The
National Australia Bank v Walter/Palatinat:
A
Case Study in the Adverse Small Business Environment in Australia
Evan Jones
Political Economy Discipline
Faculty of Economics & Business
University of Sydney
evanj@econ.usyd.edu.au
April 2007
Disclaimer:
The responsibility for the opinions expressed in this article rests solely
with the author(s). The Faculty of Economics & Business gives no warranty
and accepts no responsibility for the accuracy or the completeness of the
material.
The
National Australia Bank v Walter/Palatinat:
A
Case Study in the Adverse Small Business Environment in Australia
Evan Jones
Introduction
In
August 2004, the National Australia Bank issued a Statement of Corporate
Principles (National, 2004: 6). The statement, summarised here (not
accessible on the NAB website), embodies a strong ethical code of
practice:
Our core beliefs and values are based on the following principles:-
•
We will be open and honest
•
We take ownership and hold ourselves accountable (for all of our
actions)
•
We expect teamwork and collaboration across our organisation for the
benefit of all stakeholders
•
We treat everyone with fairness and respect
•
We value speed, simplicity and efficient execution of our promises
And we do not have room for people who do not live these principles.
This formal code needs to be juxtaposed against questionable NAB treatment
of some small business borrowers, treatment that has extended over an
extended period. What follows is a case study of one borrower, the Walter
family, who established with NAB credit a brewery/restaurant in Albury/Wodonga
on the New South Wales/Victorian border. The experience of the Walter
family in the courts is not unrepresentative of bank litigation involving
small business customers. Moreover, the experience of the Walters with the
regulatory agencies is particularly instructive on the profound vacuum
that exists in Australia in the regulation of the relationship between
bank lenders and small business borrowers.1
1
The structured subordination of small business borrowers to their
lenders is but an extreme case of more pervasive structured
subordination of small business to corporate business across key sectors
in the Australian economy (Jones, 2005b).
The
Walter Family and the National Australia Bank
Fritz and Ingrid Walter ran a successful business in Germany, had acquired
a reasonable nest egg and lived a comfortable life. Several holidays in
Australia generated an interest in migrating permanently to this country.
In the late 1980s, the Walters attended a seminar at Frankfurt sponsored
by Australian government officials on the attractions of business
migration to Australia. They met Victorian government officials who
promoted the Albury/Wodonga area, reinforced by local officials when the
Walters visited the area in 1994. Local officials were promoting the
‘Gateway Island’ project (adjacent to Sydney/Melbourne traffic) as a
tourist attraction.
The website of the Victorian government’s Frankfurt office (reproduced
below, since removed) promoted Victoria as possessing a number of
fundamental ingredients for doing business, including sound financial
infrastructure.
Frankfurt
Victorian Government Business Office
The
Victorian Government Business Office in Frankfurt was established in
1969. The office is available to assist prospective investors with
advice and information about Victoria. It also provides support to
Victorian companies seeking to export to the countries serviced by the
Frankfurt VGBO.
Countries serviced by the Frankfurt VGBO
Germany, Switzerland, Austria, Scandinavia and Eastern Europe.
Victoria offers :
•
A cost efficient place to do business
•
Secure and familiar legal and financial infrastructure
and services
•
Political stability in a democratic OECD economy
•
A location in the Asia-Pacific time zone
•
Access to highly skilled and affordable employees
•
A strong base in innovation and research
•
A high technology manufacturing sector
•
Strong safeguards for your intellectual property
•
Communication and transport that link you to global
markets
•
A network of Government Offices in Asia to assist your
expansion into the region
•
First class quality of life for expatriate executives
Victorian Government Business Office in Frankfurt
Contacts
Grueneburgweg 58-62 D-60322 Frankfurt am Main | Germany
Phone: +49 69 668074–0 | Fax: +49 69 6680 74-66
The language has to be seen as misleading and frivolous, indeed dishonest,
in the light of the Walter family experience.
By
1997 the Walters bought land in the ‘Gateway Island’ domain, planning a
brewery and restaurant. They hired as consultant an Australian-based
compatriot with experience in boutiques breweries. Funds for the purchase
and development of the property came predominantly from the disposal of
existing family assets, generating over $700,000 in capital. Later, sale
of another asset added $200,000, totaling over $900,000 in family capital.
Additional funds were later made available from sale of the Walter family
business in Germany for $2.2 million. Total expenditure by the Walters on
the project was of the order of $3.5 million.
Fritz and Ingrid and their daughter Carmen Walter moved to Wodonga in
February 1998. Construction had begun in July 1997 and the brewery was
officially opened (albeit prematurely) by the then Victorian Premier, Jeff
Kennett, in May 1998.
The Walters began banking with the National Australia Bank, and developed
a seemingly good relationship with the then Wodonga Business Banking
Centre manager, Mr. Wayne Keating. The Walters obtained a bridging loan,
secured by the unimproved land, in September 1997, and equipment leasing
facilities, an overdraft and a home loan in May 1998.
By
October, it was clear that business turnover was not up to expectations.
There were cost overruns due to the high quality of construction and
outfitting, and inadequate understanding of Australian building codes.
Original cashflow projections were too optimistic.
The Walters claim that they were let down by the Council which had not
proceeded with the precinct project. Moreover, the Council had failed to
install traffic lights on the main thoroughfare that would make the
business accessible to traffic passing in the opposite (Melbourne to
Sydney) direction. The traffic lights were belatedly installed after the
business had been closed down by the NAB and the property sold.
The claim that promised support was not forthcoming was reinforced by the
then Branch Manager in a later Credit Memorandum of June 1999. The Manager
noted:2
On 7th
May 1998 the business prematurely opened at the request of the local
council who were trying to promote the Gateway Island project to the
Premier of Victoria and wanted to show him on a visit that there was
commercial investment happening.
2
B. Membery, ‘Walter Connection Credit Memorandum’, 1 June 1999, p.1.
The Walters approached their manager via their accountant in October 1998
and asked for a restructuring of their loan facilities to reduce monthly
repayments. The then manager claimed that the request would probably be
acceptable to his superiors. At about this time, the Walters’ branch
manager resigned, and was replaced by Mr. Barry Membery.
It
was not until two months later, in December 1998, that the Walters’
received a response. The Walters’ accountant had requested a single bills
facility, an instrument over which borrowers can exercise some discretion.
The Walters were offered $1.38 million (their existing indebtedness),
comprising a fixed interest one-year bank-funded loan of $1 million and a
principal and interest loan of $380,000. This mix of debt seemed bizarre
to the Walters. According to the Walters, the new manager declined to
explain the loan’s character, and offered it on a ‘take it or leave it’
basis.
Carmen Walter asked Membery, ‘How did the bank arrive at these
pre-determined facilities?’ (or words to that effect). Membery replied:
‘You wouldn’t understand’. His general response to questioning was that
‘it is best for your business’. The Walters presumed that the one-year
loan would be turned over (subject to interest rate movements), and they
were not disabused of this belief. The discussion generally focused on the
interest rate payable; there was no discussion regarding repayment of
principal.
The other key change in the restructured facilities was that the home loan
debt was unilaterally moved from a personal housing loan and transferred
to the business facilities as a ‘business combination’ loan. As a
consequence, the converted housing loan debt faced a higher interest rate
and larger repayments (from $3500 per month to $5925 per month). This
change was done without explanation or permission.
Document discovery highlights that the initial loans were made on the
security of the Walters’ assets, with inadequate attention to the
business.3
The Walters had come from a country with an entrenched tradition of banks
which specialise in small business lending and which take seriously the
business of their small business borrowers.
3
‘Lending to this connection has in the past been based on security held’.
Barry Membery, Credit Memorandum, 13 October 1998.
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History of Banking Fraud:
The Coming Battle
