The original branch manager Keating approved the May 1998 facilities
locally within his Delegated Lending Authority (in bank terminology,
‘Applicant Approval Level 5’). This decision meant that the documentation
can be consigned to the filing cabinet, with the project probably avoiding
scrutiny by a superior authority as checks on within-DLA approvals are
random and partial. It also means that any problems arising from the
initial approval process are encased for festering and deferral, but with
the knowledge that remedial action will always be at the expense of the
borrower. In the meantime, the manager will have earned ‘brownie points’
for catering to the permanent pressure from above to expand the loan book.
It is noteworthy that Keating concludes his May 1998 Credit Memorandum
with the sentence ‘Excellent collateral gains have been made with over 10
of this banks (sic) major products & services being provided’.4
A
branch lending manager contains approval within his/her DLA by
establishing a ‘Category A’ loan to valuation ratio. Leverage by the
branch manager is perennially obtained by the manipulation of the Market
Value (or, less typically, Bank Value) of assets over which the bank holds
security. The higher the Market Value the higher the loan total that can
be structured within Category A. Keating has achieved Bank Value by
applying what appears to be conventional NAB shading ratios to Market
Value –
70% for land/buildings5
and 80% for the House Property. But Keating has constructed an acceptable
Bank Value for the land/buildings by positing a Market Value of $2.5
million. The all-up cost of freehold land and buildings (not including
fitout) was $2.3 million. Keating’s Credit Memorandum claims that ‘With
over $3m having been spent … we have at this point placed a conservative
M/V on our security of $2.5m’ (p.2).
This sentence implies that he has included the expenditure on the
unsecured brewery equipment in total expenditure. By this means, Keating
converts an overly generous M/V into a ‘conservative’ M/V.6
In
the same document Keating concludes ‘The abovementioned represents a sound
Category A position’ (p.3). The clear impression is that Keating has
inflated the Market Value of the land/building assets to achieve this end.
The documentation itself is not consistent, with the Credit Memorandum
differing in loan totals from that within the two Line of Credit
Applications compiled on the same day. Examination of the Security
Schedule for the approval would provide insight into this matter, but that
Schedule was not among the documents discovered by the bank for court
proceedings – a perennial omission in bank litigation.
Another peculiar aspect of the approval process was the early neglect of
the significance of asset ownership by a family trust. As noted in court
(National Australia Bank v Walter, 2004: par.50):
Mr
Keating did not recollect whether he was aware, as at September 1997, that
the brewery property was owned by the Walter Family Trust. There was no
evidence to establish that the Walter Family Trust was brought to his
attention at that date. He was unable independently to recollect when he
had first heard of the establishment of the Walter Family Trust. [c/f
Dodds-Streeton: ‘disinterested and honest witnesses’]
4
W.B. Keating, Credit Memorandum, Palatinat Brewery Pty Ltd [etc.], 28
May 1998, p.5.
5
The standard shading of Market Value in the 1970s and 19980s was 80%.
6
The Market Value was deflated in 1999 to $2 million, which may have been
more reasonable in the prevailing circumstances.
Keating appears to be dissembling with this statement. The Walters claim
that Keating was apprised from the beginning of the Trust; their claim is
the more plausible. Trust arrangements present a natural threat to bank
security. NAB procedures have conventionally dictated that potential
relationships involving trusts were to be vetted with the State Legal
staff to confirm the borrowing powers (and any other relevant
contingencies) of the trust. Such a procedure was clearly not followed in
the Walter case, highlighting again that the ‘level 5’ local approval
suppressed potentially troublesome elements of the relationship. Superior
officers would have been alerted to the unconventional process belatedly
when renegotiation of the facilities was sought in late 1998 [
7
for this reason alone, the facilities would have been put on watch, but it
was to the Walters’ account that any initial laxity was attached.]
Yet another peculiar aspect of the approval process was the benign
creation of loan facilities for a building still under construction,
especially given that the Walter family were owner-builders. Under past
NAB conventions, the project would have been placed within ‘Under Building
Advance Conditions’ (UBAC) which allowed loan extensions only after expert
certification or in stages related to building progress subject to regular
inspection. Again, there is the bypassing of a procedure that builds
caution into the approval process.
After the December 1998 restructuring the Walter file remained ‘upstairs’
with the Credit Bureau, unbeknown to the Walters, effectively on watch.
The restructuring foreshadowed a review in six months time. That review
took place and the new branch manager’s lengthy June 1999 Credit
Memorandum was essentially positive. Local turnover was looking up, and
there was the prospect of enhanced beer sales through a wholesaler that
would further increase turnover. The branch manager concluded his report
(p.4):
We have every confidence in the Walters meeting there (sic) commitments
on an ongoing basis. Their input and honesty is considered a strong
point. The regional manager concurred with this assessment.
One other dimension from the mid 1999 Review merits attention. The
Business Banking Centre manager noted (pp.5, 4, 3):
On the brewing side the Walters have shown there (sic) ability to
produce an excellent product that at this moment is entered in the World
Beer Championships in Melbourne. The product regardless of all other
opinion in the district is considered of a high standard. …
However it is noticed that this brewery has come under the notice of CUB
and there is some evidence to say CUB may be attempting to frustrate
their efforts
…
Discussions also reveal that they are close to signing contracts with a
wholesaler that has potential to double sales. Due to twice in the last
month having their attempts to purchase equipment being undermined by
CUB they will not disclose details of upcoming contract.
7
Henceforth, the Market Value of the assets was deflated, and
deliberation moved upstairs within State Administration to ‘Aggregate
Approval Level 3’, as per Membery’s Business Credit Submission of 31 May
1999.
This is a curious situation. Does the CUB have an interest in this tiny
boutique brewery? CUB personnel did come into the restaurant and spoke to
Walter senior, saying ‘you won’t make it without us’. Was this a veiled
threat?
Following the positive report, Membery (the Walters’ second manager) left
soon after to be replaced by an interim manager, and by September 1999 a
fourth person was in the position. One of the first actions of this fourth
manager was to turn up unexpectedly at the business and try to sell the
Walters life insurance.
Although the fixed interest facility was due for reconsideration in late
December 1999, no correspondence was forthcoming. Out of the blue in
February 2000, interest rates were increased to penalty levels – to
12.25%, up from 7.9%. The Walters’ accountant complained, and was met with
an April 2000 response from Asset Structuring expressing concern regarding
the company’s profit and loss position. The Walters had not been informed
that their accounts had been downgraded to impaired status and moved to
the Asset Structuring Unit in October 1999.
The Walters were not in default on their payments. All loan repayments had
been met. Moreover, supplier relationships were debt free.
In
mid April 2000, the Walters were instructed to sell their business and
home by 30 June. Since the debt restructuring in December 1998, they had
reduced the total debt by approximately $400,000 through the sale of two
properties in Western Australia. A meeting with Ben Edney, Head of Asset
Structuring, in Melbourne in September was met with the response ‘we don’t
want you’. A subsequent meeting with Ray Pridmore, General Manager of
Asset Structuring, was met with refusal of assistance as it was claimed
that the Walters’ assets had been eroded.
On
30 November 2000, the bank withdrew almost $15,000 from the company
account (consistent with regular payments on the two loans). On the next
day a bank-appointed receiver, D’Aloia Handberg, arrived and took
possession of the brewery and subsequently froze the account. The Walters
were denied access to the balance of the account, estimated at $30,000. G.
D. Sutherland, a Melbourne-based valuer appointed by the receiver, valued
the property (freehold, goodwill, plant and equipment, excluding brewery
equipment) in the range of $800,000 to $1 million.8
This valuation contrasted with a May 1999 appraisal by a local valuer
(initiated by the Bank) at between $3-3.5 million, with a ‘fire sale’
valuation of $2 million. The receiver closed down the business on 16
February 2001, having run it in his own interests for 2 ˝ months.9
The
property was auctioned on 2 March 2001, the sale price being $1.03
million, inclusive of all chattels (but not the brewing equipment). The
land and buildings component of this return was $919,000. Why did the
receivers not attempt to sell the business as a going concern? Why did
they jettison the brewing equipment, worth $.75 million? It is not
inconsequential that the bank did not have security over this equipment.
Why was the property auctioned two weeks after the business was closed
down? What kind of marketing process for a specialised property can occur
in twoweeks?10
8
Sutherland Property,
Report and Valuation, Palatinat Brewery
…, 5 December 2000.
9
On the 18 January 2001, Handberg wrote a letter to himself followed by a
reply to himself, wearing the two hats of receiver of the freehold and
manager of Palatinat Brewery. The contents highlight that the Walters’
interests were of no consequence in his management (and ready disposal)
of Palatinat.
The 1999 $3-3.5 million valuation was probably an over-estimate, but the
Sutherland valuation was almost certainly an under-estimate. The figure
has the appearance of a contrivance. The reasoning behind the December
2000 valuation by Sutherland was replicated in the 2003 litigation. Grant
Sutherland, principal of G. D. Sutherland, claimed that the business was
worthless, that sunk costs were irrelevant, and that all that mattered was
future potential use.
It
is noteworthy that a NAB file note dated 18 January 2001 confirms
discussion between a bank officer and Geoff Handberg, D’Aloia Handberg
principal. Mention is made of the implications if the receiver were to
sell the property for $1.5 million.
There is explicit recognition that this outcome would result in a $200,000
surplus for the customer. NAB standard practice appears to be to ensure
that the defaulted borrower is left with a residual deficit so that the
bank can pursue the borrower to bankruptcy, if necessary, leaving the
borrower legally powerless. The Sutherland valuation and the auction sale
price conveniently left the Walters with a residual deficit. By the time
of sale, the land would be conservatively valued at $400,000. The
purchaser was getting a building constructed to the highest standards for
a relatively cheap price, at something of the order of $520,000.11
The Walter residence, quarantined during litigation, was appropriated in
August 2004.
10
D’Aloia Handberg is representative of the receiver/manager profession
whose nominal responsibility is to seek to resurrect the business in
their hands but who act instead as liquidators. Another instance
involving this company is instructive. In November 2000, the
Commonwealth Bank of Australia cavalierly put Vic Air Supplies
(manufacturer of heating/air conditioning equipment) into receivership,
appointing D’Aloia Handberg. The receiver attempted to dismantle the
company as quickly as possible, arranged a doctored report on the health
of the company which the owner only managed to obtain six years later
due to pressure from the Banking Ombudsman, and attempted (fortunately
unsuccessfully) to prevent the company’s owner from raising the funds to
recover the company from receivership. The aggression of D’Aloia
Handberg received a judicial condemnation in Smarter Way v D’Aloia
(2000).
11
Events since the auction compound the presumption that the sale process
was flawed. Subsequently, the purchaser at auction leased the property
to another party, who in turn leased the property to a third party. The
up front lease consideration sum extracted by the purchaser was not
significantly different to the price paid at auction. In effect, the
initial price was sufficiently low that it has allowed another party to
henceforth enjoy rental income on a property in which he has no capital
invested, a very astute commercial proposition indeed.
1 -
2 -
3 -
4 -
5 -
6 -
7 -
8 -
9
History of Banking Fraud:
The Coming Battle
