Further examination of the Bankwest allegations
The previous chapter outlined the key common grievances that certain
business customers had with Bankwest. This chapter utilises that evidence to explore
whether there was an unusual incentive for the CBA-owned Bankwest to act as it
did or, alternatively, whether developments in the economy or in specific
sectors during and following the global financial crisis help explain the bank's
approach. Specifically, this chapter includes a discussion of:
- the terms of the CBA's acquisition of Bankwest, a factor that a
number of aggrieved borrowers consider directly influenced Bankwest's actions;
- other considerations, including the downturn in the property
market and business activity in some sectors of the economy;
The chapter also examines the opportunities available for aggrieved
borrowers to resolve their dispute or to seek redress, and considers the
effectiveness of these options.
The terms of the CBA's purchase of Bankwest
Warranties in the purchase agreement
As noted in the previous chapter, the CBA's proposed acquisition of
Bankwest and St Andrew's Australia
was announced on 8 October 2008. The CBA completed the acquisition on 18 December
2008. Some submissions received by the committee focused on speculation
regarding the terms of the purchase agreement; in particular, whether an
unusual "clawback" provision or warranty exists that provided an
incentive for the CBA to act against existing Bankwest business customers. To
put it another way, whether a clause in the agreement exists that either
allowed the purchase price for Bankwest and St Andrew's to be reduced by an
amount related to the bad debts on Bankwest's books, or otherwise acted as a
warranty that could be called upon to the CBA's benefit. Such a provision,
according to those who are convinced of this, would explain Bankwest's purging
of its commercial property loans once it passed into the CBA's ownership.
HBOS's 2008 annual report indeed reveals that there was a warranty of some
Under the share sale agreement HBOS plc has provided certain
warranties to Commonwealth Bank of Australia, that all relevant, material
circumstances and facts in relation to the sale have been disclosed and
described in agreement. The share sale agreement provided for adjustments to
the initial purchase price based on the risk weighted assets of Bank of Western
Australia Limited and the net assets of St. Andrews Australia Pty Limited. As a
result, the loss on sale of these businesses may be subject to adjustment for
the contingent element of the commitment receivable.
On 30 April 2009, Bankwest announced a loss of $139 million for 2008.
This result included loan impairment expenses totalling around $825 million,
nearly ten times the level in 2007.
In a statement to the ASX on the same day, the CBA announced:
As advised at the time of acquisition of Bankwest, the Group
is purchasing a bank which is appropriately capitalised and provisioned. The
final purchase price for Bankwest will be determined over the next two months
taking into account its capital position and provisions for bad and doubtful
The Australian reported in May 2009:
In the $2.1 billion sale deal
struck last year, CBA retained an agreement that Bankwest had to be
appropriately provisioned when the WA institution came under its ownership. It
is understood the new provisioning level is split evenly between collective and
CBA is expected to claim about $400 million, the individual
provision amount, from HBOS.
The process is to go to an arbitration hearing, and most
analysts expect the full-year loss and provision spike to reduce the total sale
amount that is yet to be paid by CBA.
The purchase price for Bankwest was finalised in early July 2009.
Submissions that focused on the warranty speculation argued that the CBA
managed to successfully use the clause and obtained an additional discount on
the purchase price from the new owners of HBOS (Lloyds Banking Group) by
improperly increasing the impairments on Bankwest's books. Some submissions
also claimed that, after the price adjustment process, the CBA still needed to
ensure that impairment of the loans could be demonstrated.
The following statement by Mr Geoff Shannon details the argument:
The 2008–09 figure for the impaired loans is estimated at
around $850 million—$620 million or so as the discount of the purchase
price, and a further $200-plus million in that first part of 2009. The 2009–10
figure for the impaired loans was another $754 million ... as a result
of an internal Bankwest audit known as 'Operation Magellan', a code named
operation. This figure of $750 million is on top ... of the previous impairment
charge of around $850 million ... it appears to me that, for at
least the $850 million figure, there was a dollar-for-dollar reward for these
Mr Geoff Shannon also argued that the CBA would further benefit through
tax deductions associated with the impaired loans and, because it has allegedly
claimed a price adjustment based on the impaired loans it has demonstrated, it
also would profit through the sale of any impaired assets.
The contentions appear based on media reports (such as the article cited earlier)
and the financial statements of Bankwest's former owners.
The 2009 reports and accounts for HBOS and the Bank of Scotland report a loss
on the sale of Bankwest and St Andrew's Australia of £845 million in 2008,
and a further loss of £100 million in 2009. Both reports include the following
On 8 October 2008, the Group agreed the sale of part of its
Australian operations, principally Bank of Western Australia Limited and St.
Andrews Australia Pty Limited, to Commonwealth Bank of Australia Limited. The
sale completed on 19 December 2008 and resulted in an estimated pre-tax loss on
disposal of £845 million (including goodwill written-off of £240 million).
The agreement provided for adjustments to the consideration received in certain
circumstances and as a result a further loss of £100 million has been
recognised in the current year.
The CBA's response
The CBA strongly denied claims that the purchase agreement allowed it to
benefit from terminating the loans of certain Bankwest business customers:
It has been suggested that CBA gained a commercial benefit from
putting some Bankwest commercial loans into default which then allowed CBA to
recoup subsequent losses from HBOS. Let me say categorically that that
suggestion is simply untrue.
The CBA argued that speculation about the sale agreement is 'based on an
erroneous understanding of the purchase price adjustment process and the
alleged "clawback" the CBA received from Bankwest's former ultimate
parent, HBOS plc'. It is useful to reproduce the relevant statement
from the CBA's submission at length:
The sale agreement set out a purchase price adjustment
process, which is standard practice in this type of sale scenario. Under the
purchase price mechanism, the initial price CBA paid for Bankwest could
increase or decrease by reference to the financial accounts which were to be
prepared for Bankwest as at 19 December 2008.
As part of this process, the parties agreed HBOS Australia
Pty Ltd (as seller of the Bankwest shares) would prepare draft financial
accounts for Bankwest to reflect its financial position as at 19 December 2008.
The headline values reflected in the draft accounts for Bankwest would, in
part, be impacted by the level of provisions which HBOS Australia Pty Ltd
allowed for when preparing them.
Under the sale agreement, CBA would review the draft financial
accounts and raise any issues with HBOS Australia Pty Ltd.
If the parties could not agree the final accounts between
themselves, the sale agreement provided for a final determination by an
independent expert to assist them resolve any outstanding issues.
Ultimately, the parties were unable to agree on a number of
items, including that the level of individual provisions reflected in the
19 December 2008 accounts were appropriate in all cases.
Ernst and Young was appointed as the independent expert to determine
these disputed items. Ernst and Young's determination was final and binding.
We are aware of speculation that HBOS plc paid CBA some
$200 million as a result of the price adjustment process. This is not
correct. The purchase price adjustment process was finalised by early July 2009
and resulted in a small increase in the purchase price for Bankwest.
The price adjustment process was designed to achieve a
"zero sum" outcome. It could not, and did not, deliver any windfall
gains. If the financial accounts finalised by Ernst and Young reflected an
increase in value, CBA was to pay more and vice versa.
CBA paid for the independently determined value it acquired
in Bankwest, and Bankwest, under CBA ownership, has borne any losses it has
subsequently incurred from loans that were not assessed to be impaired or in
default as at 19 December 2008.
During their evidence to the committee at a public hearing, the CBA representatives
expanded on this statement and advised that the CBA paid an additional $26 million
for Bankwest as a result of the price adjustment process.
For absolute clarity, the CBA later confirmed in writing that the final price
it paid was $2.1261 billion.
Reconciling the competing arguments
As the preceding paragraphs show, in 2009 both HBOS and the CBA reported
that they incurred further costs related to the finalisation of the
acquisition—HBOS an additional £100 million and the CBA an extra $26 million.
The question naturally arises as to how this could be so.
There do appear to be difficulties in comparing the financial statements
of HBOS given it was itself acquired around the same time as its subsidiary
Bankwest. The CBA observed:
We do not know what accounting policies or accounting
treatment that Bank of Scotland plc applied to its accounts in order to
determine (historically or at the relevant times) the carrying value of the
Bankwest Entities. Consequently, CBA is unable to comment on the level of write
offs disclosed in Bank of Scotland's 2009 Report and Accounts.
HBOS's books were seemingly subject to more conservative treatment under
its new owners; for example, shortly after the acquisition Lloyds increased the
impairment losses from £3.3 billion (year to 30 November 2008) to approximately
£7 billion (year to 31 December 2008).
The UK's financial regulator concluded that, under its previous owners, 'there
was a collective denial within the Corporate Division of the impact of the
financial crisis on the portfolio' which impacted the ability of the
independent auditor to fully assess HBOS's accounts:
The culture of optimism which pervaded the business impeded
the identification and effective management of transactions as they became
stressed and delayed the referral of stressed transactions to the High Risk
team. There was a significant risk that this would have an impact on HBOS's
capital requirements. It also meant that the full extent of stress in the
Corporate portfolio was not visible to Group, auditors and
regulators ... Throughout [April 2008 to December 2008], HBOS's
auditors KPMG agreed that the overall level of the Firm's provisioning was
acceptable. However, in relation to Corporate, they consistently suggested that
a more prudent approach would be to increase the level of provision by a
significant amount. The Firm consistently chose to provision at what KPMG
identified as being the optimistic end of the acceptable range for Corporate.
KPMG's view of what constituted the acceptable range was informed by
management's assessment of the degree of credit risk in particular
transactions. Further ... the slow migration to High Risk meant that
the full extent of stress in the Corporate portfolio was not visible to KPMG.
Notwithstanding the statements in HBOS's report and accounts, the CBA added
that it 'categorically confirms that the initial price agreed by HBOS Australia
and CBA for the Bankwest Entities was not reduced by an amount equal to
£100 million or by any other amount'.
The post-GFC property market and business environment
Another possible explanation for the actions taken by Bankwest can be
based on the types of business loans held by Bankwest and the impact of the
global financial crisis on the businesses and assets related to these loans. As
the relevant submissions were largely from individuals involved in enterprises
where the nature of the property is a key feature (such as hotel owners and
property developers), it is necessary to consider the state of the market for
these types of properties.
The CBA provided an overview of how it considers the crisis impacted the
position and options of many business:
The economic environment since the commencement of the GFC
has adversely impacted the financial profile and flexibility of many
enterprises, as well as some individuals. As a result, these enterprises and individuals
have found it increasingly difficult to meet normal (unchanged) criteria
relating to maintaining existing debt facilities or loans. Since the
commencement of the GFC there has been a reduction in second tier lenders who
would ordinarily consider these enterprises and individuals a suitable
refinance proposition. In some cases this has resulted in overall borrowing
increases (both working capital and term debt in the case of enterprises) from
larger lenders such as the CBA. Normally, however, this is only if the borrower
has shown a continued ability to meet commitments and/or pledged additional
collateral. In the main, the aggregate debt offered to borrowers of a stable
credit profile would have remained the same over the GFC, but many borrowers with
stable credit profiles would have reduced their indebtedness based on their
more conservative settings for leverage.
It is also significant that Bankwest, under its previous owner and prior
to the global financial crisis, was approving business loan applications that
other banks were not. During the period following the crisis, the new owner is
likely to be additionally sceptical of the quality of the loans that they were
unwilling to finance prior to the crisis.
In a letter to the committee, a senior manager at the Australian
division of Colliers International stated:
The demand for residential development
properties deteriorated significantly as a result of the global financial
crisis ("GFC"). In many instances, values of en-globo parcels of land
decreased by approximately 70% due to the GFC.
Figure 8.1 shows the scale of the downturn in commercial real estate
prices that occurred during the global financial crisis.
Figure 8.1: Property price indicators
Source: RBA, Financial
Stability Review, March 2012, p. 16; based on Bloomberg, Jones Lang LaSalle
Research, Property Council of Australia, RBA, RP Data-Rismark and Thomson
The overall property values of hotels were particularly affected—a
development which has also been relatively sustained. Developments in major
Australian hotel markets are relevant to some of the evidence received by the
committee. In its 2011 assessment of these markets, hotel advisory firm Dransfield concluded that hotel values have 'partially
recovered' to pre‑crisis levels, however it added the following
Many assets offered remain on the market with sellers
unwilling to meet the market (where values have not fully recovered to pre-GFC
levels) and with supply far exceeding demand. Again a significant proportion
(estimated at around 20%) is distressed assets under administration, with the
majority of these in leisure based/resort destinations.
Bankwest's submission discusses how, in its view, its business lending
portfolio was particularly impacted by developments in regional property markets:
A reasonable proportion of Bankwest's loan impairments were
contained in its property lending portfolio and in particular a number of
residential, hotel, aged care and land development exposures in regional
Queensland and New South Wales. These sectors and regions in general have been
suffering difficult financial circumstances since the GFC began such as lower
revenues and earnings and a diminution in the value of the underlying assets.
Bankwest advised the committee that up to 7.23 per cent of its east
coast property developer, property operator and pub customers became impaired
between December 2008 and 30 June 2012.
Concerns about the commercial property market were also expressed by other
banks, such as HBOS which largely attributed an increase in impairment losses
of 67 per cent in 2009 (the year after it divested Bankwest) to falls in
the value of commercial real estate, noting in particular that '[s]ignificant
provisions were required against the Group's Irish and Australian commercial
real estate portfolios'.
NAB noted similar issues with hotels and other properties on the east coast:
On hotels generally that has been a problem area for us as
well. You would have thought that it would not be a problem running a pub in
Australia, but it has become one in some instances. On property development,
particularly in south-east Queensland and in those areas that are exchange rate
impacted that rely on tourism, we do have issues ... The hotel market
will sort itself out. New buyers will come in at a lower price, I guess, and
they will make the most of them work. On the property side there is some
oversupply that will need to be cleared out, particularly in south-east
Queensland, and that market should revert to something a little bit more
normal, but it might take a little while.
In this context, that revaluations were required by Bankwest does not
appear unusual, particularly as the terms of the loans provide Bankwest with
the ability to update the valuation at least once a year.
ANZ submitted that such risk management processes were actually required by the
government's prudential supervisor:
APRA believes it's important to have more specific 'triggers'
in lending policies as part of risk management procedures, to ensure that real
estate held as security is revalued when there is a material change in the
market value of real estate within an area or region.
Of course, this is a high-level discussion on the commercial property
market. Assumptions that the value of commercial property decreased across the
board are contestable. For example, in his submission Mr James Neale declared
that his five acre industrial property at Mount Kuring-gai was sold for
$635,000, although prior to the sale he had refused a $4.1 million offer from
an apartment developer and after the sale the property was valued at $3.58
Impact on business revenue
The Australian economy performed better than most advanced economies
during the global financial crisis, with a significant factor being the mining
boom caused by the increased demand in China for certain mineral resources. The
crisis did have an immediate impact on the Australian economy, an impact also
reflected by other measures such as unemployment, surveys of consumer and
business confidence and household savings. The below charts provide some
indication of the economy‑wide impact.
Figure 8.2: Nominal
and real GDP growth
Tony McDonald and Steve Morling, 'The Australian economy and the global
downturn Part 1: Reasons for resilience', Treasury Economic Roundup,
2011, issue 2, p. 12; based on ABS cat. 5206.0.
8.3: Unemployment rate
Source: ABS cat. 6202.0.
Figure 8.4: NAB business
balance; deviation from average since 1989.
Source: NAB, RBA.
These economic developments affected industries differently. For hotel
businesses in the major markets, it is estimated that overall revenue was
reduced by 6.8 per cent as a result of the economic downturn arising from the
global financial crisis.
This would be a factor considered by lenders when assessing whether marginal
hotel businesses are likely to be viable. As a number of aggrieved Bankwest
borrowers operated pubs and small hotels in regional areas, some analysis of
that sector is useful. To illustrate, Mr Geoffrey Reiher explained how the cash
flow of the hotel he co‑owned in Cobar, New South Wales was affected
following the global financial crisis:
We entered into a two-year interest only deal when the GFC
hit. We made sure our commitments were all up to date. The hotel was doing up
to $25,000 a week in the good times and through the GFC we went down to
probably $11,000 a week. In that time the hotel bar takings actually went up 10
per cent; our downfall was gaming. From that we managed to get it back up to
about $18,000 a week, until our termination.
Value of property developments
It is an acceptable premise that the value of a property is only proven
when someone actually pays that amount. However, when a bank has been financing
a property development that is partially or substantially completed, as a
general principle it would appear to be in the bank's interest to work through any
difficulties to the extent possible to ensure that the construction is
completed, thus ensuring the best opportunity for the debt to be recouped. There
is also an apparent contradiction between Bankwest's submission and evidence
relating to individual cases. Bankwest's submission states that one of the
characteristics often identified before it decides to appoint a receiver is
that 'the underlying project or development has stalled or costs have blown out'.
However, borrowers counter that it was because previously committed funds were
not forthcoming that construction had stalled. Additionally, selling projects
that are nearing completion does not seem to maximise the value that could be
recouped; one borrower argued that they had $8 million worth of committed pre‑sales
for a project that was 70–80 per cent completed, but which was ultimately
placed in receivership and sold for $2.215 million.
Mr Guy Goldrick, who was involved in a development linked to Bankwest, explained
Our project was going well when, out of the blue, we were
told to stop work. We were left hanging for nine months, all the while being
told our development was fine and then, in 2009, we were given 24 hours to pay
back $6.4 million.
The project was sold in its incomplete form for around $3.2 million. The
value of the completed project was estimated to be around $15 million.
Mr Goldrick argued:
If they had worked with us in any way, shape or form, we
could have finished the development and moved ahead. Maybe if we had sold two
at a reduced price, we could have paid out the debt. Even if we had had to sell
three to pay out the debt, we would not have been in the position where the
bank were still owed money.
Bankwest's general response to these types of cases was to state that 'it
is not in our interest to sell an asset for a lower value and take a loss'.
Even so, as previously noted, the new owners of Bankwest had decided to
redirect the focus of its business portfolio away from the property sector.
The tension between this decision and decisions about individual developments
was highlighted by a senior Bankwest executive:
When developments get into difficulties, there are debates
between the bank and the customer as to whether or not it is better to put more
money in to finish the development at that point. The reality of what was going
on globally at that point was that all banks, because we were at the point
where we entered the financial crisis, were looking at the sectors that they
wanted to lend into. At that point in any cycle lending into development of
property always starts to slope.
Mr Corfield added:
... there are of course a number of development customers
where we have finished the development with those customers in order to make
sure, as you say, that we can realise the value for the bank and for the
customer ... However, the reality is equally, unfortunately, that in some
of these development cases putting in further money will not realise any extra
value either for the customer or for the bank and unfortunately the reality of
what happened in the GFC was that values fell very significantly, especially in
regional development centres.
Revaluations, receivers and 'market value'
This section examines concerns about how valuations were conducted, the
appointment of receivers and, from an overall viewpoint, whether the best price
of the properties being sold was achieved.
Revaluations were a recurring feature in the evidence from borrowers who
feel aggrieved by Bankwest's actions. Some borrowers also posed questions about
the relationship between Bankwest and its panel valuers
and the nature of the instructions from the bank about how the revaluation was
to be conducted.
That valuers are independent from the banks was a point emphasised by many
organisations in response to these suggestions. For the valuers it uses the CBA
requires, among other things, that they hold associate membership of the
Australian Property Institute, that the valuation report be signed by a valuer
with at least five years' experience of valuing the relevant type of property
(and be countersigned by the director of valuation in the firm if the amount of
the valuation exceeds $1 million) and not have a direct or indirect interest in
or association with the client or the property concerned.
The Royal Institution of Chartered Surveyors (RICS Oceania) stated that the
valuation provided by professional valuers is done at a point in time and under
professional standards, such as the RICS Valuation Standards and the
International Valuation Standards Council.
The previous chapter detailed some of the evidence regarding
revaluations, and how the outcomes of revaluations were significantly lower
than previous valuations conducted, placing the borrower outside their LVR. In
its submission, RICS Oceania noted that the global financial crisis and the
related fall in property prices presented challenges for valuers:
The unfortunate and grim reality of the global financial
crisis is the devastation to businesses and livelihoods, as property prices
fell in response to the changing international financial environment. Through
this period valuers and the valuation profession struggled to determine what a
market value [was] in a market place that became so difficult so quickly.
In addition to changes in market conditions related to the global
financial crisis, RICS Oceania also stated that the outcome of revaluations
could differ significantly from the initial valuation:
Revaluations of properties may have some greater variance as
valuers may not see the previous valuation. They are instructed to value the
property as it is presented to them by the client. This may cause a variance of
the valuation that may seem excessively different from the previous valuation.
However, many borrowers had specific objections to how the initial
valuation or the revaluation was conducted.
The integrity of these valuations is important given the evidence of
significant detrimental consequences that an inadequate valuation can have for
the borrower, such as termination of the loan and bankruptcy. Some submissions
were critical of the interpretation of 'market value'. Agtion Consultancy
Services director Mr Lindsay Johnston submitted that he is aware of up to five
different methods that can be applied to value a property:
Values of mortgagors' properties for mortgage lending
purposes are invariably lowered to the bottom of the possible range and the
terms of reference that are adopted deviate from the principle set out in the
legal authority Spencer v Commonwealth. It appears that valuers acting
conservatively under the influence of their bank appointers adopt a valuation
based on a distressed sale outcome of the property being potentially sold as
"mortgagee in possession" or by a bank appointed receiver.
The highest value method appears to arise when a property is ... being
valued for a deceased estate. These valuations often exceed the likely market
What happened to market value, within the meaning of Spencer
v Commonwealth? Surely there is only one market value?
Mr Geoff Shannon provided the committee with an example of a revaluation
undertaken of a property at Nambucca Heads which also highlights the multiple
methodologies available for valuing a property:
... wherein the valuer describes two methods of
establishing a valuation price. Method one, as is, gives the current market
value of this particular project as $4.3 million. Method two, in one line,
gross realisation, gives the value for the same project as $2.8 million. I
highlight that that is two different values for the same property on the same
day and on the same page. This is understandable, given the alternative sales
options individually versus in one line. However, I draw your attention to the
fact that the facility terms at the time of entering the loan contract describe
the method that is required to be adopted. So why did Bankwest obtain a second
valuation via the second method? I believe that Bankwest is instructing the
valuers to value the property using different—and lower—valuation methods to
those outlined in the original facility terms. This would mean that the bank
has breached the client's loan contract by opting for an alternative method to
that stated in the facility documents.
As this is relevant for many of the examples put to the committee, the
following is the Australian Property Institute's guidance for valuations of
multiple properties in a single development:
Where a Member undertakes a valuation of multiple properties
in one development, such as lots in a subdivision or units in a building, the
sum of the individual values or gross realisation assessed on the basis of an
orderly marketing and sale program should be clearly defined as the total gross
The valuation of multiple properties in one development
should be completed on the basis of a single transaction or sale in one line to
one buyer. This valuation approach should incorporate an appropriate discount
to reflect the costs incurred in realising the proceeds from the sale of the
individual properties. These costs normally include marketing and sale costs,
holding costs and a profit and risk factor.
Banks, to protect their position as a secured creditor, generally include
in a loan contract the right to appoint a receiver and to sell the customer's
assets if the customer defaults. Receivership:
... is an administrative procedure by which a person—who
must be a registered liquidator—is appointed to administer property on behalf
of a secured creditor ... The appointment may be limited to mere
protection of one particular item of property—for example factory premises—or
it may extend to general control over all of the property and business affairs
of a company—for example the factory and the engineering business carried on
there. A receiver may be appointed privately under contract, or by the
Court ... the former ... is by far the most common type of
receivership and the type that is relevant to this inquiry.
Receivers are subject to requirements under the Corporations Act 2001,
ASIC regulatory guidance and, for members of the Insolvency Practitioners
Association of Australia (IPA), the IPA's Code of Professional Practice.
While the receiver's primary responsibility is to the secured creditor the
receiver has certain duties to the company. ASIC advises that case law
indicates that receivers have the duty to:
(a) exercise his or her powers in good
faith (including a duty not to sacrifice the company's interests);
(b) act strictly within, and in
accordance with, the conditions of his or her appointment; and
(c) account to the company after discharging
the secured creditor's security, not only for the surplus assets, but also for
his or her conduct of the receivership (including the duty to terminate the
receivership as soon as the interests of the secured creditor have been
Some borrowers suggest that it is too easy for the bank to appoint
There is a trend to liquidate rather than workout a loan.
With liquidation comes downward pressure on asset values which in itself
triggers further defaults through non compliance of loan covenants ... Receivership is a
"death warrant" to a borrower. Once this is on record it is
impossible to attract first and second tier lenders to the funding table. The
appointment of a receiver is all too hastily done. It destroys any
creditability of both borrower and business.
Market value and best price
The committee received evidence suggesting that the properties of a
number of businesses, once placed in receivership, were:
- sold for a price substantially below the value stated in recent
- not being sold in a way that would maximise value; and
- ultimately sold at a price that was less than other unconditional
offers that were not accepted.
Some examples of these concerns are below:
The "market valuations" obtained by St George Bank,
ANZ and the NAB were in excess of $10 million compared to the Receivers
sale of the properties at approx. $5m.
* * *
Senator WILLIAMS: Were you a company?
Mr Butler: Yes.
Senator WILLIAMS: Under section 420A [of the Corporations
Act] they must make the best effort to get the maximum price.
Mr Butler: Yes.
Senator WILLIAMS: And it did not go to auction?
Mr Butler: No.
Senator WILLIAMS: They had offers of $14 million and it was
sold for $9.5 million?
Mr Butler: Yes.
* * *
November 27, 2008 (9 months after the Bank received $500,000
from the proceeds of the sale of the Motel) the property was auctioned by a
Receiver appointed by the Bank (Earnst [sic] & Young). At auction, the
property passed in and a later offer of $2,850,000 was declined by the Receiver
and ultimately sold for $1,000,000 less (ie: $1,800,000).
When a receiver sells the property of a company, both legislation and
professional standards govern their conduct. Subsection 420A(1) of the Corporations
Act requires that all reasonable care be taken to sell the property at
market value or the best price that is reasonably obtainable:
In exercising a power of sale in respect of property of a
corporation, a controller
must take all reasonable care to sell the property for:
(a) if, when it is sold, it has a
market value—not less than that market value; or
(b) otherwise—the best price that is
reasonably obtainable, having regard to the circumstances existing when the
property is sold.
A key concept is 'market value'. According to the International
Valuation Standards 2011, market value:
... is the estimated amount for which an asset should
exchange on the valuation date between a willing buyer and a willing seller in
an arms length transaction, after proper marketing and where the parties had
each acted knowledgeably, prudently and without compulsion.
The IPA explained how section 420A works in practice:
The sale of assets at market value is a significant legal
obligation of a receiver and it is one that is sometimes contested in the
courts ... The law generally requires receivers to engage in a
competitive process, for example, involving tender or auction, and based on
valuation and sale advice. Assets sold by receivers also attract those looking
for a reduced price. Most court challenges to receivers' sales do not succeed.
The actions taken by receivers in seeking market value were criticised,
particularly when properties were sold by receivers for less than the amount of
alternative offers the borrowers had secured but which were not accepted by the
receiver. This issue was pursued when Bankwest appeared before the committee:
CHAIR: We have also heard evidence through the course of this
inquiry that some of the customers are aware of potential buyers, or
alternatively have actually found them, for all or part of their businesses and
have approached the receivers you have appointed and have either been ignored
or had those offers rejected. Then, subsequently, the property on which the
security was held was sold at a much lower level. Are you aware of stories
along those lines?
Mr Corfield: Yes. Obviously over the course of the financial
crisis valuations fell very dramatically.
CHAIR: That is right. But if your customer is trying to work
with you to sort out their problems and comes to you and says, 'I have somebody
who is willing to buy this part of the security for this amount of money,' and
that would have substantially paid off a lot of the money that is owed to you,
but then that is rejected and later on the whole of the security is sold for a
price that is even lower, it does not fit in with what you were saying about
the GFC lowering prices, because in the midst of it they had somebody who was
willing to pay more.
Mr De Luca: That sounds unusual.
CHAIR: Over the past few days probably two cases involving
those issues have been put to us. They are cases where, particularly, the
receivers—I do not know whether Bankwest was involved—just would not entertain
Mr Corfield: Again, there are very often two sides to every
CHAIR: Which is why I am putting this to you.
Mr Corfield: During the financial crisis we saw a lot of
potential sales of assets, but ultimately those sales fell through because
buyers were as spooked by the financial crisis as sellers were.
From the evidence received, it is apparent that the sale of a partially
completed development may not reflect the expenses spent on the project.
Further, forced sales by a receiver are likely to result in a lower value than
a stated valuation for a number of other practical reasons, such as a shorter
period for marketing and because it is widely known that they must be sold. As
one submission described the process:
... a Receiver Sale is taken by prospective buyers as a
flag to a bargain because they are aware that the properties "must be
sold". I challenge anyone to prove that a Receiver/mortgagee sale obtains
a higher price than would otherwise be if the properties were market[ed]
without notice of the receiver appointed.
The same submission recommended that the concept of market value be
amended to reflect a reasonable time for sale:
It is not accepted that just because an aggressive
advertising program is implemented that the properties will fulfil "market
value" status. Too many forced sales hide behind the "promotion
activities" of receivers and banks to justify a "market value"
and think that they have compiled with Section 420A of the Act.
ASIC noted that the courts have taken an interpretation of section 420A
that focuses 'more on what was the process taken, rather than focus on whether
the best possible price was achieved'.
Further, the IPA contends:
... we find that the owners of the business often have an
overly optimistic view of the value of the business, and a limited sense of
their responsibility for its decline. Also, questions of market value are often
contentious, more so in what we may call a post GFC climate when expectations
of sale price have to be adjusted.
Treatment of GST revenue
As GST is levied on the final consumer of a good or service, a business
that supplies final consumers is required to charge GST on these goods and
services. The business is then required to calculate, report and remit the GST
amounts to the Australian Taxation Office (ATO) on a monthly, quarterly or
annual basis. Effectively, the business collects the tax for the ATO.
Mr Iannello and Ms Pagano, who were involved in a residential property
development in Western Australia, submitted that Bankwest would not release
approximately $425,000 that was set aside in a bank account for GST. After the
ATO demanded payment, the business appointed an administrator and Bankwest
subsequently appointed a receiver.
Questions about what happens to any monies that a business has set aside for
GST after a receiver is appointed to that business by a bank were asked by the
committee. Whether the GST revenue incurred from the sale of developments was
ultimately forwarded to the ATO was also a particular focus:
Senator WILLIAMS: Why has Bankwest been so reluctant, because
the receivers were selling these joints up and giving you all the money after
their fees, to hand over the GST component to the Australian Taxation Office?
Mr De Luca: I am not aware that we have been.
Senator WILLIAMS: Let me make you aware of it. Lauderdale
Projects Pty Ltd and the Bank of Western Australia—the sale went through for
$9 million. Bankwest agreed to the sale contract. There was $900,000 of
GST. So the sale price was $9.9 million. The receiver gave Bankwest
$9.9 million. If Lauderdale did not get the $900,000 they could not pay
the Australian Taxation Office in their quarterly or monthly BAS. You held on
to the money. You would not hand over that $900,000. So what happened? The
parties—and Bankwest agreed to this—called in a bloke called Ron Merkel, a
former judge. You agreed to abide by Mr Merkel's decision as an expert ... He
said 'The GST amount is properly to be regarded as an expense occasioned by the
sale rather than as part of the purchase price payable to the bank by the
sale.' ... He went on to say that 'Bankwest as secured creditor under
its mortgage and charges is not entitled to the GST amount in priority to the
ATO as of date of completion of the sale or at any time thereafter and the
payment of the GST amount to Bankwest without making provisions for the payment
to the Australian Taxation Office of the GST due on the sale of the property
will in the circumstances of the present matter be unlawful' ... When you got that
$9.9 million, you clearly knew that $900,000 was the GST component. Why
would Bankwest not hand that over to the ATO?
Mr De Luca: I am not aware of that matter. I am happy to look
into that one for you.
Senator WILLIAMS: You had better look deep because I am sure
that there are going to be other people looking into it as well.
Bankwest subsequently provided a statement to the committee emphasising
that it is not responsible for the GST liabilities of its customers and,
although receivers are responsible for paying GST liabilities arising after
their appointment, neither the receivers nor the bank are responsible for
payment of GST liabilities that arise prior to this. A relevant extract from
that statement is provided below:
... in February 2010, Lauderdale exchanged contracts for
the sale of its property with a purchase price of $9 million plus GST of
$900,000. The Bank had not appointed receivers to the Company in question. As
the sale proceeds were insufficient to repay the debt due to Bankwest,
Lauderdale queried whether it was entitled to keep the GST component of the
sale proceeds in the sum of $900,000 and later remit those monies to the ATO.
At this time the Bank had concerns that the customer was diverting funds to
related parties. Rather than allow this query to hold up settlement, Lauderdale
and the Bank agreed to proceed on the basis that the funds would be paid into a
solicitor's trust account at settlement and the parties would agree to abide by
the views of Ron Merkel. Following Ron Merkel's opinion the $900,000 was
released to Lauderdale. The money had never come into Bankwest's control. As
the sale was made by Lauderdale prior to the appointment of any receiver, the
operation of the GST law is such that any GST obligation is that of Lauderdale
and not the Bank who had no obligation to account to the ATO for GST.
The CBA advised that information it has received from insolvency firms
indicates that businesses entering receivership do not generally have amounts specifically
set aside to fulfil their GST obligations. The CBA also noted that, once a
receiver is appointed, amounts owing to the ATO for unremitted GST would be
treated as an unsecured claim and do not have priority under either the
Corporations Act or relevant sections of the GST legislation.
The committee notes that there are disputes about particular cases where
GST revenue had been collected, but was not ultimately passed on to the ATO.
The committee would be concerned if these payments were not remitted to the
ATO, particularly as the payments were made on the understanding that the
purchaser was fulfilling a tax liability. While there are different viewpoints
about the particulars of individual cases, there are sufficient issues for the
ATO to examine. If the ATO considers that there are issues with the treatment
of GST revenue but that it is unable to take enforcement action under current
legislation, it should recommend appropriate policy changes to the government.
That the Australian Taxation Office (ATO) investigates allegations that
GST revenue was not handled appropriately by banks and receivers and that, if
necessary, the ATO makes recommendations to the Australian government about
legislative changes in this area.
Options available for borrowers to seek redress
The remainder of this chapter turns away from the possible explanations
for why a significant number of small business customers of Bankwest had their
loan terminated to examine options that aggrieved borrowers have available to
them for their case to be heard.
Contract law and statutes
For aggrieved borrowers, contract law based on common law and equity
generally applies although additional legislative protections are contained in Commonwealth,
state and territory legislation. Overall, the law is structured to generally
allow lenders and borrowers 'to enter freely into agreements that they consider
appropriate for their circumstances', although 'there are a number of legal
protections for [consumers and] small business borrowers to ensure that they
are not subject to treatment that is generally considered unfair, and that the
process for lenders to exercise their contractual rights over secured assets is
Protections for borrowers from various lending practices are currently
directed toward consumer credit, rather than small businesses and other
commercial activities. These provisions are contained in the National
Consumer Credit Protection Act 2009 (NCCP Act) and the Australian Consumer
Some of the issues addressed include unfair contract terms, responsible lending
by licensees and the right to apply for a repayment arrangement on the grounds
of financial hardship.
Some statutory protections, however, apply to financial institutions'
dealings with small businesses. The Australian Securities and Investments
Commission Act 2001 includes broad prohibitions against misleading or
deceptive conduct and false and misleading representations in respect to the
provisions of financial products and services.
Specific unconscionable conduct
provisions also apply to dealings with consumers and small businesses:
A person must not, in trade or commerce, in connection with:
(a) the supply or possible supply of
financial services to a person (other than a listed public company); or
(b) the acquisition or possible
acquisition of financial services from a person (other than a listed public
engage in conduct that is, in all the circumstances,
On the Bankwest issue, based on the legislative boundaries in place and
the resulting matters that fall within ASIC's jurisdiction, as well as the
number of complaints it has received, ASIC advised that it considers it has not
'received any evidence to suggest some sort of systemic misconduct by Bankwest',
nor as at August 2012, has it received 'anything that warrants further pursuit'.
Possible small business credit
On 3 July 2008, the Council of Australian Governments (COAG) agreed to
transfer responsibility for the regulation of consumer credit from the states
and territories to the Commonwealth. This ultimately led to reforms such as the
National Credit Code (a schedule to the NCCP Act). As part of these reforms, possible
changes to the regulation of the provision of credit to small businesses were
In July 2010, the government released for consultation a green paper on
the remaining proposals being considered as part of the credit reform agenda.
The issue of credit to small business was covered in this paper. The paper
The reasons put forward in support of small business
borrowers being afforded the same degree of protection as consumers
include similarities in the types of securities used for small business
loans (such as the primary residence); and similarities in the level of
sophistication of small business borrowers' understanding of credit contracts
and credit products.
However, it is difficult to assess the significance of these
issues due to the diversity of the small business sector and the relatively
small number of small business complaints reported compared with complaints
from individuals. Despite this, there is merit in examining whether small
business borrowers would benefit from some statutory protections.
The three options canvassed by the green paper for small business credit
- limited application of consumer credit protection regulations;
- full application of consumer credit protections regulations; or
- development of tailored regulations for small business lending.
A decision on the proposed reform has not yet been made or publicised.
In its submission to this inquiry, Treasury stated that 'consultations to date
have identified as a key concern the need to balance benefits to small
businesses against any possible increase in the cost of credit or decrease in
In its submission, CPA Australia stated that it strongly recommends that
the proposals to extend the national consumer credit regime to small businesses
not be pursued.
Industry codes of conduct
There are a number of voluntary codes of conduct that govern the lending
activities of financial service providers and the dealings of these providers
with their customers. The codes include the Code of Banking Practice, the
Mutual Banking Code of Practice and the Mortgage and Finance Association of Australia
Code of Practice. The most well-known and relevant code for this inquiry is the
Code of Banking Practice administered by the Australian Bankers' Association,
which is a voluntary code of conduct that outlines a bank's commitments and
obligations to its personal and small business customers. The Code was released
in 1993 and is reviewed every three years, although the last review was concluded
in December 2008.
The Code of Banking Practice includes provisions on:
- disclosure of fees and charges and other terms and conditions;
- changes to terms and conditions and fees and charges;
- disclosure of general information about banking services;
- privacy and confidentiality;
- statements of account;
- copies of documents;
- direct debits;
- credit card chargebacks;
- debt collection; and
- complaints handling.
External dispute resolution—the
Financial Ombudsman Service
There are two main external dispute resolution (EDR) schemes relevant to
the banking and financial sector. They are the Financial Ombudsman Service
(FOS) and the Credit Ombudsman Service. As the evidence received by this
inquiry refers to banks and FOS is the most relevant to the subject matter,
this report will focus on FOS rather than the Credit Ombudsman Service.
FOS is an EDR scheme approved by ASIC which commenced on 1 July 2008
after the consolidation of other EDR schemes.
FOS is structured as a not‑for‑profit organisation governed by an
independent board of representatives of consumers and the financial services
FOS notes that it reports to ASIC quarterly on systemic issues and identifies
financial services providers that have engaged in serious misconduct.
Difficulties in seeking redress
The judicial system
A recurring theme in evidence has been the difficulties that aggrieved
borrowers have faced in seeking to challenge the decisions and actions of banks
and receivers. Prior to any legal action being considered, attempts to resolve
the situation can cost the borrower significantly:
In one meeting it was me and my wife against two [receivers]
and three lawyers all on about $500 per hour and being paid for from my company
and they told us so!! In other words shut up and go away as every time you ask
us a question we will charge you.
In terms of the resources available to pursue and continue legal action,
an individual engaging in legal proceedings against a major bank is undertaking
an inherently unequal endeavour. As noted in the previous chapter, in many
instances the result of the borrower's loan being terminated is that the
borrower had been forced to seek government income support or assistance from
family and friends. Accordingly, the prohibitive expense of mounting and
sustaining legal action is beyond the reach of many, especially once the assets
have been sold. Further, there are other factors which add to the difficulties;
... the legal system requests that the claimant put up
surety for the bank's legal costs. An impossibility in most cases so litigation
"dies on the vine". There is a practice of deferring proceedings which
continually runs up costs to all. Remembering that all of the bank's legal
costs are ultimately charged back to the borrower, the borrower in effect is
doubled dipped with legal costs.
There are also more practical challenges:
I found that requesting the services of a major law firm to
represent me against Bankwest was difficult. In [a] confession made by many
large Sydney based firms it was stated that they would have a conflict as they
have banks as their clients. One firm stated that the bank business is more
profitable to them then my case. It shows that profit is the motive and
selection for litigation cases.
One borrower also alleged that, after their company's assets were sold
and the debt to Bankwest was repaid, their company's receivership was prolonged
until they agreed to discontinue legal action and not to take legal action
against the bank in the future:
[Bankwest] [c]onditions release of our funds with dropping all
current legal action & undertaking not to hold either Bankwest or receivers
accountable in future. Otherwise, Bankwest will continue to debit monthly costs
to the said surplus funds until they are depleted. Receivers inform me their
role was completed many times, and direct to Bankwest, all questions as to why
receivers [were] not discharged from [the] companies.
Possible class action against
Indicating that the justice system may yet provide some comfort to ex‑customers
of Bankwest that feel aggrieved by the bank's actions, Slater & Gordon, in
conjunction with litigation funder IMF Australia, has indicated that it is
conducting due diligence with respect to a potential class action for aggrieved
borrowers against Bankwest and the CBA.
In April 2012 it was reported that about 130 people had registered as
Limitations of FOS
In addition to difficulties faced by aggrieved borrowers in seeking
examination of their case by the courts, limitations with EDR schemes such as
FOS were identified. The terms of reference for FOS outline the types of disputes
it may not consider. Of relevance, FOS may not consider disputes where the
value of the applicant's claim exceeds $500,000.
The maximum compensation that may be decided by FOS is limited to $280,000. FOS
notes that there is 'often confusion' as to whether it has jurisdiction in
relation to small business disputes. It publishes the following explanation:
In assessing whether we have jurisdiction to consider a claim
about financial difficulty lodged by a small business, we will consider the
amount of the loss that is claimed. The account balance or facility limit is
not relevant when assessing jurisdiction. It is the amount of loss suffered
that is significant. This potential loss usually encompasses the "moneys
worth" of any variation sought, any default margin levied on the
contractual interest being charged, enforcement expenses and costs of any
Receiver or controller appointed over the secured assets.
A number of former Bankwest customers who lodged submissions to this
inquiry were critical of FOS. These criticisms were generally about the
assessment of their case and the limitations about what FOS can examine. An
instructive example was provided by Mr Sean Butler, who lodged a complaint with
FOS that could not be examined because:
- the business was in receivership and FOS requires the authority
of the receiver to consider the dispute;
- receivers are not a financial services provider—FOS can only
examine the actions of entities that have provided a direct financial service
and which are members of FOS;
- the loss claimed exceeds $500,000; and
- FOS is unable to consider the actions of a third party to the
There were examples, however, where the involvement of FOS was clearly
In April 2010 Bankwest sent me a letter of demand for an
extra $500,000 worth of charges that they claimed we still owed.
Bankwest would still not speak to us.
I contacted the banking Ombudsman and within 48 hours
Bankwest phoned me and advised me that conditionally on me signing a document
saying I would not take any legal action against them they would forgive
The founder of the Unhappy Banking group, Mr Geoff Shannon considers EDR
schemes such as FOS to be 'a fantastic system' and advises aggrieved borrowers
that contact him to lodge a dispute with FOS rather than with ASIC.
He suggests, however, that because banks are appointing receivers 'far more
quickly now than they were before' a loophole exists because the receivers can
refuse to grant authority for the dispute to be considered by FOS.
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