BENEFICIAL FINANCE - FUNDING, ASSET AND LIABILITY MANAGEMENT,
INTERNAL AUDIT, AND OTHER MATTERS CONSIDERED
MANAGEMENT AND FINANCIAL
TABLE OF CONTENTS
41.1 PURPOSE OF CHAPTER
41.2 PLAN OF CHAPTER
41.3 OFF-BALANCE SHEET STRUCTURE OF BENEFICIAL FINANCE
41.3.1 THE EXTENT OF THE OFF-BALANCE SHEET ENTITIES
41.3.2 REASONS FOR THE ESTABLISHMENT OF THE OFF-BALANCE SHEET STRUCTURE
220.127.116.11 The Debenture Trust Deeds
41.3.3 ESTABLISHMENT OF THE OFF-BALANCE SHEET STRUCTURE
41.3.4 MEANING OF "SUBSIDIARY"
18.104.22.168 Thomson Simmons & Co 1985 Advice
22.214.171.124 Legal Definition
126.96.36.199 Subsequent Legislative Developments
188.8.131.52 Other Legislative Definitions of "Control"
184.108.40.206 Conclusion on "Control"
41.3.5 USE OF OFF-BALANCE SHEET STRUCTURES IN 1984-85
41.3.6 THE OFF-BALANCE SHEET STRUCTURE AND ITS OPERATION
41.3.7 THE ROLE OF THE AUDITORS AND THE TRUSTEE FOR DEBENTURE HOLDERS
41.3.8 CONCLUSIONS ON THE OFF-BALANCE SHEET STRUCTURE
41.4 INTERNAL MANAGEMENT REPORTING
41.4.1 DUTIES AND RESPONSIBILITIES OF THE BOARD
41.4.2 AGGREGATE ACCOUNTING
41.4.3 AGGREGATE ACCOUNTS - 31 DECEMBER 1988
41.4.4 AGGREGATE ACCOUNTS - 30 JUNE 1989
41.4.5 AGGREGATE ACCOUNTS - 31 DECEMBER 1989
41.4.6 AGGREGATE ACCOUNTS - 30 JUNE 1990
41.4.7 CONCLUSIONS FROM AGGREGATE ACCOUNTING
41.1 PURPOSE OF CHAPTER
This Chapter examines the arrangements concerning the
off-balance sheet entities of Beneficial Finance for two quite distinct purposes. It
reports on the investigation into the matters and events which caused the financial
position of the Bank and the Bank Group, as publicly reported in February 1991. It also
has relevance to my Investigation into the appropriateness and adequacy of the external
audits of the accounts of the Bank, which are reported upon in other Chapters of my
I am required by Paragraph A(a) of my Terms of Appointment
to investigate matters and events which caused the financial position of the Bank and the
Bank Group. In my opinion, "financial position" is a very wide concept, and goes
beyond consideration of the contents of the published statutory reports of the Bank and
the Bank Group. Paragraph A(a) requires me to investigate off-balance sheet matters which
may be relevant to the financial position of the Bank and Beneficial Finance, as a member
of the Bank Group, during the period from 1 January 1984 to 30 June 1990.
Paragraph B of my Terms of Appointment requires me to
investigate the appropriateness and adequacy of the external audits of the accounts of the
Bank and Beneficial Finance. As noted in Chapter 54 - "The External Audits of
Beneficial Finance: Introduction", the Bank's published statutory reports
included consolidated accounts of the Bank and what are called its subsidiary companies,
including Beneficial Finance. As a matter of law, the Bank cannot have subsidiary
companies in the usual sense, because this term is defined in the Companies Code in
relation to companies governed by the Code. The Bank is not an entity governed by the
Code. In respect of the accounts of the Bank, and the consolidated accounts of the Bank
and its subsidiaries, published in respect of the period from 1 July 1984 to 30 June 1990,
the external auditors reported that the consolidated accounts complied with the provisions
of the Companies Code and gave a true and fair view of the state of affairs of the group
at the relevant balance dates. Similar reports were issued by the external auditors of
Beneficial Finance in relation to the consolidated accounts of Beneficial Finance and its
I comment in Chapter 46 - "The External Audits of
the State Bank: Background Information", on the relative responsibilities of the
external auditors of the Bank and its subsidiaries other than Beneficial Finance, and the
external auditors of Beneficial Finance and its subsidiaries. The Bank's auditors, KPMG
Peat Marwick, have submitted that they were entitled to rely on the work performed by
Price Waterhouse, as external auditors of Beneficial Finance and its subsidiaries, for the
purpose of auditing the consolidated accounts of the Bank(). In my opinion, the
work performed by Price Waterhouse formed part of the audit of the consolidated accounts
of the Bank and its subsidiaries.
In my opinion, my Terms of Appointment consequently require
me to investigate and report whether the above audit reports were appropriate and,
specifically, whether adequate disclosure was made in the accounts of the results and
affairs of the off-balance sheet entities of Beneficial Finance to ensure that the
accounts gave a true and fair view of the results and affairs of the Bank and Beneficial
In any event, for the avoidance of doubt, my Terms of
Appointment were amended on 23 December 1992 to make it clear that paragraph B of my Terms
of Appointment extends to the external audit of the accounts of Beneficial Finance, which
include the consolidated accounts of Beneficial Finance and its subsidiaries, and of such
other subsidiaries of the Bank as I consider should be subject to investigation under
Paragraph C of my Terms of Appointment requires me to
investigate and report, having regard to the matters in Paragraphs A and B, as to whether "...
the operations, affairs and transactions of the ... Bank Group were adequately or properly
supervised, directed and controlled by ... the Directors, officers and employees of the
members of the Bank Group".
Paragraph E of my Terms of Appointment requires me to
report on any matters which, in my opinion, may disclose any unlawful or improper
activity, and whether in my opinion, such matters should be further investigated. My
consideration of the questions arising, and recommendations as to matters which I consider
should be referred for further investigation by the appropriate authority, are set out in
In this Chapter I examine two matters, concerning
Beneficial Finance. They are as follows:
(a) The relationship between Beneficial Finance and its "off-balance
(b) The impact of the off-balance sheet structure on
financial information prepared by the management of Beneficial Finance, during the period
from 1 July 1984 to 30 June 1990, as a matter of internal management reporting to the
I do not, however, examine and report in this Chapter on
any information relating to Beneficial Finance prepared by officers of the Bank which may
have been provided to the Bank Board.
41.2 PLAN OF CHAPTER
Off-Balance Sheet Structure of Beneficial Finance
This Section examines the development of the structure of
entities known as Beneficial Finance's "off-balance sheet entities", and
their status under the Companies (South Australia) Code. Transactions entered into by
these entities were, in my opinion, matters and events which caused the financial position
of the Bank and the Bank Group as reported in February 1991 by the Treasurer. Details of
the off-balance sheet entities that were created in the period covered by this
Investigation are set out in an appendix to Chapter 28 - "Overview of Beneficial
Finance Corporation Limited".
Internal Management Reporting
This Section examines the information necessary for the
Board and management of Beneficial Finance to properly and adequately supervise, direct,
and control, the affairs and transactions of Beneficial Finance. Financial information
presented to the Beneficial Finance Board is also examined and assessed.
This Section sets out my findings and conclusions on the
41.3 OFF-BALANCE SHEET STRUCTURE OF BENEFICIAL FINANCE
41.3.1 THE EXTENT OF THE OFF-BALANCE SHEET ENTITIES
At 30 June 1990, the operations of Beneficial Finance were
conducted through a complex structure, both on and off-balance sheet, of trusts,
companies, partnerships, and unincorporated joint ventures. At this date, prior to
re-structuring, the assets held through off-balance sheet entities were in the order of
$679.0M.() At this date many of the entities which had formerly been
off-balance sheet were brought onto the balance sheet of the Bank, by being transferred to
a subsidiary of the Bank, Southstate Corporate Holdings Ltd. The restructure proposed to
reduce off-balance sheet assets to $425.0M(), and to leave off-balance sheet
certain losses estimated at $9.7M before inter-company adjustments.() The above
asset figures are before eliminating inter-company loans. The extent of the actual assets
and losses of those entities which remained off-balance sheet for the year ended 30 June
1990 is discussed in Chapter 59 - "Review of the 1990 External Audit of Beneficial
41.3.2 REASONS FOR THE ESTABLISHMENT OF THE OFF-BALANCE
The creation of such a complex structure was the result of
management proposals approved by the Beneficial Finance Board.
The structure of off-balance sheet entities was created
principally to avoid restrictions imposed by the terms of the debenture trust deeds
created, by law, to protect the interests of the debenture holders of Beneficial Finance.
The objective of conducting business of the Bank Group in a
manner unaffected by the terms of the trust deeds, which Beneficial Finance regarded as
being commercially restrictive, could have been achieved by the quite simple and proper
expedient of creating "subsidiary" companies under the Bank itself, where there
was no such deed. This was the method used in June 1990 to bring certain off-balance sheet
entities onto the Bank Group's balance sheet.
220.127.116.11 The Debenture Trust Deeds
In a submission to me from certain former Non-Executive
Directors of the Bank and Beneficial Finance, it is asserted that:
"The development of the off-balance sheet entities
within Beneficial was a response to the provision of an overly restrictive Trust Deed and
the demand for tax effective structured finance packages during the mid to late
It is also asserted that the `complex corporate structure',
to which I have referred, was not uncommon "and indeed characterised most
Australian Banks and financial institutions at this time."
Price Waterhouse also have submitted that the use of
off-balance sheet entities was not uncommon in the banking and finance industry in the
My Terms of Appointment require me to examine the
operations and affairs of Beneficial Finance, as a member of the Bank Group. I consider
that this requires me, in the context of the off-balance sheet entities, to examine the
structure established by Beneficial Finance. I accept the evidence given to me by Mr G J
Yelland, internal legal counsel of Beneficial Finance, and Mr D J Tucker, member of the
firm of Thomson Simmons & Co, who advised on and established the structure, that they
had no knowledge, when establishing the off-balance sheet structure, of the way in which
other banks and financial institutions in Australia at the time may have structured their
off-balance sheet entities.() In my opinion, evidence as to what may have been
done by other banks and financial institutions in the 1980's would not assist me in
determining the implications of Beneficial Finance's off-balance sheet structure.
The Companies Code provided, at all relevant times, that
Beneficial Finance was a `borrowing corporation' for the purpose of Part IV Division 5, as
it raised money from the public by means of issuing debentures as a security for loans
made to it. Effectively, the Companies Code provides that a corporation which invites the
public to subscribe for or purchase debentures shall enter into a Trust Deed appointing a
trustee corporation to hold security over the corporation's assets, and/or monitor the
maintenance of certain financial ratios that must be complied with by the corporation, on
behalf of the debenture holders. The appointment of the trustee is designed to ensure that
the borrowings from the public are subject to independent oversight by an entity that has
a legal obligation to act in the interests of the debenture holders; the trust deed
usually contains (and in Beneficial Finance's case did contain) a limitation on the amount
that the borrowing corporation may borrow.
The trustee for the debenture holders of Beneficial Finance
held security over Beneficial Finance's assets pursuant to a debenture Trust Deed, entered
into in 1960, and an unsecured notes Deed, entered into in 1974. These Deeds were replaced
by a further Deed, for both debenture stock and unsecured notes, entered into in March
1985. The replacement Trust Deed, although executed in 1985, did not become operative
until September 1989, as it was not until then that the large number of debenture and note
holders under the earlier Deeds could be contacted and have their borrowings discharged or
transferred to the new Trust Deed.
The submission from certain former Non-Executive Directors
describes the 1960 Trust Deed as being:
"... restrictive and even commercially unrealistic
for the sophisticated financing transactions prevalent during the mid to late 1980s"
Beneficial Finance, however, was bound by each of the Trust
Deeds. Beneficial Finance, set about finding ways to overcome their terms. The terms that
caused particular concern were those which provided, firstly, that, where Beneficial
Finance acquired a subsidiary company, the subsidiary had to become a guarantor of the
whole of the liabilities of Beneficial Finance to the Trustee, and, secondly, the gearing
requirements which imposed upon Beneficial Finance a minimum ratio of total liabilities to
total tangible assets. Under the 1960 Trust Deed, this latter requirement imposed upon
Beneficial Finance a maximum borrowing ratio of seven times shareholders funds, (which the
1985 deed changed to twelve times shareholders funds).
As to the requirement that a subsidiary become a guarantor
of all of the liabilities of Beneficial Finance the submission on behalf of the former
Non-Executive Directors states():
"It was a common practice amongst financiers in the
mid to late 1980's for these financiers to in effect become equity participants in the
projects which were being developed. Where a joint venture company was to be formed for
the purposes of a particular project it was clearly commercially unrealistic to expect the
joint venture partner to permit the joint venture vehicle to become a subsidiary of
Beneficial guaranteeing liabilities of Beneficial quite unrelated with the joint venture.
This, along with the taxation advantages available in structured finance packages was the
principal reason for the use of "off-balance sheet entities". The off-balance
sheet entity structure was conceived to allow Beneficial to enter into structured and tax
effective joint venture and other transactions without the vehicles through which those
transactions were being effected becoming subsidiaries within the definition of
"subsidiary" contained in Section 7(1) of the Companies Code. The incorporation
of off-balance sheet entities was a common practice amongst financial corporations at this
To place the establishment of the off-balance sheet
entities of Beneficial Finance in context, I refer below to the debate in Australia
concerning the off-balance sheet structures of certain corporations in 1984-85.
Certain reasons stated above for the use of off-balance
sheet entities in the corporate structure, as developed by the Beneficial Finance Group in
the period from 1986 to 1990, are confirmed by the Five Year Plan (1988 to 1993) of
Beneficial Finance's Investment Banking Division, which states:
"... The existing Investment Banking Division
structure involves a mixture of on and off-balance sheet activity. This situation has
developed primarily as a result of Debenture Trust Deed limitations such as the inability
to raise non-recourse prior ranking debt against assets owned by Beneficial, the
requirement of minority shareholders in companies in which Beneficial owns greater than
50% to effectively provide guarantees to Debenture Holders and the lack of flexibility in
buying and selling corporate entities."
"... for Beneficial to achieve optimum results in
the next five years a new corporate structure was essential to overcome Trust Deed
limitations on segments of the company's operations, minimise contingent liabilities and
to expand into overseas markets."
In the late 1980's, Beneficial Finance sought to expand its
markets and range of financial products. One of the strategies for achieving this
expansion was to acquire an interest in other established operations. Sometimes when this
occurred the original proprietors of the business retained an equity interest in the
business so as to ensure that expertise and market links were not lost.
Beneficial Finance considered it to be commercially
unrealistic for these operations to become subsidiaries as that would have required them
to guarantee the liabilities of Beneficial Finance. Such a requirement was seen as a major
obstacle to attracting or retaining external shareholders.
In the late 1980's, Beneficial Finance also acquired a
controlling interest in various property development entities with external participants.
For the reasons noted above, Beneficial Finance considered it commercially unrealistic for
these entities to become subsidiaries of Beneficial Finance.
The Beneficial Finance Trust Deeds also precluded the
pledging of specific assets as security in preference to the Trustee for debenture
holders, which would have restricted the ability of subsidiaries to raise external
For the reasons discussed above, Beneficial Finance sought
to set up a structure such that:
(a) Beneficial Finance could acquire what amounted, in
practice, to a controlling interest in another entity; and
(b) despite practical control being held by Beneficial
Finance, the entity would not become a subsidiary of Beneficial Finance within the meaning
of the definition of a subsidiary contained in the Companies Code.
41.3.3 ESTABLISHMENT OF THE OFF-BALANCE SHEET STRUCTURE
On 3 April 1985, Mr Yelland, Manager Legal Services of
Beneficial Finance, wrote to Mr Tucker of Thomson Simmons & Co, solicitors for
Mr Yelland's letter confirms instructions given to Mr
Tucker in a meeting of 3 April 1985.
The letter sought advice as to a suitable structure for the
acquisition by Beneficial Finance of the Centrelease Group of Companies.
In part, Mr Yelland's letter read as follows:
"... the major problem we have is selecting a
suitable vehicle within or outside of our Group to acquire these interests.
The acquiring vehicle is seen as not only the
appropriate receptacle for these interests, but also will be developed as the
entrepreneurial [arm] of the Group. Hence, it is most desirable that that
vehicle avoid the Trust Deed constraints as (to in particular) securing borrowings outside
of the (new) Debenture Trust Deed constraints and that its assets (and liabilities) be off
balance sheet ...
As we see it the alternative of acquiring vehicles open
to us are ...
4. Through a company over which the Corporation would
have unofficial control but which would not be a subsidiary ...
Given then that our directors can be satisfied with
the control which Beneficial can exert over the arrangement covered in 4(a) in respect of
both Board representation and sharing, it seems to be the most suitable way to go,
provided the vendors can be persuaded to accept the profit-sharing contractual
basis." [Emphasis added]
It will be seen from this letter that Mr Yelland was
seeking advice from Mr Tucker as to a structure for the establishment of a new entity
which would form part of the business operations of Beneficial Finance, over which
Beneficial Finance would have "unofficial control", but which would not
be a subsidiary of Beneficial Finance.
Mr Tucker replied with the memorandum of Thomson Simmon's
& Co's advice dated 7 April 1985.
In the memorandum, Mr Tucker discussed various alternatives
which, in his letter, Mr Yelland had proposed. One of those alternatives, noted by Thomson
Simmons & Co in paragraph 5.5 was as follows:
"A company over which Beneficial would have
unofficial control but which would not be a subsidiary, formed in one of the two following
(a) With its shareholding held as to 48% both Beneficial
and 48% by another entity of convenience which is not a subsidiary of, or related to,
Beneficial. This entity would hold sufficient of its shareholding in the company as
trustee for Centrelease to entitle Centrelease to beneficial ownership of 20% of the
shares in [Joint Finance Company]. The remaining 4 per cent of the shares would be
held by individuals nominated by, but not holding as trustee for, Beneficial. Beneficial
would not appoint, or be able to appoint, more than one half of the directors of the
(b) As above but with the shareholding owned as to 48
per cent by Beneficial, 20 per cent by Centre Lease and 32 per cent by an entity unrelated
In paragraph 12 of the memorandum Thomson Simmons & Co
"We therefore suggest use of a company, however for
the reasons which follow we suggest a different share structure and board arrangements to
those which have been proposed."
Mr Tucker then set out the provisions of Section 7 of the
Companies Code. The memorandum continued in paragraphs 14 and 15:
"It is noted that it is control which lies at the
heart of Section 7. If the company is not controlled by another company then it is not a
subsidiary. But it has been observed in the proposal in paragraph 5.5, a company owned as
to 50 per cent is not a subsidiary.
The terms of Section 7(1) are not impossible to
overcome. We have considered several alternatives for structuring JFC so as not to bring
it within Section 7(1)."
Mr Tucker then considered a series of alternatives in which
company structures were proposed, but the shareholding of either Beneficial Finance, or
any subsidiary of Beneficial Finance, was restricted to 50 per cent.
Thomson Simmons & Co recommended a structure using
ordinary shares and redeemable preference shares, such that the voting power of the
holders of the ordinary shares and of the redeemable preference shares were precisely 50
per cent each.
The memorandum concluded with the following paragraph 23:
"Establishment of JFC in the manner above advised
will take it outside the disclosure requirements of the Companies Code and its liabilities
outside of the range of liabilities to be included in calculations for the purpose of
determining borrowing limits under Beneficial's Trust Deeds and is likely also to remove
JFC from consideration under the Deeds relating to Euro Bond borrowings and any negative
pledge arrangements which Beneficial may have.
Such companies are not uncommon but it will be apparent
that skill has been employed to construct JFC in a manner calculated to have the above
effect. Consideration must therefore be given to the perception of JFC if constructed as
advised, in the context of the general commercial operations of Beneficial and its
relationship with persons and groups who may be effected by the formation of such a
Mr Yelland gave evidence that he did not understand
paragraph 23 as questioning whether the proposal was the sort of thing in which Beneficial
Finance should be involved. () Nor did he regard it as his role within
management of Beneficial Finance to oversee the advice obtained from Thomson Simmons &
Co, or to question management whether Beneficial Finance should proceed with a proposal
which Thomson Simmons & Co had advised was legal.
Following the advice of Thomson Simmons & Co on 7
April 1985, the proposal to establish the off-balance sheet structure, which became known
as Kabani, was brought before a committee of the Beneficial Finance Board at its meeting
on 15 April 1985. The proposal was approved, subject to a number of conditions being
"(a) The proposed company structure to be
submitted to Price Waterhouse to ensure they are satisfied from the point of view of the
auditors. Price Waterhouse to be appointed auditors of the new company."()
The next meeting of the Beneficial Finance Board was
held on 30 April 1985. It is recorded in the minutes that the conditions laid down in the
minutes of 15 April 1985, for the formation of the off-balance sheet company, had been
met. () In this matter, the Board was misled.
Mr A H Giles of Price Waterhouse gave evidence that
Price Waterhouse were not asked to give an opinion on the proposed structure, and that the
first they knew of the structure was in relation to Price Waterhouse's appointment as
auditors in June 1985.()
The Beneficial Finance Board, on 30 April 1985, approved
the establishment of the Kabani type structure and the immediate entering into of heads of
agreement regarding the Centrelease transaction, with a view to settlement on 1 July 1985.
Price Waterhouse were appointed auditors of Kabani and
Lagan, respectively, on 27 and 28 June 1985 (with effect from 1 July 1985), and, in later
years, were appointed auditors of Malary (with effect from 1 July 1985) and Fortina (with
effect from 1 July 1986).
Beneficial Finance established four groups of off-balance
sheet entities. The holding company of each of these groups was owned by two discretionary
trusts. These trusts held all the issued share capital in the following holding companies
(the Kabani type companies):
(a) Kabani Pty Limited;
(b) Malary Pty Limited;
(c) Lagan Pty Limited; and
(d) Fortina Pty Limited.
Each of these holding companies had a capital structure
comprising ordinary shares and preference shares. All of the ordinary shares in each of
these companies were held by a trust which had been specifically created by Mr Tucker
personally settling a sum of money ($10) upon trust, to be held by a trustee for that
purpose. These trusts were known as, for example, the Kabani Ordinary Shares Settlement
Trust. The trustee of each of the ordinary share trusts was Bondi Investments Limited,
ultimately, a wholly owned subsidiary of Beneficial Finance.
Each of the ordinary share settlements was settled under a
trust deed, which provided that any income derived from the assets of the trust, that is,
its holding in the ordinary share capital of the four holding companies, would be
distributed at the discretion of the trustee to a range of specified beneficiaries. All
of these beneficiaries were members of the Beneficial Finance Group, with the exception of
a beneficiary described as the National Heart Foundation.
The preference shares of each of the four holding companies
were held by another four trusts. All the preference shares in a particular company were
held by a particular trust. These trusts were known as, for example, the Kabani Preference
Shares Settlement. The trustee of each of the preference share trusts was Thomson Simmons
Nominees Pty Limited. These trusts were created by Mr Tucker settling a sum of money ($10)
to be held by a trustee under trust deeds which were substantially similar to the trust
deeds under which the ordinary share settlements were established. The preference share
settlements were discretionary trusts, each having the same beneficiaries as the ordinary
I will refer in this Chapter to the trusts holding shares
in Kabani, Malary, Lagan and Fortina as the Kabani type trusts.
The preference and ordinary shareholders were each entitled
to appoint one half of the Board of Directors of the Kabani type companies. Persons who
were directors of Beneficial Finance were appointed to the board of each of the Kabani
type companies (Kabani, Malary, Lagan and Fortina) at the date of incorporation. Half of
the voting power for each company was initially held by Thomson Simmons Nominees Pty
Limited, as trustee for the preference share settlement, but further preference shares
were issued by the Kabani type companies on and after 6 May 1986, which resulted in
Thomson Simmons Nominees Pty Ltd holding a majority of the voting power for each company.
The further preference share issues were undertaken upon the advice of Thomson Simmons
& Co, with the approval of Beneficial Finance.() This took the investment
of the preference share trust in Kabani from an initial $10 to $121 by 30 June 1989.
Nevertheless, the position upon, and after, such further preference share issues, was that
the preference and ordinary shareholders continued each to be entitled to appoint one half
of the Board of Directors of the Kabani type companies.()
The off-balance sheet entities operated and controlled
through the Kabani type trust structures were not consolidated into the accounts of
Beneficial Finance. Beneficial Finance took the view that those entities did not fall
within the definition of a subsidiary contained in the Code. This view of the effect of
the structures was supported by a number of legal opinions obtained by Beneficial Finance
and the trustee of Beneficial Finance's Debenture Trust Deed, Austrust Limited, at various
times between 1985 and 1991.() Many of these opinions fall outside the period
under review, and could not have influenced matters in relation to the accounts for the
years ended 30 June 1985 to 1990. Accordingly, I will not refer in detail to such opinions
in this Report.
As noted in Chapters 57 - "Review of the 1988
External Audit of Beneficial Finance" to Chapter 59 - "Review of the 1990
External Audit of Beneficial Finance", management of Beneficial Finance resisted
attempts by the auditors to provide disclosure of the results and affairs of the
off-balance sheet entities, and insisted on disclosures being limited to the bare minimum.
Management, in February 1989, obtained advice from Thomson Simmons & Co advising that
disclosure was not required under ASRB1016 on Equity Accounting. Further advice was
obtained from Thomson Simmons & Co in October and November 1990 that disclosure was
not required under AAS24 on Consolidated Financial Statements, and confirmation of this
advice was obtained from Mr M Robertson QC in September 1991 on AAS24 and the
corresponding approved accounting standard ASRB1024.
41.3.4 MEANING OF "SUBSIDIARY"
18.104.22.168 Thomson Simmons & Co 1985 Advice
The view of Beneficial Finance and its legal advisers,
Thomson Simmons & Co, was that the Kabani type companies fell outside the definition
of "subsidiary" of Beneficial Finance as contained in the Code. The
arguments for this were that Beneficial Finance:
(a) had no direct shareholding in any of the four holding
(b) each Kabani type trust controlled only one half of the
composition of the Board of Directors of each company;
(c) the shares held by trustees of the Kabani type trusts
were to be disregarded in determining "control" by reason of Section
7(3)(a) of the Code, since the shares were held in a fiduciary capacity; and
(d) neither trustee had a majority voting power at company
The 1985 advice did not go into detail about the
discretionary trusts which were to hold the shares in Kabani. In fact, the trusts made
Beneficial Finance the taker in default of appointment on vesting of the trust. This means
that Beneficial Finance had a vested equitable interest in all the issued share capital of
Kabani, subject to possible divestment by the trustee.()
The 1985 advice did not address the ordinary meaning of "control"
as used in the definition of subsidiary, and the significance of the practical dominance
over the affairs of the off-balance sheet entities exerted by Beneficial Finance, as a
question of fact. Indeed, according to the evidence of Mr Tucker, he was aware that his
client intended to exert practical commercial dominance over the Kabani type companies,
but he took the view that he need not concern himself with these matters for the purpose
of his advice.() Mr Tucker acknowledged that practical dominance in all matters
appears to have been assumed by Beneficial Finance.() Because of the view he
took on those matters, however, Mr Tucker did not consider whether "control"
had a meaning beyond strict legal control, nor did he research any of the authorities on
the meaning of control (other than the Keighery case, discussed below, which appears to
support his view).()
I have received submissions from certain former
Non-Executive Directors of the Bank and Beneficial Finance, from the external auditors of
Beneficial Finance, Price Waterhouse, and from the solicitors who advised Beneficial
Finance in connection with the off-balance sheet structure, Thomson Simmons and Co, that
it is beyond my power to form a view whether any given company was or was not a subsidiary
of Beneficial Finance under the Companies Code, or of the Bank as it used that expression,
since this involves determining matters of law.()
While I have some reservations about these submissions,
and I do not wish to be taken to have accepted them, for the reasons set out below, I do
not propose to make a finding on whether the off-balance sheet entities were subsidiaries
of Beneficial Finance or not. Further, I consider it is necessary to briefly examine the
issue of control because I consider I must, pursuant to Term of Appointment E, consider
whether any matters may disclose unlawful or improper activity.
22.214.171.124 Legal Definition
Section 7 of the Code contains the definition of a
subsidiary which is set out below:
"... 7(1) For the purposes of this Code, a
corporation shall, subject to sub-section (3), be deemed to be a subsidiary of another
corporation if -
(a) that other corporation -
(i) controls the composition of the board of directors
of the first-mentioned corporation;
(ii) is in a position to cast, or control the casting
of, more than one-half of the maximum number of votes that might be cast at a general
meeting of the first-mentioned corporation; or
(iii) holds more than one-half of the issued share
capital of the first-mentioned corporation (excluding any part of that issued share
capital that carries no right to participate beyond a specified amount in a distribution
of either profits or capital); or
(b) the first-mentioned corporation is a subsidiary of
any corporation that is that other corporation's subsidiary (including a corporation that
is that other corporation's subsidiary by another application or other applications of
7(2) Without limiting by implication the
circumstances in which the composition of a corporation's board of directors is to be
taken to be controlled by another corporation, the composition of a corporation's board of
directors shall be taken to be controlled by another corporation if that other
corporation, by the exercise of some power exercisable whether with or without the consent
or concurrence of any other person by that other corporation, can appoint or remove all or
a majority of the directors, and for the purposes of this provision that other corporation
shall be deemed to have power to make such an appointment if -
(a) a person cannot be appointed as a director without
the exercise in his favour by that other corporation of such a power; or
(b) a person's appointment as a director follows
necessarily from his being a director or other officer of that other corporation."
It will be seen that a corporation is a subsidiary of
another if the other:
(a) controls the composition of the board of directors of
the first-mentioned corporation;()
(b) is in a position to control the casting of more than
one-half of the maximum number of votes that might be cast at a general meeting of the
first-mentioned corporation; or
(c) holds more than one-half of the issued share capital of
the first-mentioned corporation.
I will, for the moment, concentrate on the meaning of "control"
(as used in the Code) of the composition of the board of directors in the following
analysis, but the same reasoning would apply to (b) above.
Section 7(3)(a) provides that any power exercisable by a
corporation in a fiduciary capacity shall be treated as not exercisable by it for the
purposes of the above tests.() Section 7(3)(b) provides that any power
exercisable by a bare trustee shall be treated as exercisable by the beneficiary.
Section 7(2) provides in part:
"Without limiting by implication the circumstances
in which the composition of a corporation's board of directors is to be taken to be
controlled by another corporation [it] shall be taken to be controlled by another
corporation if that other corporation, by the exercise of some power with or
without the consent or concurrence of any other person by that other corporation, can
appoint or remove all or a majority of the directors ......" [Emphasis added]
The words in bold did not appear in the Companies Act 1961,
and were added upon the introduction of the Companies Code in 1981.() I
am advised that this represents a statutory extension of the ordinary meaning of "control".
I have also had regard to the requirement contained in
Section 5A of the Companies and Securities (Interpretation and Miscellaneous Provisions)
(South Australia) Code, which provides:
"... In the interpretation of a provision of a
relevant Code, a construction that would promote the purpose or object underlying the
relevant Code (whether that purpose or object is expressly stated in the relevant Code or
not) shall be preferred to a construction that would not promote that purpose or
In my opinion, the purpose of requiring a holding company
and its subsidiaries to prepare consolidated accounts is to truly and fairly represent the
operations of entities under the same control in their relations with outsiders, and the
meaning of "subsidiary" should be considered in this context.
The ordinary meaning of the word "control"
is "to exercise restraint or direction upon the free action of; to dominate or
command".() The concept of control does not appear to be limited by
the means used to achieve it. I am aware of a number of authorities which adopt the
dictionary definition in various legal contexts other that the Companies Code.()
Further, I am not aware of any authorities directly in
point as to whether the meaning of "control" in the context of Section
7(1)(a)(i) -control of the composition of the Board - may cover situations where control
is pursuant to commercial or practical dominance rather than pursuant to enforceable legal
There is a line of authority in the context of control of a
company under tax and estate duty legislation that "control" means legal power
to direct a majority of votes at a general meeting.()
Some recent Australian authorities, which were not
available in 1985, suggest that the Courts may be prepared, in contexts other than the
Companies Code, to give the word "control" a wide meaning.()
I have received submissions that "control" as
used in Section 7(1) means control pursuant to legally enforceable rights, and that
"power" as used in Section 7(2) has a corresponding meaning.() I
observe that the Peat Marwick Accounting and Reporting Manual Update of February 1985,
referred to below, also expresses this view, but does not cite any authority for it.()
Price Waterhouse submitted that there was no need to have
recourse to Section 5A, quoted above, since the interpretation of Section 7(1) is
"quite explicit, clear and unambiguous" on this point.() Price
Waterhouse, however, acknowledge that there are no authorities directly in point.()
Price Waterhouse further submit that the word
"control" must be construed in its context in the Companies Code as a whole,
which is not limited to the context of the group accounts.() They point out
that the definition of "subsidiary" is relevant in the context of a number of
provisions, such as the prohibition on a company giving financial assistance in connection
with the acquisition of its own shares, and the prohibition on a company making loans to a
director, which carry criminal sanctions. Price Waterhouse submit that, in this context,
it is unlikely that Parliament intended the tests for "subsidiary" companies to
turn on inquiries into the existence of "control" in the sense of practical
commercial dominance, rather it is likely that Parliament was contemplating a test of
legal control which would be clear and easy to apply.() In my opinion, it would
not be appropriate for me to attempt to determine which tests Parliament intended when
Section 7(1) was enacted.
126.96.36.199 Subsequent Legislative Developments
In their submission dated 18 November 1992, Price
Waterhouse submitted that the propriety of the use, in the 1980s, of off-balance sheet
companies, not being subsidiaries under the law as it then stood, was recognised by
subsequent reform of the law with the introduction of the concept of the controlled entity
in the Corporations Law in 1991 and the introduction of AASB1024.
The provisions of the Corporations law were amended,
effective from 1 August 1991, by the adoption of new provisions relating to the
preparation of consolidated accounts for a company and its controlled entities. This is
clearly something which occurred subsequent to the period under review in this
Investigation. It is suggested by Price Waterhouse that the subsequent events throw light
on the law applying in the period under review. I will examine the concept of
"control" adopted in the new provisions, but first will examine the need for
reform which had been identified by Parliament.
In his Second Reading Speech on the Corporations
Legislation Amendment Bill 1991, the Federal Attorney-General said at pages 3 and 4:
"There have been widespread abuses of the existing
company accounting and reporting requirements under which the true financial position of a
group of companies has been able to be disguised by "off-balance sheet"
reporting. This has enabled the financial statements of the company to be manipulated in
such a way as to mislead investors and the market generally regarding the real level of
liabilities or performance of a company or the group as a whole.
These abuses have been possible because company
reporting requirements apply to companies and their "subsidiaries". The
definition of "subsidiary" has a rather technical meaning in the Law which does
not reach non-corporate entities. Further, group accounts have not been required to be
consolidated, with the result that they can be very difficult to analyse.
One of the consequences of these practices has been a
significant loss of investor confidence, both amongst Australian and overseas investors,
in the reliability of corporate financial information in Australia.
To address these problems, the Bill provides for
amendments to require that a company's directors must produce a single profit and loss
account and balance sheet for all companies and other incorporated or unincorporated
entities controlled by that company. The Bill will include a broad definition of control
which focuses on the reality of control rather than technicalities."
In my opinion, the focus of the need for reform appears
to have been non-corporate entities, which clearly could not have been subject to
consolidation under the previous law since it applied only to "subsidiary"
companies. Since, in the case of non-corporate entities, one could not refer to the
traditional corporate indicia of control, it appears to have been thought necessary to
base the relevant link for the purpose of preparing consolidated accounts upon the concept
of "control" in a wider context than corporations.
The Attorney-General also refers to the feature of the
law prior to 1991 that group accounts were not required to be consolidated, but could be
constituted by presenting separate accounts for each company in the group. This change in
the law does not seem relevant to the present issue.
I have also referred to the Explanatory Memorandum
circulated by the Attorney-General on the Corporations Legislation Amendment Bill 1991. At
page 68, the definition of control in AASB1024 was described as follows:
"... `control' - the capacity of an entity to
dominate decision-making, directly or indirectly, in relation to the financial and
operating policies of another entity so as to enable that other entity to operate with it
in achieving the objectives of the controlling entity".
AASB1024 paragraph 9 defines the word "capacity"
"Ability or power, whether direct or indirect,
and includes ability or power that is presently exercisable as a result of, by means of,
or in breach of, or by revocation of , any of or any combination of the following:
(b) relevant agreements; and
whether or not enforceable."
AASB1024 contains the following commentary on the term
"control", which may be used as an aid to interpretation:
"... (xvi) any of the following factors would
normally indicate the existence of control by one entity of another entity:
(a) the capacity to dominate the composition of the
board of directors or governing board of another entity;
(b) the capacity to appoint or remove all or a majority
of the directors or governing members of another entity;
(c) the capacity to control the casting of a majority of
the votes cast at a meeting of the board of directors or governing board of another
(d) the capacity to cast, or regulate the casting of, a
majority of the votes that are likely to be cast at a general meeting of another entity,
irrespective of whether the capacity is held through shares or options; and
(e) the existence of a statute, agreement, or trust
deed, or any other scheme, arrangement or device, which, in substance, gives an entity the
capacity to enjoy the majority of the benefits and to be exposed to the majority of the
risks of that entity, notwithstanding that control may appear to be vested in another
(xx) The indicators of control outlined in the preceding
paragraphs need to be distinguished from a circumstance where control of a particular
entity is jointly held by two or more unrelated entities such that none unilaterally
controls that entity. In this case none of the entities would qualify as the parent
entity; however, it is important to consider the substance of the relationship between the
entities which are deemed to have joint control of that other entity. For example, it is
not unusual for an entity to be established to avoid recognising certain assets and
liabilities in the accounts. While ownership interests and board representation of the new
entity may be vested equally in the entity which sought to establish the new entity and in
its financiers or legal advisers, this relationship may not constitute joint control as
discussed above. To determine with whom control lies, it will be necessary to examine
the manner in which major policy decisions are reached and the nature of the control over
ongoing activities of the entity, rather than accepting that the nominal powers reflect
the substance of the relationship." [Emphasis added]
Price Waterhouse have submitted that it can be inferred,
from the words of the Attorney-General quoted above, that he was acknowledging that, prior
to 1991, "control" in the definition of "subsidiary" was limited to
control pursuant to legally enforceable rights, and excluded control from practical
commercial dominance. ()
In my opinion, there is no clear statement that the new
definition of control by reference to powers, whether or not legally enforceable, was
intended to change the concept of control used in the previous law. In my opinion, the new
definition and commentary now puts the matter beyond doubt.()
188.8.131.52 Other Legislative Definitions of
I have read the following definition of control in the
Broadcasting and Television Act 1942, in relation to control of licences issued under that
"91 (1) In this Division, unless the contrary
`control' includes control as a result of, or by means
of, trusts, agreements, arrangements, understandings and practices, whether or not having
legal or equitable force and whether or not based on legal or equitable rights;"
The question is whether such a definition extends the
ordinary meaning of "control", and whether the absence of such a definition in
the Companies Code affects the interpretation of the term.
The definition has been construed by the full Federal
Court, which held, in January 1987, that the definition does not widen the ordinary
meaning of control:()
"... it was argued that s 91(1) cannot be relied on
to broaden the concept of `control' in s 92D [control of a company]. That
sub-section, it was said, defines control by reference to `control' itself, and says
nothing of the content of the concept of control. It deals only with the means by which it
is exercised, such as by trusts, agreements, arrangements, undertakings and so forth. I
agree with the view that s 91(1) does not, of itself, widen the concept of control."
The same reasoning would appear to be applicable to the
definition of control in AASB1024.
184.108.40.206 Conclusion on "Control"
It seems to me that the efficacy of the proposed
structure to avoid the application of Section 7 of the Companies Code was a matter of
opinion, on which there was no direct authority. I accept that the opinion Thomson Simmons
& Co expressed in their 1985 advice was reasonably open to them to give, and the
qualification they expressed in paragraph 23 as to the desirability of Beneficial Finance
establishing the structure, was proper.
While such an interpretation may be queried, since it
would appear to drive a coach and horses through Section 7 of the Companies Code, it is
not for me to attempt to resolve any uncertainty in the law in this regard. Accordingly, I
do not consider it appropriate for me to make a finding on whether the off-balance sheet
entities were subsidiaries of Beneficial Finance or not.
41.3.5 USE OF OFF-BALANCE SHEET STRUCTURES IN 1984-85
In the September 1985 issue of "Abacus", an
academic accountancy journal circulating in Australia, an article appeared written by Mr G
Sullivan, lecturer in accountancy at the University of New South Wales(). The
focus of the article was the use of unit trust off- balance sheet entities by six of the
top one hundred Australian companies as revealed in an article in the Weekend Australian
of 26-27 January 1985(). These structures appear to have been used as financing
structures by borrowers.
According to Mr Sullivan's references, the use and
accounting treatment of off-balance sheet structures had been under review by the
accountancy profession for some time.() For example, in his July 1983 article
in the "Chartered Accountant in Australia", Mr C Jackman, a partner in Price
Waterhouse, Sydney, observed :
"The developing practice of off-balance sheet
finance causes major distortions in the type of ratios examined by financial statement
analysts. Fortunately some companies do provide the appropriate relevant information to
adjust notionally amounts shown in the balance sheet, whether in accordance with statutory
requirements (for example leasing commitments under the Companies Code Schedule 7, Clause
5 (2)(g); accounting standards; or in the overall interest of presenting a true and fair
view.... Discussions between lawyers and trustee companies on the one hand and accountants
on the other generally lead to the conclusion that the former belief that the accountants
have the responsibility for determining the appropriate accounting treatment in these
"off-balance sheet" financings while the latter are often strongly influenced by
the legal form of the transaction...... The accounting profession and indeed the
promulgators of corporate legalisation have only started to come to terms with the rapid
change in and increasing sophistication of financing arrangements. However, it seems
likely that future legislation will require financing to be placed "on" the
balance sheet rather than "off" the balance sheet".
In February 1985, one of the accountancy firms who audited
the Bank's accounts, Peat Marwick, published an update to their Accounting and Reporting
Manual. The paper referred to recent examples of the use of off-balance sheet arrangements
in the form of unit trusts and companies. The paper concluded with the following statement
in relation to Peat Marwick's views on the accounting treatment of off-balance sheet
"The following matters are relevant to a discussion
on the firm's attitude to off-balance sheet companies:
1. There is currently no Accounting Standard, Exposure
Draft or other guidance either in Australia or overseas which addresses this problem.
2. It is not yet considered appropriate for the Firm to
come out strongly in either direction ie either to take a moral stance and insist that our
clients consolidate such companies or alternatively actively to go out of our way to
market such arrangements.
3. In essence the Firm does not condone the use of
off-balance sheet arrangements purely and simply to enter into financing arrangements
which would not be acceptable if they were in the company's own balance sheet. However, if
clients are to enter into such arrangements then we must not only satisfy ourselves as to
the legalistic matters covered in this paper but also as to the necessity for adequate
4. It is recommended that clients entering into such
off-balance sheet arrangements should clearly state in a note to their accounts that such
an arrangement exists and where material the assets and liabilities of the off-balance
sheet company should be disclosed as an abridged set of accounts within the note to the
accounts. If the putative parent has guaranteed the borrowings of the off-balance sheet
company then this would have a significant impact in relation to the contingent liability
5. It is also important that the auditor makes reference
to any off-balance sheet financing when submitting formal reports such as those normally
required under debenture trust deeds."
The above paper recognises a view, current within the
profession at the time, that off-balance sheet entities should be consolidated if
necessary to ensure that the accounts of the putative parent company give a true and fair
view. As mentioned in Chapter 57 - "Review of the 1988 External Audit of
Beneficial Finance", this is a view which ultimately the National Companies and
Securities Commission sanctioned, but believed it could not enforce under the law as it
stood prior to 1991.
It appears from the press articles referred to in Mr
Sullivan's article that the use of unit trust off-balance sheet entities by CSR and Entrad
were the cause of some controversy in the national financial press in March 1985.()
In July 1992, Mr Giles and Mr D R Clark of Price Waterhouse
were examined in relation to the external audits of Beneficial Finance. Both stated that
they were aware in 1985 of the use of off-balance sheet entities(). While Mr
Giles stated that he was not aware that there were differing views in the accountancy
profession at that time as to how off-balance sheet entities should be treated, Mr Clark
gave evidence that he was aware at that time that views differed on the accounting
treatment(). The view expressed by Mr Sullivan in his article is that,
accepting that the consolidated account provisions of the Companies Code do not allow the
consolidation of unit trusts, disclosure of material transactions would be necessary to
satisfy the requirement for true and fair reporting()
Mr Yelland gave evidence that he was not aware prior to
this Investigation of any controversy in Australia in finance and accountancy concerning
off-balance sheet structures.() I infer, however, from the instructions that
were given to Thomson Simmons & Co on 3 April 1985, that management of Beneficial
Finance were aware that off-balance sheet structures were being used in commerce in
Australia. In my opinion, management should have known that the use of such structures by
some Australian companies had given rise to some controversy with regard to the proper
accounting treatment and disclosure.
In my opinion, Thomson Simmons & Co, in paragraph 23 of
their advice dated 7 April 1985, were telling their client that use of an off-balance
sheet structure could be perceived by persons dealing with Beneficial Finance as a
contrived device to avoid the effect of Section 7 of the Companies Code, and that
Beneficial Finance should consider whether it wished to risk commercial disapproval. In my
opinion, Thomson Simmons & Co acted quite properly in the circumstances.
Mr Yelland submitted that he did not read paragraph 23 of
the Thomson Simmons & Co advice in the above way.() Mr Yelland submitted
that he now believes that Mr Tucker was referring to the relationship of Beneficial
Finance's Treasury division with the capital markets, and that, accordingly, some
confidential disclosures were made to the capital market lenders and ratings agencies on
Beneficial Finance's involvement with the off-balance entities.
The Thomson Simmons & Co memorandum of advice, dated 7
April 1985, was not included in the Board papers for the meetings of 15 and 30 April 1985
at which the establishment of the first Kabani type structure was considered. Mr D W
Simmons gave evidence that he had no recollection of seeing the advice, and if it was not
in the Board Papers, then the Board would not have received a copy.()
I accept that the Board of Beneficial Finance was not
informed of the possible controversial effects of establishing the structure, nor of the
warning given by Thomson Simmons & Co in paragraph 23 of their advice dated 7 April
I have formed the opinion, on balance, that the matters
concerning the establishment of the Kabani type companies do not disclose any unlawful or
improper activity on the part of Beneficial Finance or the Board of Directors. I have not
been able to establish whether management knowingly mis-informed the Board of the matters
noted above, or if so, who was responsible. Accordingly, I make no recommendation that any
of such matters be further investigated.
41.3.6 THE OFF-BALANCE SHEET STRUCTURE AND ITS OPERATION
The instructions of Beneficial Finance to Thomson Simmons
& Co, and their advice, of April 1985 indicate that Beneficial Finance's commercial
reason in establishing the off-balance sheet entities was to enable it to undertake
business ventures without its interest in these ventures being subject to an obligation to
give a guarantee to the trustee for debenture holders over the entire assets of the
venture. Clearly such an arrangement would not have been commercially acceptable to
prospective joint venturers.
Other effects of excluding such business undertakings from
consolidation in the Beneficial Finance Group accounts would be to avoid the borrowing
ratio restrictions in the debenture trust deed, and to avoid the disclosure of the
earnings (or losses), assets (and the nature of the investments), and liabilities
undertaken through off-balance sheet entities, which would otherwise be required under the
Code if undertaken by Beneficial Finance or its acknowledged subsidiaries. While the
impact on the borrowing ratio in early years was not such as to adversely affect
compliance, even if the interests had been consolidated,() Beneficial Finance
was apparently looking to the future when debenture trust deed limitations on borrowings
might be of more concern.()
It is clear from the correspondence between Beneficial
Finance and its solicitors, Thomson Simmons & Co, prior to the structures being
established, that Beneficial Finance's instructions to Thomson Simmons & Co were that
it desired to control the entities, but to avoid them being subsidiaries.()
I accept the evidence of Mr Yelland that the issue of
accounting disclosure of the off-balance sheet entities was not considered by him, nor was
it put to Thomson Simmons & Co, because the key issue was avoidance of subsidiary
status.() Nevertheless, as mentioned above, management of Beneficial Finance
subsequently resisted any disclosure relating to the off-balance sheet entities beyond the
In my opinion, the facts and circumstances set out in
the next few paragraphs indicate that the affairs of the Kabani type companies were in
fact controlled by Beneficial Finance and conducted for its own benefit and at its own
risk pursuant to a variety of legal and practical commercial powers.
It follows, in my opinion, from the preceding finding
above, that the affairs and results of the off-balance sheet entities of Beneficial
Finance were relevant to the financial position of Beneficial Finance, and, if material,
should have been disclosed in the accounts of Beneficial Finance and in the consolidated
accounts of Beneficial Finance and its subsidiaries in order for such accounts to show a
true and fair view. I am required by my Terms of Appointment to investigate and report
whether the external auditors dealt with this issue appropriately and adequately.
Price Waterhouse have submitted, on the basis that no legal
powers provided Beneficial Finance with `control' of the off-balance sheet entities, that
no disclosure was required beyond that specified in Schedule 7 of the Companies
Regulations in order for the accounts to give a true and fair view of the results and
affairs of Beneficial Finance and the Beneficial Finance Group.() As noted
above, I have formed the opinion that Beneficial Finance exerted control pursuant to a
variety of legal and practical commercial powers. In my opinion, having regard to the
accounting standards requirement to favour "substance over form" nothing should
turn on that. I discuss the "true and fair" reporting requirement further in
Chapter 57 - "Review of the 1988 External Audit of Beneficial Finance".
The facts and circumstances leading to my conclusions
above are as follows:
(a) Beneficial Finance instructed its solicitors to set up
the structure of off-balance sheet entities on behalf of Beneficial Finance.
(b) The structure was intended to be a permanent part, the "entrepreneurial
arm", of the business structure of Beneficial Finance.() The
off-balance sheet entities were integrated into the Beneficial Finance Group, and treated
for management purposes indistinguishably from Beneficial Finance's acknowledged
subsidiaries. It was certainly the case that those at Board level and at senior
management of Beneficial Finance had no doubt that the entities were under the practical
dominance of Beneficial Finance, and were run for the benefit of Beneficial Finance.()
The Managing Director of Beneficial Finance at all relevant times, Mr J A Baker, had no
doubt about the situation when questioned during my investigation:
"A: I don't know whether you can say it legally,
but everyone just assumed that Kabani was Beneficial. It was just a corporate umbrella of
Q: What you are saying is that Kabani did what
Beneficial told it to do?
A: Yes, there's no doubt about that.
Q: Kabani never met as a board, did it ?
A: No, all paper meetings." ()
(c) It was the intention of Beneficial Finance, in
instructing its solicitors to establish the Kabani type trust structures, that they be so
devised that Beneficial Finance would control the affairs and investment of those entities()
Mr Baker gave the following evidence:()
"Q: Did Beneficial Finance have control over
board representation and the exercise of shareholding, that is, voting power and so on, in
A: Well, I would think so.
Q: What leads you to think that Beneficial Finance
did have that control?
A: We would not have utilised it if we could not
control it, I do not think."
(d) Under the trust structures Beneficial Finance, at all
times, had a vested equitable interest in all the issued share capital of the Kabani type
companies, subject only to divestment if, upon termination of the trusts, the Trustee
exercised its power of appointment in favour of some other beneficiaries.()
(e) The Directors of Beneficial Finance would not have been
acting in the interests of Beneficial Finance, as they were legally obliged to act, if
they had permitted business opportunities of Beneficial Finance to be exploited otherwise
than for the benefit of Beneficial Finance.() It is clear from the minutes of
the Beneficial Finance Board that business undertaken through the off-balance sheet
entities, represented business opportunities of Beneficial Finance that were directed to
the off-balance sheet entities, with the approval of the Beneficial Finance Board, on the
understanding that the resulting benefits would be derived by Beneficial Finance.()
(f) The Kabani type trusts had no source of funds for
commercial investment, and could not raise funds, without the trustees obtaining the prior
written consent of Beneficial Finance. The consent of Beneficial Finance was required for
many ordinary commercial steps by the trustees.()
(g) All funds of the off-balance sheet entities were either
borrowed from Beneficial Finance or, obtained through a transaction in pursuance whereof
the risk of borrowing was borne by Beneficial Finance.() Mr Yelland deposed
that this was one of the means of "unofficial control" to which he was
referring in his letter of instructions, dated 3 April 1985, to Thomson Simmons & Co.()
On 30 November 1990, the Beneficial Finance Board passed the following resolution in
relation to the Kabani type companies and other specified off-balance sheet entities, for
the purpose, according to the agenda papers, of enabling the directors of those companies
to sign the directors' reports for those companies for the year ended 30 June 1990:()
"It was resolved that Beneficial Finance
Corporation Limited (Beneficial) support the associated companies listed below (the
Companies) to the extent that it will provide such support as may be necessary to ensure
that those companies are able to meet their debts as and when they fall due."
(h) The Kabani type companies were not joint venture
companies, but holding companies for other business undertakings. There was no person
commercially interested in the ownership of them other than Beneficial Finance. Mr Yelland
gave evidence that this absence of "outside interference" was one of the
means of "unofficial control" to which he was referring in his letter of
instructions dated 3 April 1985 to Thomson Simmons & Co.() The only
purpose of the Kabani structure was to prevent the Kabani type companies and their
subsidiaries being or becoming subsidiaries of Beneficial Finance.()
(i) Directors of Beneficial Finance comprised the Kabani
Board and the Boards of the other three similar companies established under the
structures. In this respect, Beneficial Finance treated the off-balance sheet entities in
the same way as the group's acknowledged subsidiaries.() There were no
directors of the off-balance sheet entities other than those under some duty to Beneficial
Finance. Mr Yelland gave evidence that this was one of the means of "unofficial
control" to which he was referring in his letter of instructions dated 3 April
1985 to Thomson Simmons & Co:()
Q:I am at the moment putting to you the question that
in deciding matters before the Kabani board, those persons chosen for the Kabani board
would be expected to conform to the intentions of Beneficial finance, not by co-incidence
but by design.
A: Well, from where I sat, I would have expected
(j) Staff of Beneficial Finance conducted the day-to-day
operations of the companies pursuant to service agreements between Beneficial Finance and
each of the four companies.() Mr Yelland testified that this was one of the
means of "unofficial control" to which he was referring in his letter of
instructions, dated 3 April 1985, to Thomson Simmons & Co.()
(k) Accounts of Beneficial Finance for internal management
purposes have, since December 1988, been prepared on the basis that the accounts of the
off-balance sheet entities are consolidated together with Beneficial Finance and its
acknowledged subsidiaries. (I examine the "aggregate accounting" exercise in
detail in Section 41.4 below).
(l) Statutory accounts of Beneficial Finance for the year
ended 30 June 1990 disclose the off-balance sheet entities as "controlled
entities" pursuant to ASRB1017 (Related Party Disclosures).()
Beneficial Finance's participation interest in Kabani was stated to be "100%".
(m) The ordinary share settlement trust, and the
preference settlement trust, for the respective Kabani type companies, were established at
the same time, with no commercial purpose other than to break the relationship of holding
company and subsidiaries between Beneficial Finance and Kabani type companies. The only
beneficiary nominated which was not a member of the Beneficial Finance Group was the
National Heart Foundation. The evidence of Mr Baker and Mr Yelland was that Beneficial
Finance did not intend to confer any benefit on the National Heart Foundation.()
(n) The business of the off-balance sheet companies was
discussed, controlled, and directed, at board meetings of Beneficial Finance. Meetings of
directors and annual general meetings of the off-balance sheet entities were constituted
only by paper meetings arranged by Beneficial Finance.()
(o) The ordinary share settlement trust deed, and the
preference share settlement trust deed, for each of the four companies, contained a number
of terms which facilitated Beneficial Finance's control of the affairs of the Kabani type
(i) The trusts were established by deed of settlement
whereby the settlor, Mr Tucker, one of the members of the firm of lawyers who advised
Beneficial Finance and acted on the instructions of Beneficial Finance to establish the
companies and trusts, made a gift of $10 to be held upon the specified trusts for the
benefit of Beneficial Finance and four of its subsidiaries, and a fifth beneficiary, the
National Heart Foundation. At no relevant time was a body of that name in existence.()
Mr Tucker deposed to the Investigation that he intended to refer to the South Australian
arm of the National Heart Foundation. However, the National Heart Foundation of Australia
(South Australian division) Incorporated was not contacted prior to being named in the
deeds of settlement.
(ii) Under trust law, where the beneficiaries comprise a
closed class they have the right to call on the trustee to vest the trust and transfer the
assets to them or as they direct.() If the National Heart Foundation had not
been included as a beneficiary, all the beneficiaries would be under the control of
Beneficial Finance, which would therefore have a legal right to vest the trust assets. Mr
Tucker acknowledged that this was the only reason for nominating the National Heart
Foundation as a beneficiary.() Beneficial Finance could still exercise this
power, but only with the concurrence of the National Heart Foundation.
(iii) The sole initial capital of each trust was the sum
of $10, invested in shares in the Kabani type companies. The settlor foresaw that business
opportunities would be limited with total capital of $10, and so provided the trustee with
power to borrow notwithstanding that borrowings may exceed the value of the trust fund,
provided the written consent of Beneficial Finance was first obtained.() In my
opinion, this constitutes a legal power of Beneficial Finance which it used to control the
affairs of Kabani type companies.
(iv) The trustee is permitted to invest in wasting and
speculative assets, and to have the same powers of investment as if the trustee were the
absolute beneficial owner.()
(v) The trustee may exercise his powers notwithstanding
that he may have a personal interest in the outcome.()
(vi) The trustee may mix trust funds with other moneys.()
(vii) The trustee may, with the consent of Beneficial
Finance, delegate all its powers under the trusts.()
(viii) The trustee shall not be liable for breach of trust
unless due to deliberate bad faith, nor shall any director of the trustee incur any
personal liability from the bona fide exercise of the trustee's rights powers and duties.()
(ix) The trustee may remove any person as a beneficiary.()
(x) The trustee may vest the trust early, at any time after
one year from the date of establishment.() In the case of the trusts of which
Thomson Simmons Nominees Pty Ltd was trustee, Beneficial Finance had the right to direct
the trustee to vest the trust.() On vesting, unless the trustee otherwise
exercises its discretion, the trust fund vests in Beneficial Finance.()
Accordingly, at all material times, Beneficial Finance had a vested interest in the assets
of the trust, subject to divestment if the trustee should, on the vesting date, exercise
its power to appoint the assets to another beneficiary. The only beneficiary outside the
Beneficial Finance Group was the National Heart Foundation.
(xi) In default of appointment by the trustee, both income
and capital is to be held in trust for Beneficial finance.() Under trust law, a
trustee must give due consideration to the position of the discretionary objects of its
power of appointment, ie to all beneficiaries, including the National Heart Foundation.()
(xii) The trust deed purports to bind all persons claiming
any beneficial interest in the trust fund to the clause excluding liability on the part of
the trustee for breaches of trust unless due to deliberate bad faith.()
(p) Accordingly, the trustees of the Kabani type trusts
must have known, at all relevant times, that the omission to exercise powers of
distribution of income and capital, after sufficient consideration of the position of the
National Heart Foundation to satisfy trust law, would have resulted in the entire income
and capital of the trusts going to Beneficial Finance.
(q) The evidence of Mr Tucker was that Thomson Simmons
Nominees Pty Ltd has no records relating to its appointment as trustee, or administration,
of the Kabani type trusts of which it is trustee, and does not appear ever to have
received notice of an annual general meeting of the Kabani type companies, or to have been
notified concerning changes in the composition of the Boards of the Kabani type companies.()
(r) Since the establishment of the Kabani type trusts, all
distributions of income have been made to the Ordinary Settlement Trusts and ultimately to
Beneficial Finance through wholly owned subsidiaries, except for an interim dividend of
$3,920 paid to the preference shareholders on 30 June 1989. This income was distributed to
Beneficial Finance. As noted in paragraph (q) above, the trustee of the Preference Share
Settlements, Thomson Simmons Nominees Pty Ltd, appears to have no record of playing any
role in this distribution. The only documentation available to the Investigation
concerning the preference share dividend of June 1989 is a set of accounts of the trust,
for the year ended 30 June 1989, apparently prepared by Price Waterhouse (the auditors of
the Kabani type companies appointed by Beneficial Finance) and signed by two directors of
Thomson Simmons Nominees Pty Ltd. The audit report on the accounts for the year ended 30
June 1989 is dated 6 November 1991, which is considerably outside the period under review
in this Investigation. The accounts mis-described Thomson Simmons Nominees Pty Ltd as
manager of the trust. In the light of the evidence of Mr Tucker referred to in paragraph
(q) above, it is not clear to me how the auditors were able to express the opinion that
the accounting and other records of the trust had been properly kept.
(s) On 30 June 1989 additional preference shares were
issued by certain Kabani type companies to Thomson Simmons Nominees Pty Ltd as trustee of
the preference share trusts for the sole purpose of watering down the voting power held by
the ordinary share trust to below 25 per cent. Beneficial Finance had provided guarantees
and indemnities to third parties in respect of finance facilities provided by those
parties to certain of the off-balance sheet entities.() Under the terms of
Beneficial Finance's 1985 Debenture Trust Deed, Beneficial Finance had to include any such
liability in its liabilities for trust deed purposes, and Beneficial
Finance believed that those provisions of the Debenture
Trust Deed would not apply if the voting power of the ordinary share trusts were reduced
to below 25 per cent.()
(t) In June 1990, distributions of income were made to
Beneficial Finance through the Kabani Ordinary Share Settlement and the Fortina Ordinary
Share Settlement, amounting in all to $6.1M, without there appearing to be any preference
share dividend paid for distribution through the relevant Preference Share Settlements.
This would have constituted a breach of the rights of the preference shareholder, Thomson
Simmons Nominees Pty Ltd, as trustee of the Preference Share Settlements. It does not
appear from any of the minutes of Bondi Investments Pty Ltd, as trustee of the ordinary
share settlements, that any consideration was ever given to the position of the National
Heart Foundation and the merits of any distribution of income to it.() The
evidence of Mr Baker, former Managing Director of Beneficial Finance, previously referred
to, and of Mr B D Barton, former Company Secretary of the Beneficial Finance Group, is
that these meetings were never held, but would have been paper meetings.() The
evidence of Mr Yelland was that the minutes of 30 June 1990 referred to above appear also
to have been paper meetings.()
(u) On 27 June 1990, the trustee of the Kabani and Fortina
Ordinary Share Settlements, Bondi Investments Pty Ltd, apparently exercised its powers,
with the consent of Beneficial Finance, to add itself (Bondi) as a beneficiary of those
trusts. The trustee then proceeded to distribute to itself the sum of $6.1M referred to
above, without any apparent consideration of the interests of the National Heart
Foundation. According to the evidence examined by the Investigation, Mr Yelland, on 4
July 1990, wrote to Thomson Simmons & Co seeking their advice on the addition of the
trustee as a beneficiary. Thomson Simmons & Co's advice was given on 1 August 1990
that the trustee could be made a beneficiary. Minutes of Bondi, purporting to record a
meeting of directors on 30 June 1990, record the tabling of the consent of Beneficial
Finance to Bondi being made a beneficiary. This consent was in the form settled by Thomson
Simmons & Co on 1 August 1990. The minutes do not, however, record any resolution of
the trustee to add itself as a beneficiary pursuant to the powers conferred on it under
the trust deeds. In evidence to the Investigation, Mr Yelland accepted that it was
reasonable to infer that the minuted meeting never took place.() Further, the
steps taken in June 1989 appear to have been directed by Beneficial Finance. It would be a
breach of the duty by the trustee (Bondi) to have acted according to the dictates of
Beneficial Finance, regardless of the interests of the other beneficiaries, which included
the National Heart Foundation.()
(v) On 29 June 1990, a management proposal was approved
by the Beneficial Finance Board for a corporate restructuring, the main thrust of which
was to transfer certain off-balance sheet entities to a subsidiary of the Bank, to be
called Southstate Corporate Holdings Ltd.() The Board Paper stated that the
effect of the restructure would be to reduce off-balance sheet assets from $679.0M to
$425.0M, and to leave off-balance sheet certain losses estimated at $9.7M before
inter-company adjustments. The Kabani type companies and certain of their subsidiaries
remained off-balance sheet. The transfer of the off-balance sheet entities was effected
pursuant to a decision of the Beneficial Finance Board, without any indication that the
Board needed the concurrence of any other person to implement the restructuring.
(w) Beneficial Finance understood that the trustees of
the Kabani type trusts would act in accordance with its wishes, by virtue of the
relationship between them. ()
(x) At 30 June 1990, after the reconstruction referred to
above, there were assets in the order of $77.0M (after eliminating inter-company loans)()
held through the Kabani type companies and remaining off-balance sheet entities. The value
of the assets administered by the trustee of the Preference Share Settlements was by
comparison nominal. For example, at that date, the accounts of the Kabani Redeemable
Preference Shares Settlement showed assets of $121, against which a provision of $121 for
diminution in value had been made, leaving zero net assets of the trust fund.()
41.3.7 THE ROLE OF THE AUDITORS AND THE TRUSTEE FOR
Former director and Chairman of Beneficial Finance, Mr
Barrett, accepted the legal advice that the avoidance of the trust deed requirements, by
the off-balance sheet entities, was lawful, and he was given further comfort by his belief
that the external auditors had also agreed that the use of Kabani type structures was
quite acceptable(). Furthermore, in evidence to me, he stated that he
understood that the management had consulted with the trustees, and that they were "happy
and comfortable with the situation"().
In my opinion, the Board was misled by management as to
I accept the following matters raised by Price Waterhouse
in their written submission to me dated 18 August 1992:
(a) Beneficial Finance provided Price Waterhouse with a
copy of the Thomson Simmons and Co advice, dated 7 April 1985, and a further letter from
Thomson Simmons, dated 19 July 1985, in which they repeated their conclusion that Kabani
and Lagan were not subsidiaries of Beneficial Finance. This letter also concluded that the
trustee for debenture holders need not be informed of the off-balance sheet entities.
(b) Price Waterhouse was of the view that the trustee for
debenture holders should be made aware of the existence of the off-balance sheet entities,
and the matter was brought up at a meeting between Mr Giles and Mr D R Clark of Price
Waterhouse, and Mr Baker, the Managing Director of Beneficial Finance, on 23 April 1986.
(c) Subsequently Mr Baker and Mr Barton of Beneficial
Finance held a meeting with Mr B Wood, the General Manager of the trustee, Elders Trustee
and Executor Company Ltd on 27 August 1986; a copy of Mr Barton's file note of that
meeting, which was made available to Price Waterhouse, and stated that:
"Mr Wood agreed that there appeared to be no
restriction placed by the trust deed on this type of involvement (off-balance sheet
Although Price Waterhouse submitted that the matter of
disclosure to the trustee was referred by Mr Giles to the Beneficial Finance Board on 29
July 1986, the Minutes of the Board Meeting contain no record of this matter being raised
(which I accept does not mean the matter was not in fact discussed).
The Investigation observed that the audit files()
contained a copy of Beneficial Finance's executives notes of the meeting held, on 27
August 1986, between Mr Baker, Mr Barton and Mr Wood which states in part that:
(vi) Mr Wood was advised that Beneficial is undertaking
off balance sheet operations in relation to Centrelease, Pegasus Securities, Allied
Westralian, with the likelihood of other operations, in joint venture with groups which
have a particular expertise. Any receivables being funded by Beneficial are shown as a
tangible asset. The off balance sheet structure provided the opportunity to obtain outside
wholesale funding by pledging particular assets without affecting Trust Deed requirements.
Mr Wood agreed that there appeared to be no restriction placed by the Trust Deed on this
type of involvement."
No-one from Price Waterhouse attended this meeting, and
Price Waterhouse did not obtain direct confirmation from Elders Trustee (now Austrust
Limited) that it accepted Beneficial Finance's view of the status of the off-balance sheet
In my opinion, Price Waterhouse should have inquired of the
trustee whether the apparent approval of the Kabani structure was based on due
consideration of the matter in the light of adequate information. It appears that Price
Waterhouse did not make any such enquiry, because Mr Giles thought it was not his place to
pre-empt management's communication with the trustee. This was, nonetheless, a matter that
was of potential significance, and, if necessary, Price Waterhouse could have arranged
through Beneficial Finance management to confirm the position independently with the
A paragraph of Mr Wood's notes of the meeting of 27 August
1986, states that:
"9. Beneficial currently conducting off-balance
sheet joint venture operations outside terms of trust deed. Currently loans to the joint
ventures are made by Beneficial and therefore are assets under the Trust Deed. Long term
intention is to have them self funding with borrowing from banks, not from public. This
appears to be legitimate operation and not requiring trustee involvement."
On 27 August 1992, Mr Wood, the Managing Director of
Austrust Limited (formerly Elders Trustee and Executor Company Limited), was examined.
The following questions were put to Mr Wood, and the
following answers given:
"Q... What sort of information and explanations did
[Mr Baker and Mr Barton] give you concerning these off-balance sheet operations?
A: Virtually none. Beneficial had for many years been
involved in joint ventures, twenty years I guess, and joint ventures in Beneficial's
parlance and in my parlance meant small land subdivisions. It was a situation where
Beneficial would take some involvement in the management of the operations as well as
advancing funds to improve their profitability. In the light of the improved land climate
at the time, it seemed quite legitimate that they should be getting back into that type of
Q: Did they expressly say that they were talking about
A: No, they did not...
Q: But that is an inference you drew, based on your
A: I drew that inference...
Q: [(vi) of the Beneficial Finance file note
mentioned above was read to Mr Wood]. Now, my question is whether you believe that is a
fair record of what was discussed?
A: Well, the preamble is obviously a far wider version
of anything that I can recollect. The specific naming of groups and companies is something
I have no recollection of whatsoever, nor the question of pledging assets of other groups
do I recall that ever being discussed."
If Price Waterhouse had made direct enquiries of the
trustee regarding its apparent approval of the Kabani structure it may have led to
clarification of apparent inconsistencies between the Beneficial Finance and Elders
Trustee records of the meeting of 27 August 1986.
In 1988, the trustee for debenture holders investigated the
Kabani structure. On 3 November 1988, Beneficial Finance wrote to Elders Trustee enclosing
a press release regarding the Beneficial Group acquisition of Campbell Capital Limited.
That letter states:
"Campbell Capital Limited shares will be issued 49
percent to Beneficial Finance Corporation Ltd and 51 percent to Kabani Pty Ltd, and as
such will not be deemed a subsidiary of Beneficial within the meaning of Section 7 of the
The press release which is attached to the letter is dated
Wednesday, 3 November 1988. The first paragraph states:
"The Beneficial Group has acquired the investment
bank, Campbell Capital Ltd."
and the last paragraph states:
"In joining the Beneficial Finance Group the team
at Campbell Capital ..."
On 8 November 1988 an article appeared in the Adelaide "Advertiser"
reporting that Beneficial Finance had taken a major stake in the national hotel and resort
developer Pacific Rim. The same day, the trustee asked Beneficial Finance to advise
ownership details of Pacific Rim Leisure, East End Co Ltd and Kabani Pty Ltd and whether
or not they were deemed subsidiaries under the 1985 Trust Deed. Beneficial Finance replied
the same day by facsimile that:
"BFCL and Kabani have essentially the same Board.
However `control' is avoided (sec 7 (1)(a) and 7 (2)) by Kabani's Board being appointed
since inception (ie not by BFCL)."
There were two attachments to the facsimile from Beneficial
Finance, the third page is headed "Kabani Pty Ltd" and contains the
"1. Kabani is a trustee for Kabani unit trust...
5. Beneficial has been appointed formally manager,
6. Kabani has the following wholly owned subsidiaries
similarly constituted to itself, Malary Pty Ltd., Lagan Pty. Ltd., Fortina Pty. Ltd."
Based on the evidence examined by the Investigation, those
statements are incorrect.
Mr Yelland submitted that point 5 may have been a reference
to the agreement between Beneficial Finance and the Kabani type companies whereby
Beneficial Finance would provide administrative, personnel, accounting, and general
management services.() Notwithstanding the service agreement, in my opinion,
point 5 was not a correct representation of the position.
On 10 November 1988, the trustee wrote in identical terms
to its solicitors, Finlaysons, and to Price Waterhouse, seeking from both Finlaysons and
Price Waterhouse advice and recommendations as to the action the trustee should take.
According to the terms of that letter, the abovementioned
details provided to the trustee by Beneficial Finance concerning Kabani were forwarded to
At the 27 August 1992, examination of Mr B Wood, the
Managing Director of Austrust (formerly Elders Trustee), and the following questions were
put to him and the following answers given:
"Q: Following that letter to Price Waterhouse [the
letter of 10 November 1988], you have given us a hand written file note dated 23
November by Mr Wilson of your company which you have said seems to be the only recorded
outcome of that correspondence. You have said that to the best of your recollection the
suggested meeting [with Mr Giles of Price Waterhouse and Mr Tucker of Thomson Simmons
& Co] did not eventuate because you wanted the benefit of Finlaysons advice before
taking the matter further. Can you confirm if that is ---
A: That is absolutely correct. Yes.
Q: ... That means that Price Waterhouse did not respond
with advice or recommendations either orally or in writing?
A: There is no record of that. I would expect that there
would have been some conversations but they are not recorded."
The position regarding advice given by Finlaysons to the
Trustee, Austrust Limited, is set out in Finlaysons' letter of 8 January 1991, which
states in part:
"... set out below is a summary of the
investigation undertaken by this firm and the advice given in late 1988 and early 1989.
1 On 10 November you wrote to us requesting advice in
relation to whether Kabani Pty Ltd, Pacific Leisure Pty Ltd and Argus International Hotels
Pty Ltd were subsidiaries of BFCL.
2 On 16 November 1988 we wrote to Mr G Yelland
requesting certain information in relation to those companies.
3 On 14 December 1988 we received a partial response
from Stuart Wright of BFCL.
4 On 22 December 1988 and 28 December 1988 we received
further responses from Stuart Wright.
5 On 23 January 1989 we requested further information
from BFCL and Peter Slattery wrote to you giving some preliminary views in relation to
Kabani, Malary, Lagan, Fortina, Pacific Leisure Pty Ltd, First Pacific Mortgage Limited
and First Pacific Insurance Brokers Limited.
6 On 24 January 1989 we received a response from BFCL.
7 On 2 February 1989 Peter Slattery wrote to you
advising that on the information available Kabani was not a subsidiary of BFCL unless BFCL
could influence the exercise of voting rights of shares in Kabani under the terms of the
trusts pursuant to which the shares in Kabani were held.
8 On 2 February 1989 we wrote to Stuart Wright of BFCL
requesting copies of the relevant trust deeds.
9 On 21 February 1989 Stuart Wright replied refusing to
make the trust deeds available.
10 On 24 February 1989 Peter Slattery wrote to you
informing you of this fact.
11 The trust deeds were made available, at least in
relation to Lagan and on 7 March 1989, having reviewed the relevant trust deeds, Peter
Slattery wrote to you setting out his opinion that on the basis that the trust deeds for
Lagan, Malary, Kabani and Fortina were identical there was nothing in those trust deeds
that made those companies subsidiaries of BFCL. His opinion was that unless there was some
arrangement or understanding BFCL, in relation to composition of the board of directors of
those companies, neither they nor First Pacific Mortgage or First Pacific Insurance
Brokers were subsidiaries of BFCL.
12 On 13 March 1989 Peter Slattery wrote to you
confirming that as Lagan, Malary, Kabani, Fortina, First Pacific Mortgage or First Pacific
Insurance Brokers were not subsidiaries of BFCL it was not possible to require them to
give guarantees pursuant to the terms of the 1985 trust deed. He also confirmed that he
did not believe the trustee needed to make any further enquiries unless further
information came to hand concerning the relationship between those companies and BFCL....
In essence, therefore, after reasonably lengthy
enquiries we came to a view that, based on the information available and the assurance
that each of the companies had been formed identically, that they were not subsidiaries of
It must be emphasised, however, that at the time of
giving our advice we may not have had access to all the relevant information in relation
to the companies. Specifically if there were arrangements pursuant to which BFCL could
control the composition of the boards of the companies or control the voting rights
attaching to shares in the companies of which we were not aware, our opinion would have to
be reviewed." [Emphasis added]
Mr Yelland made a statutory declaration, on 16 March
1989, to the effect that Beneficial Finance did not control the composition of the board
of directors of Kabani, Lagan or Malary. That declaration was provided to Austrust. Mr
Wood, Managing Director of Austrust, stated in evidence that he believed that the
statutory declaration was obtained to satisfy his company that it was not necessary to
pursue enquiries as to whether there was some arrangement of the kind referred to in
Finlaysons letter of 7 March 1989.()
In evidence to the Investigation, Mr Yelland
acknowledged that his statutory declaration was instrumental in the trustee accepting the
status of the Kabani type companies.() Mr Yelland explained in evidence
that the matters declared by him in the statutory declaration of 16 March 1989 represented
his own conclusion based on his understanding of the legal effect of the structure and the
advice that Beneficial Finance had obtained.() Mr Yelland added that the
statutory declaration was made in response to a request, either from Austrust or
Finlaysons, that he confirm by statutory declaration that there was no agreement or
understanding concerning the composition of the boards of the Kabani type companies.().
In my opinion, the declaration made by Mr Yelland was unhelpful because he was deposing to
a matter which was not a fact but an opinion as to a legal consequence, based on a view of
the law which was not stated, of facts which were not stated. Mr Yelland submitted that
the wording of the declaration was discussed with Austrust and Finlaysons.() I
have been informed by Austrust that there is no record on Finlaysons' file that the form
of the declaration was discussed with them.()
In their submission, dated 18 August 1992, Price Waterhouse
stated that Mr Giles recalled having seen a copy of Finlayson's final advice in the
matter, although Price Waterhouse had not kept a copy on their audit file. Price
Waterhouse said that they had, however, retained on their audit file a copy of a Board
paper prepared by Beneficial Finance's General Counsel, Mr Yelland, confirming that the
effect of the Kabani structure was accepted by the trustee. This paper was tabled at the
Beneficial Finance Board meeting on 31 March 1989. The paper, which was undated, stated in
"Kabani was established as an off-balance sheet
company giving all of the desired managerial control but none of the assets/liability
accountability by the Beneficial Group. Nor was Kabani subject to the Trust Deed
constraints on gearing ratios....
The technique used, has been accepted for the past three
years by both the Directors and Auditors, and now the Trustee. There is little doubt as to
the legal efficacy of the technique used and it is not unique to the Beneficial
In my opinion, the statement that the structure had been
accepted by the auditors was speculative. Mr Yelland testified that, to his knowledge, the
auditors had not expressly approved the structure, and that the statement was based on his
inference, drawn, from the auditors' acceptance of the Beneficial Finance accounts in the
years 1985-88 and their position as auditors of the Kabani type companies, that, they had
accepted the efficacy of the structure.() Mr Yelland acknowledged that this
inference could not be safely drawn because the auditors may simply not have questioned
the efficacy of the structure or its disclosure on the grounds that it was not a material
issue in those years. The auditors have submitted, and I accept, that the results and
affairs of the Kabani type companies were not material to the results and affairs of the
Beneficial Finance Group in the years 1985-87. For the reasons set out in Chapter 57 - "Review
of the 1988 External Audit of Beneficial Finance", in my opinion the auditors
failed to consider whether the results and affairs of the Kabani type companies were
material in 1988.
In my opinion, management were not forthright in providing
information to the trustee for debenture holders or the Board in relation to the Kabani
type structure. I have, however, formed the opinion that the matters noted above
concerning the enquiries made by the trustee for debenture holders in 1989, and the
subsequent reporting by management to the Board on the outcome of those enquiries, do not
disclose any unlawful or improper activity on the part of management.
41.3.8 CONCLUSIONS ON THE OFF-BALANCE SHEET STRUCTURE
Based on the evidence examined by the Investigation, and
for the reasons set out in this Chapter and Chapters 57 - "Review of the 1988
External Audit of Beneficial Finance" to Chapter 59 - "Review of the 1990
External Audit of Beneficial Finance" of this Report, I have formed the opinion
(a) the affairs of the Kabani type companies were, in
fact, controlled by Beneficial Finance, and such affairs were conducted for the benefit,
and at the risk, of Beneficial Finance, pursuant to a variety of legal and practical
commercial powers created under the off-balance sheet structure; and
(b) consequently, at all relevant times, the results and
affairs of the off-balance sheet entities would, if material to the results and affairs of
Beneficial Finance, be required to be disclosed in order for the accounts of Beneficial
Finance, and the consolidated accounts of Beneficial Finance and its subsidiaries, to show
a true and fair view in accordance with Section 269 of the Companies Code.
41.4 INTERNAL MANAGEMENT REPORTING
In my opinion, the establishment and conduct of operations
through the off-balance sheet structure was one of the factors that contributed to the
financial position into which Beneficial Finance had fallen by early 1991.
There are many indications that the directors of
Beneficial Finance were having great difficulty comprehending the issues upon which they
were constantly being asked to make decisions. Mr M G Hamilton, for example, considered
that the board was simply overwhelmed by the amount of information which was delivered to
them for each meeting. He said that:
"I think that it was extraordinarily difficult
for some board members to comprehend the sheer complexity of a number of the issues they
were being asked to approve".()
In his opinion, the Beneficial Finance Board and the
management were progressively becoming unable to maintain control over the unwieldy
structures, and the accounting section could not keep up with the paperwork generated by
the multiplicity of entities involved.
"The joint ventures and the off-balance sheet
activities were becoming so complex that Beneficial management was, I think, not totally
in control of its own activities".()
Management accounts for selected off-balance sheet entities
were regularly included in the monthly Board Papers received by Directors of Beneficial
Finance. These accounts were prepared on a legal entity basis, and did not eliminate
transactions and balances involving Beneficial Finance, its acknowledged subsidiaries, or
other off-balance sheet entities, nor was the effect of such matters fully disclosed.
Internal management accounts of the Beneficial Finance Group did not consolidate the
results and affairs of the off-balance sheet entities. Accordingly, for most of the
period under review, the Board of Beneficial Finance did not receive financial information
clearly setting out the impact of the off-balance sheet entities on the financial position
of Beneficial Finance. I refer below to attempts initiated by the Board to obtain
consolidated financial information.
The submission to me from certain former Non-Executive
Directors of both the Bank and Beneficial Finance confirms the problems created by the
complexity of the structure.()
I accept the submissions that were put to me by the Bank in
relation to the following matters:
(a) There was no co-ordinated approach to the creation of
the off-balance sheet structure and it largely grew in an uncontrolled fashion.()
(b) Off-balance sheet entities were not created to hide
non-performing assets - the assets acquired off-balance sheet were considered to be good
investment or business propositions.()
(c) the majority of joint ventures, however, many of which
were entered into through off-balance sheet entities, proved to be ill founded.()
(d) The Bank's present policy is that no new joint ventures
of the type undertaken by Beneficial Finance will be entered into,() and that
the off-balance sheet entities will be eliminated as soon as feasible.()
(e) All controlled off-balance sheet entities have been
brought onto the accounts of the Bank Group since June 1991.()
(f) Beneficial Finance lacked adequate management
information systems to provide basic balance sheet and profit and loss statement
information concerning the assets under the control of Beneficial Finance's management,
(which included off-balance sheet entities and joint ventures), and this contributed to
the losses reported by Beneficial Finance.()
Whilst the extent of the growth of the company was
itself a factor, the off-balance sheet structure meant, that at any given moment, it was
difficult to know the true financial position of the Group. This position was obviously
more acute amongst the directors than the management; Mr Baker himself professes to have
been taken by surprise to find that off-balance sheet ventures were making losses.().
For the reasons set out in Chapter 35 - "Beneficial Finance - Prospectus 65",
I am not prepared to accept Mr Baker's assertion in this regard. In my opinion, the
complex off-balance sheet structure was a factor that contributed to the difficulties
faced by the Board and management to assess and control the business of the Beneficial
The Board were concerned from an early stage to bring the
off-balance sheet entities on to the balance sheet of Beneficial Finance, for management
accounting purposes. Their concern appears to have been that they had too little knowledge
of the true financial position of the Beneficial Finance Group.
The Beneficial Finance Board had, as early as 28 April
1988, expressed their concern about the need for equity accounting, and aggregate
accounting, and a task force had been established to examine that issue. It was a slow
affair, with steps gradually being taken to bring entities progressively on to the
accounts of Beneficial Finance, but the report of the task force was not delivered until 1
March 1991. The earlier result of the investigations of the task force of Mr A Z Kane and
Mr J R Devereaux pointed to the absolute necessity to resolve the whole matter quickly,
and to bring all the operations on to the accounts of Beneficial Finance. The figures
produced by the task force in February 1990 showed accumulated losses off-balance sheet of
about $22.0M. The emergence of this result in January and February 1990 came as a surprise
to the Board and Management.()
41.4.1 DUTIES AND RESPONSIBILITIES OF THE BOARD
I have examined the duties and responsibilities of the
Board in Chapter 2 - "Reference Information on the Investigation" of my
first Report. For the purposes of this Section, I will summarise those duties and
responsibilities that relate to Beneficial Finance's internal management reporting.
One of the principal duties of a Board of directors is
to supervise, direct, and control, the affairs and transactions of the company. To satisfy
this duty, each director should receive such timely, adequate, and reliable, financial
information as will enable the director to fully understand the following matters:
(a) Whether adequate systems and controls are in place
to ensure that the company's assets are safeguarded from the risk of loss.
(b) Whether adequate systems and controls are in place
to ensure that financial information produced by management and presented to the Board is
of the required standard.
(c) The full extent of the company's exposure to, and
risk of, financial loss.
In satisfying their duties in relation to matters
concerned with a company's financial management, directors are required to:
"... exercise a reasonable degree of care and
In the context of this Section, I believe the standard
expected of a director of Beneficial Finance, a company with consolidated total assets of
$2,674.0M() funded by borrowings, much from the Australian public, of $2,436.0M()
would be demanding.
41.4.2 AGGREGATE ACCOUNTING
"Aggregate Accounting" and "Aggregate
Accounts" were terms used by Beneficial Finance to describe the notional
consolidation of off-balance sheet entities into the consolidated financial statements of
The need for aggregate accounting arose as a result of:
(a) Growth in the number of off-balance sheet entities and
concerns of the Board to understand the impact of this growth on Beneficial Finance.
(b) Impending developments in accounting standards, which
would eventually require greater disclosure in statutory financial statements of
Beneficial Finance's off-balance sheet activities.
Certain former Non-Executive Directors of the Bank and
Beneficial Finance have made the following submissions to me:
"... The growth in off-balance sheet activities,
particularly in relation to joint venture projects occurred in Beneficial mainly during
1988. When it became clear to the Beneficial Board that the Group was undergoing
unprecedented growth in that area it was quickly realised that the existing reporting
mechanisms and statutory accounts were no longer suited to give the Board all necessary
management information. It was then that the aggregate accounting and corporate
restructure exercises were initiated." ()
The Board Minutes of 28 October 1988 recorded that:
"... Concern was expressed that financial
information relating to off-balance sheet activities, which is not declared in the
consolidated accounts, should be notionally grouped to ensure an understanding of their
effect on group activities. It was agreed to produce six monthly, in February and August,
a fully consolidated set of accounts which will include all off-balance sheet
In January 1989, the Beneficial Finance Board considered a
preliminary report on a proposal to restructure Beneficial Finance, and resolved that any
"... must result in the ability to report monthly
to the Board on the total Group results including all off-balance sheet companies."
Mr Giles, Partner of external auditors Price Waterhouse,
attended the January 1989 Board meeting. Minutes of that meeting record that he advised
"... the requirements for equity accounting
standards for the accounts for the year ending 30 June 1989."
In January 1989, a number of changes to law and approved
accounting standards were imminent. These changes had all been publicly foreshadowed
during 1988. All would have the effect, when introduced, of compelling Beneficial Finance
to make a greater disclosure than before of the activities of the off-balance sheet
entities in its statutory accounts for external reporting purposes.
In March 1989, Special Submission 255 was presented to the
Board at Beneficial Finance. SS255 directed the attention of the Board to the need for
greater disclosure in the accounts of the Bank Group of the activities of Beneficial
Finance's off-balance sheet operations on account of the matters already mentioned, and
also because concern had been expressed by the Trustee for Debenture Holders as to the
extent and increasing financial importance of Beneficial Finance's off-balance sheet
In response to these developments, Beneficial Finance
established, in January 1989, a project team, comprising Mr Kane and Mr Devereaux, to
report to the Beneficial Finance Executive Committee on the issues of Equity and Aggregate
The culmination of these events was the preparation of an "Aggregated
Accounting Statement", the purpose of which was "... to provide further
information to Management and the Board as to the extent of Beneficial's control and mix
of assets and liabilities beyond that provided in its consolidated Group accounts."
Prior to the preparation of the first set of aggregate
accounts, however, the project team prepared two illustrative equity accounting statements
(a) Accounts, as at 30 June 1988, were presented to the
February 1989 Beneficial Finance Board meeting. The purpose of the exercise was
acknowledged by the auditors to be mainly to present the format, rather than provide
(b) Accounts, as at 31 December 1988, were presented to the
March 1989 Beneficial Finance Board meeting. These accounts stated also they did not
include the off-balance sheet entities.
A report accompanying the aggregate accounts as at 31
December 1988 noted that:
"... A valuable lesson to be learned from the
exercise was that accounts prepared by non-Beneficial Finance parties were not prepared on
a consistent basis or format for Equity Accounting."
The report also stated that a further aggregate accounting
statement, as at 31 December 1988, which would include all "the Kabani-type
entities", was in process of preparation.
41.4.3 AGGREGATE ACCOUNTS - 31 DECEMBER 1988
The first set of aggregate accounts to include all the
material off-balance sheet entities of Beneficial Finance was prepared in relation to the
six month period to 31 December 1988, and was presented to the April 1989 meeting of the
Beneficial Finance Board.
When compared with the statutory accounts published by
Beneficial Finance, the aggregate accounts showed an increase in controlled total assets,
after elimination of inter-company transactions, of $310.2M, with the main contributing
(a) Outside borrowings including creditors and accruals 290
(b) Retained profits and reserves() 5
An attachment to these aggregate accounts identified twenty
seven entities which had material assets greater than $1.0M, and provided a general
description of the assets of those entities.
Some information was not readily available for inclusion in
these accounts; therefore an amount of approximately $23.0M (1.1 per cent) of total assets
was estimated by the project team as being assets attributable to those entities for which
information was incomplete.() Accordingly, the aggregate accounts, prepared as
at 31 December 1988, which comprised only a balance sheet, included certain estimates.
They did, however, provide the Beneficial Finance Board with an indication of the effect
of consolidating off-balance sheet entities into the statutory accounts of Beneficial
Finance and its acknowledged subsidiaries.
In a report, dated 1 March 1991, the original aggregate
accounting project team, Mr Kane and Mr Devereaux, commented upon the team's findings as a
result of the preparation of the initial aggregate accounting statement. The report was
addressed to the then newly appointed Managing Director of Beneficial Finance, Mr J
Malouf. The team stated:
"... It was immediately apparent that the
"known" structure of off-balance sheet entities was not only changing but that
it was also incomplete. The first and essential task was to attempt to limit the growth of
the off-balance sheet entities and to identify other entities which were not recorded on
the corporate structure.
This was, in effect, the first occasion controls were to
be introduced which would restrict growth in the Corporate Structure and identify all
entities in which BFCL or any other entity in the Corporate Structure had an Equity
The problem of the structure was exacerbated by
availability, quality and quantity of accounting information provided by the various
Later in the same report the following observations were
"... Normal accounting and reporting standards were
"... Problems identified.
Initially, Aggregate Accounting was deemed necessary to
provide Board and Management with an overall view of the asset/liability mix of the Group.
The problems identified in achieving this aim related to:
. Dissection and disclosure of related party information
in order that inter related transactions could be eliminated;
. Establish the extent of shareholding retained by BFCL
or a related off-balance entity;
. Analysis of shareholders fund to clearly distinguish
the interests of minority shareholders and pre and post acquisition profits;
. Analysis of liabilities to determine whether funding
was derived from a mix of internal and external sources;
. Determine timing risks. Information may not correspond
exactly to BFCL's accounting period, or information not finalised, or information not
. Extent of contingent liability exposure that BFCL may
have had in relation to the off-balance sheet entities;
. Lack of consistency of the accounting information
prepared by other entities when compared with BFCL." ()
The following is a comparison of the aggregate balance
sheet, as at 31 December 1988, with the statutory accounts of Beneficial Finance Group, as
at the same date.()
Property, plant and equipment
Creditors and borrowings
Creditors and borrowings
The key points to observe from this comparison are:
(a) Total assets under the control of Beneficial finance
were greater than those shown in Beneficial Finance's consolidated financial statements by
$310.2M, of which $199.0M comprised non-monetary assets such as inventories and property,
plant and equipment (property and construction assets).
(b) Beneficial Finance's non-consolidated entities had
external borrowings of $289.7M which were not reported in Beneficial Finance's statutory
consolidated financial statements.
(c) A measure of a company's liquidity is its ratio of
current assets to current liabilities. The liquidity indicated by each balance sheet was
Ratio of CA:CL
Beneficial Finance, through its controlled off-balance
sheet entities, participated in a number of property development and/or construction
projects, which were recognised as non-current assets in the aggregate accounts. The
exposure of Beneficial Finance to these projects was recorded, in the consolidated
financial statements of Beneficial Finance, as short term funding receivables.
Accordingly, the aggregate accounting exercise revealed a much less favourable liquidity
position than had appeared from Beneficial Finance's published consolidated financial
statements, and highlighted Beneficial Finance's participation in property development.
41.4.4 AGGREGATE ACCOUNTS - 30 JUNE 1989
A more comprehensive set of aggregate accounts was
completed in August 1989, in respect of the year ended 30 June 1989. These were presented
to the Board of Beneficial Finance on 24 August 1989, and compared with the draft
statutory accounts for the same period. An equity accounting statement was also prepared
and presented to the Board of Beneficial Finance at the same time.
The aggregate accounts, presented to the Beneficial Finance
Board in August 1989, disclosed a profit after tax for the 1989 financial year of $29.6M,
compared with a reported profit after tax in the statutory accounts of $30.0M. These
aggregate accounts also disclosed losses of $2.2M relating to off-balance sheet entities;
$1.8M attributable to prior years and a current year loss of $0.4M.
The ratio of current assets to current liabilities in the
statutory financial statements was 1.3 : 1.0 compared with a ratio of 1.0 : 1.0 in the
aggregate accounts. This reinforced the result of the initial aggregate accounting
exercise that there was a less favourable liquidity position disclosed by measuring
current assets to current liabilities under aggregate accounting.
The report, of 1 March 1991, by Mr Kane and Mr Devereaux to
Mr Malouf referred to above, states that some of the off-balance sheet entities included
in the aggregate accounts, but not in the ordinary statutory accounts of Beneficial
Finance, produced only unaudited financial information for the aggregate accounting
exercise. Those entities were required to provide their best estimates of results for the
1989 year for preparation of the aggregate accounts.()
In August 1989, subsequent to the issue of 30 June 1989
statutory accounts, Mr Devereaux stated his concern to Mr M Chakravarti at the lack of
regular and reliable financial information relating to off-balance sheet entities and
inadequate monitoring of these results. The matter was referred to and discussed by Mr
Devereaux and Mr Chakravarti with Mr Baker.()
In the course of my Investigation, Mr Baker has stated in
evidence that, following discussions with Mr Devereaux and Mr Chakravarti, the following
course of action was taken.
"... There was a joint venture accounting
department set up headed by Dean Crichton and another - and a lady worked there too. I
just can't think of her name. And so there was a lot more people power put into that
accounting area to better monitor and - and control the joint venture accounts and I think
most of those joint venture accounts were subsequently brought from third party locations
and put into Adelaide head office, I think." ()
41.4.5 AGGREGATE ACCOUNTS - 31 DECEMBER 1989
Aggregate accounts were next prepared for the six month
period ended 31 December 1989. The Beneficial Finance Board Minutes disclose that the
results of this exercise were presented to the Board of Beneficial Finance on 23 February
The Beneficial Finance Board Minutes also disclose that the
Beneficial Finance statutory consolidated accounts, for the six months ended 31 December
1989, were approved by the Beneficial Finance Board at a meeting of directors on 20
February 1990, just three days before the Board of Beneficial Finance was informed of the
results of the aggregate accounting exercise.
The results of the aggregate accounting exercise, which had
been presented to the Board of Beneficial Finance on 23 February 1990, was updated for the
March 1990 Board meeting to take account of recently discovered information, including the
recognition of tax benefits attributable to losses in certain subsidiaries.
An Attachment to the Aggregate Accounting Statement
presented to the Board in February 1990 disclosed a loss attributable to off-balance sheet
entities of $12.5M for the six month period to 31 December 1989, and an accumulated loss
to 31 December 1989 of $22.1M.
The February 1990 Board Paper was prepared subsequent to
preliminary calculations undertaken by Mr Kane and Mr Devereaux, which were the subject of
comment in their report of 1 March 1991 to Mr Malouf. Their preliminary calculations were
a loss for the six month period to 31 December 1989 of $12.8M and an accumulated loss to
31 December of $23.6M. Mr Kane and Mr Devereaux commented in their report, that upon
examination, it was found that the cumulative losses from $2.2M (disclosed in the 30 June
1989 aggregate accounts) to $23.6M at 31 December 1989, was, in part, attributable to
trading before 30 June 1989 - that is, the aggregate accounting results to 31 December
1989 included adjustments for revised results of off-balance sheet entities for the year
30 June 1989. The true performance of some of the off-balance sheet entities was worse
than indicated by the figures which had been included in the 30 June 1989 aggregate
The Attachment to the February 1990 Board paper identified
that the accumulated loss of $22.1M comprised, $9.6M loss for the year ended 30 June 1989
and a loss of $12.5M for the six months to 31 December 1989.
The understatement of losses for the off-balance sheet
entities was attributed to the "... quality and accuracy" of the
information made available to them when compiling the aggregate accounts. In the report to
Mr Malouf, dated 1 March 1991, Mr Kane and Mr Devereaux have cited the following example:
"... This issue of accuracy can be demonstrated
by reference to the accounts of Campbell Capital. The monthly report to the
Board/Executive was showing a marginal profit as at 31 December 1989 of $0.1 million. In
fact, the position as reported for Aggregate purposes was a loss of $1.2 million. The
report to the Board only reported the profit position of the consolidated result of
Campbell Capital, which did not include the losses being suffered on their Equity
investments, which represented a substantial proportion of their business. It should also
be noted that some of the financial results of these Equity investments were ranging from
6 to 18 months out of date depending on whether it was the June or December 1989
Mr Kane and Mr Devereaux also commented in the same
"... This turnaround from a loss, which was seen
to be within acceptable levels of materiality by the external auditors, to a loss which
could offset 30% of the BFCL 30 June 1989 retained profits, might have been regarded as
material by the auditors if they had known at the time."
41.4.6 AGGREGATE ACCOUNTS - 30 JUNE 1990
In a special presentation to the Beneficial Finance Board
on 29 March 1990 by Mr S Spadavecchia, aggregate accounts for the off-balance sheet
entities were tabled projecting the profit/loss for the off-balance sheet entities for the
year to 30 June 1990.
This presentation forecast losses after tax attributable to
all off-balance sheet entities, for the year ended 30 June 1990 amounting to $9.4M before
inter-company adjustments. The Beneficial Finance Board Papers record that the forecast
off-balance sheet losses in the presentation were expected to be covered eventually by
increased property and investment values estimated to amount to $14.5M in the off-balance
sheet entities. These expected gains would be unrealised at 30 June 1990. Nevertheless, it
was stated in the presentation that the losses could be:
"... covered by Beneficial's unallocated provision
for doubtful debts and still leave sufficient provisions to cover the on-balance sheet
receivables portfolio." ()
The Beneficial Finance Board Minutes of 29 March 1990
"... It is intended to continue the Aggregate
Accounting exercise on a monthly basis ..."
Notwithstanding this requirement by the Board, the next
aggregate accounting statement, which forecast results to 30 June 1990, was not presented
to the Beneficial Finance Board until 29 June 1990. The forecast aggregate profit after
tax (for Beneficial Finance Group, entities to be restructured on to the balance sheet of
the Bank, and entities which were to remain off-balance sheet) was $15.8M, to which the
entities which were to remain off-balance sheet were forecast to contribute a $3.2M loss.
A further aggregate accounting statement was included in
the Beneficial Finance Board Papers of 31 August 1990, which compared the actual results
to 30 June 1990 with the forecast results to 30 June 1990 presented to the Beneficial
Finance Board on 29 June 1990. The actual aggregate result (for Beneficial Finance Group,
entities to be restructured on to the balance sheet of the Bank, and entities which were
to remain off-balance sheet) was a loss of $14.4M, which was a turnaround of $30.2M. The
entities which remained off-balance sheet contributed a loss of $5.4M to this result. The
Beneficial Finance Group balance sheet result contributed profit of $5.8M to the aggregate
result whilst a loss of $14.8M was attributable to entities to be restructured on to the
balance sheet of the Bank.
The Beneficial Finance Board Papers commented on the
reasons for the $30.0M turnaround which were principally:
"... provision for losses on receivables and
investments being reassessed after the June paper was issued, profit forecasts not being
achieved and the tax benefits of some losses not being achieved."
41.4.7 CONCLUSIONS FROM AGGREGATE ACCOUNTING
Based on the evidence examined by the Investigation and
for the reasons set out above and in Chapters 57 - "Review of the 1988 External
Audit of Beneficial Finance to Chapter 59 - "Review of the 1990 External Audit
of Beneficial Finance, I have formed the opinion that:
(a) The results and affairs of the off-balance sheet
entities of Beneficial Finance were such as to have a material effect on the financial
position of the Beneficial Finance Group reported, at balance dates, from 30 June 1988 to
30 June 1990 (inclusive).
(b) Without accurate aggregate accounts, the Board and
Management of Beneficial Finance was not properly informed as to the extent of the assets
and operations under its control and responsibility. Accordingly, without such
information, the Board and Management of Beneficial Finance were unable to, and did not,
adequately or properly supervise, direct, and control the operations, affairs, and
transactions, of the Beneficial Finance Group.
(c) By April 1989, when it received the first aggregate
accounting figures, the Beneficial Finance Board was put on notice that the operations of
the off-balance sheet entities potentially had a material effect upon the financial
position of the Beneficial Finance Group.
(d) The aggregate accounts produced in respect of each
six month trading period showed, as they became available, a deterioration in the
financial position of Beneficial Finance, as a result of the activities of the off-balance
(e) The aggregate accounts which were presented to the
Beneficial Finance Board on 29 June 1990, and which forecast aggregate accounting results
to 30 June 1990, contained forecasts which were substantially inaccurate. The Beneficial
Finance Board was not aware of the financial position or performance of the off-balance
sheet entities under its control until August 1990 when further aggregate accounts were