax
deduction does not in my view amount to one.) It was nonsense
for the Bank to obtain from a subsidiary a solemn agreement
to accept part of the parent company's possible loss when
that loss would, in any event, be sustained, and generally
felt, by the Group. One can only suppose, having regard to
the period in which this transaction occurred, that Mr Clark
intended to use the Beneficial Finance underpinning to reduce
the Bank's book losses, and to affect the public perception
of its finances accordingly - in particular, to minimise the
effect of the losses, in the Equiticorp account, on the
Bank's reported losses.
On the material before me, I
am of the opinion that there was never any intention that
Beneficial Finance would be called on to honour the $10.0M.
Beneficial Finance's records
contain a set of `minutes' of the Beneficial Finance Board of
a `meeting'() on 13 January 1989, which reports
the Board's resolution that the arrangement embodied in the
foregoing letter of the same date be accepted, and that
execution thereof would bind Beneficial Finance.
There is evidence to suggest
that this was a `paper' meeting, which never, in truth, took
place. The matter of `Paper Meetings' as I have said will be
examined in the Beneficial Finance part of my Report.
26.8.3 THE $4.0M ACQUISITION OF
MORTGAGE BONDS - 16 JANUARY 1989
By letter dated 16 January
1989, Mr B D Fitzgerald, Director Group Treasury, Equiticorp
Australia Limited, requested that the State Bank acquire
Aurora Mortgage Bonds with a face value of $NZ 4.0M. The
mortgage bonds were issued by Aurora Group Limited, being a
subsidiary company of Equiticorp Holdings Limited.
Mr Masters, General Manager,
Corporate Banking, approved the acquisition, subject to
certain conditions, on behalf of the Bank on 17 January 1989.
This approval was made
notwithstanding the letter clearly indicates that financial
problems were present within the Equiticorp Group.
The letter states, inter alia:
"The Bonds are
self servicing when taking into account the monies lodged
with the trustee, and therefore insulated from the rest
of the Aurora/Equiticorp Group.
We really need an
answer early tomorrow to undo the damage done today. We
have been unable to get hold of Franklins this evening,
but will speak to them tomorrow morning.
I honestly think it is
in the interest of the lenders to E.A.L. that this amount
is honoured tomorrow. No amount of logic is going to stop
an operation like Franklins informing other people in the
market. We must ensure E.A.L. is around to complete its
restructure, and honouring this sizeable call deposit by
your purchase of the Mortgage Bond is essential."
The letter also evidences the
fact Mr Clark is agreeable to the purchase as it states:
"Allan has spoken
with Tim about the request and he thinks the purchase is
a sensible way around the problem, but obviously will
leave the decision to you." ()
This approval for the purchase
of $NZ 4.0M mortgage bonds occurred in the same month of the
financial collapse of the Equiticorp Group.
In the first case,its purpose
was, in my opinion, to lessen the impact of losses likely to
be incurred by the Bank from its large exposure to
Equiticorp, a group of companies with which Mr Clark's name
had long been associated, and whose loan facilities had been
provided by the Bank, for the most part, while he was still
an Equiticorp director, standing under a conflict of
interest. In the second case, I believe the imprudent
decision was motivated by a desire to assist the Equiticorp
Group during this financially troubled period.
In the final analysis, a
conclusion about Mr T M Clark's conduct becomes a question of
fact and degree.
For the reasons, and on the
basis of the evidence as stated in this Chapter, the matters
upon which I have reported may, in my opinion, disclose a
conflict of interest and a breach of fiduciary duty on the
part of Mr T M Clark. It is my opinion that Mr T M Clark had
a motive to relieve the financial burden on Equiticorp
founded on his position as a director and shareholder of
26.10 REPORT IN ACCORDANCE WITH TERMS OF
I report in accordance with
Term of Appointment E that in my opinion such matters should
be further investigated.