Role and impact of insolvency practitioners
5.1
Having considered the farm debt mediation process in the previous
chapter, this chapter will examine the role and impact of insolvency
practitioners (including liquidators, administrators and receivers) in the
primary production sector.
Role of receivers
5.2
A receivership is an administrative procedure by which a person, who
must be a registered liquidator, is appointed to administer assets on behalf of
a secured creditor. The secured creditor (e.g. a bank) appoints the receiver.[1]
The duty of the receiver is to manage and realise the secured asset for the
purpose of discharging the debt.[2]
5.3
In a primary production context, for example, a bank would appoint a
receiver to administer the assets of a farmer. The receiver has a duty to the
bank, as outlined by Mr Stewart McCallum, a partner with the restructuring and
insolvency firm Ferrier Hodgson:
When we're appointed as receiver by the banks, our obligation
is to collect and realise the assets that the bank holds as security. In other
words, our role is serving the banks to maximise the sale value of the assets
that they have as security. In the context of receiverships, it's obviously
important that we continue to work cooperatively with the borrower where we can
because, to put it colloquially, that provides the path of least resistance.
That's the best way to go about it. But our duty is to the bank.[3]
5.4
Legal Aid Queensland observed that after a bank appoints receivers it is
no longer legally involved in the sale process and is exempt and removed from
any claims or actions by the farmer against the receivers. As such, there is no
obligation on the bank to ensure that the receiver acts to obtain the best
market price for the assets.[4]
A receiver however has a statutory obligation under section 420A of the Corporations
Act 2001 to undertake reasonable care to sell charged assets that have a market
value for 'not less than market value'.[5]
The application of section 420A is considered in further detail below.
5.5
Insolvency practitioners can also work for banks in non-enforcement
matters, for example as investigative accountants. Mr Will Colwell, a partner
with Ferrier Hodgson explained:
In any sector, not just the rural sector, the bank will send
us in, saying, 'This person is in emerging financial distress.' So we might be
engaged to see if they can be structured and their business turned around to
profitability...[6]
5.6
Although receivers are recovering funds on behalf of banks, their fees
are added to the debt of the farmer. Mr McCallum from Ferrier Hodgson
summarised the typical situation:
Receivers are personally liable for all of the expenses that
we incur in the receivership, but we have a right to claim those costs out of
the assets that we realise, so our costs effectively come out of the value of
the asset we realise.[7]
5.7
The fees charged by receivers will be discussed in more detail later in
this chapter.
5.8
The committee heard evidence that receivers, who are in fact appointed
as an agent of the borrower, have minimal obligations to farmers:
Senator BROCKMAN: Your legal obligation is to the
bank. That is very clear... What are your obligations to the owner of the
property beyond achieving market value for sale of assets [under section 420A
of the Corporations Act 2001]?
Mr McCallum: In high-level terms, not a lot. By that I
mean our primary obligation is to the bank... As an agent of the borrower – and
agency is a difficult concept – we've got obligations to act in their best
interests. We've got the Corporations Act duties of good faith – they're the
duties we've got to the borrower.[8]
5.9
The Australian Restructuring Insolvency and Turnaround Association
(ARITA) provided the committee with further information around the agency
dynamics in a receivership:
Agency in a receivership is very complicated. While a
receiver is appointed by the Bank and acts for the benefit of the Bank, they
are generally the agent of the borrower as stipulated in the security
documentation, however, they do not work for the borrower. Such an agency, often
referred to by the courts as a 'special' or 'limited' agency, protects the
receiver from personal liability for breaches of a company contract.[9]
5.10
The committee is concerned that these complicated dynamics lead to an
inherent conflict of interest for the receiver. This matter will be discussed
later in this chapter.
Rates of receivership in the primary production sector
5.11
Banks informed the committee that they viewed receiverships as a 'last
resort', and generally spent a significant amount of time working with farmers
to find other options before commencing any foreclosure action. For example,
ANZ stated:
It should be recognised that by the time ANZ takes action
under its security documents, the customer has always exhausted all other
possibilities to meet their commitments to the bank and other creditors. We
estimate that in the past the time between ANZ first issuing a breach or
default notice and ANZ taking action under its security documents is on average
a period of over 2.5 years for agribusiness customers.[10]
5.12
Similarly, Westpac informed the committee:
It is Westpac's preference to work with customers to restore
their financial position and resolve defaults without relying on legal rights
in loan contracts. After all, our original credit assessment is based on the
customer's ability to service the loan ('the first way out') not the
enforcement of security ('the second way out').[11]
5.13
Rural Bank advised that foreclosure was a last resort, only entered into
once all other avenues to remedy defaults had been explored and exhausted.[12]
Rabobank also expressed a similar sentiment.[13]
5.14
A number of banks also noted that they only appointed receivers in a
small number of cases. For example, NAB stated they have 'avoided receivership
for all but 1.51 per cent of [their] agribusiness workout [financially
distressed] customers in the last twelve months, representing 0.0136 per cent
of [their] overall agribusiness book.'[14]
5.15
ANZ also provided information to the committee on this matter:
In the 18 months from 1 October 2015 to 31 March 2017, ANZ
has appointed an insolvency practitioner in relation to an agribusiness
customer on six occasions. In each of these cases, the decision was made at the
request of the customer who, after receiving their own independent legal
advice, believe that this action was in their best interests.[15]
5.16
The Commonwealth Bank of Australia informed the committee that in 2016
it instigated enforcement action in relation to six farming businesses, and
that in those cases they had worked with the customers to explore alternative
solutions for an average of 44 months.[16]
5.17
Westpac advised that out of the over 30 600 agribusiness customers on
its books, it had only appointed receivers and mangers to 15 customers over the
last two years.[17]
5.18
Insolvency firm KordaMentha informed the committee that according to its
estimates based upon its market knowledge and bank submissions, receiverships
in 2017 will impact on less than 0.05 per cent of Australian farm businesses.[18]
Impact of receivers on primary producers
5.19
Throughout the inquiry the committee received evidence from primary
producers and other stakeholders outlining instances of unreasonable or
inappropriate behaviour on the part of insolvency practitioners.
5.20
The committee heard allegations relating to:
-
fire sales of assets where assets were sold for significantly
under their market value;
-
poor farm management (including animal welfare issues);
-
receiver costs which appeared unwarranted or inconceivably high;
and
-
possible unlawful behaviour.
5.21
Examples of some of these allegations are set out below.[19]
Fire sale of assets
5.22
The committee heard of several instances where farms and related assets
were sold by receivers for significantly under their market value.
5.23
For example, the committee was informed of a case of a cattle property
in Queensland that was valued in 2009 at $3.3 million bare (i.e. no stock on
it). In 2012 the receivers for the property
valued it at $1.6 million bare, but ultimately sold it for $800 000 with 800
head of cattle given in. Given that 800 head of cattle would be valued at approximately
$400 000, the property itself was sold for only $400 000.[20]
5.24
The committee heard of another case where a Queensland property was
valued at $1.3 million and sold by the bank 20 months later for $590 000.[21]
5.25
Yet another striking example was provided by Mr Harold Cronin, a primary
producer in Western Australia, who submitted:
The NAB and their appointed receiver manager, Ferrier
Hodgson, took nearly three years to dispose of the Cronin's farms. The price
they eventually received for the farms was a little over half of their sworn
valuation. Other farms were sold in the district for 'market price' during the
time the Cronin properties were for sale. There has been no explanation as to
why the Cronin's farms sold for half their sworn value.[22]
5.26
Mr Bob Yabsley stated that his property in Queensland was valued at
$27.2 million, but sold by the bank many years later for $12 million.[23]
5.27
The committee was also told of another case where receivers sold more
than $1.2 million of farm machinery in good condition for $550 000.[24]
5.28
The committee was also informed of the following situation by Mr Michael
and Mrs Cherie Doyle, primary producers in Western Australia:
Mrs Doyle: Then they [receivers] decided they were
going to sell the town property. We felt that the real estate agent was trying
to undersell it. We know that he actually was underselling it. It ended up
being put to tender. We had buyers out there for it. He would ring them up and
we were trying to sell it for $10 million or $12 million, and he was saying,
'Oh, no; you can get about $3.2 million.'
Senator MOORE: This is the one that was seven point
something [million dollars] at one stage—is that right?
Mrs Doyle: This is the one where they valued it, yes.
Senator MOORE: At $3.2 million.
Mr Doyle: They originally valued it at about $6.7
million, I believe. Then they revalued it at $4.96 million. And this is the one
for which the real estate agent, who was dodgy—I went to Perth and spoke to
these people and one guy in particular, of four, was very keen; I'd given him a
whole background on the area, the property and what it could achieve. He had
looked at all the data I'd given him, and he was sold. He said, 'Mate, we can
definitely do a deal; I've got people who will buy this tomorrow.' And I said,
'Look, it's worth $12 million, but we need to sell it, so if you give us $10½
million we can do a deal,' and he said, 'No problem.' He said that at 10½ he'd
just need to go down and have a look and let the agent know. He went down there
and the agent told the guy, 'Hey, mate: don't even worry about 10; I reckon
I'll get this for you for 3.2, no worries.' And the guy said, 'Thanks very much
for your time; see you later.' And then it was, 'Oh, I've got other properties;
do you want to look at other properties—much better-value
properties—elsewhere?' So, the guy went back to Perth, wrote the information
down, let me know what had happened and said, 'Not interested'—like there's
something dodgy going on down there.[25]
Poor farm management
5.29
The committee heard allegations of poor farm management by receivers,
including animal welfare issues and land neglect resulting in out of control
weeds and lost crop.[26]
5.30
For example, Mr Charlie Wallace alleged that receivers incorrectly sent
stud bulls and cattle to the abattoirs.[27]
He also alleged that the receivers neglected livestock on his property in
Queensland, causing adult cattle and calves to perish:
Mr Wallace: ...We managed our properties spick and span.
It was 100 per cent. We did not run them down. When the receivers came, the
first letter they wrote said that everything was run down. That is a load of
crap. It runs down after they take possession. That is when everything falls
down, because they do nothing. Cattle perished on Newburgh. The big mob
perished at Newburgh. They were too lazy to go and start pumps. I have
photographic evidence.
Senator WILLIAMS: Are you saying they literally died
of thirst?
Mr Wallace: Yes. There was no water in the troughs.
Senator WILLIAMS: What?
Mr Wallace: When potential buyers of Newburgh did an
inspection, they rang me and said that they were horrified. They said: 'Lee,
there are cattle dead around the troughs. There was no water.'
Senator WILLIAMS: That is disgraceful.[28]
5.31
Mr Bob Yabsley stated that receivers failed to undertake weed management
or flood protection measures, resulting in the significant devaluing of the
property.[29]
5.32
Mr Harold Cronin alleged that receivers on his properties in Western
Australia did not undertake essential maintenance, that fixed assets such as
pumps and piping disappeared, that houses were neglected and weed growth across
all properties was left unchecked.[30]
5.33
Mr Thomas Fox of Western Australia submitted that receivers had failed
to understand the perishable nature of his crop, which had detrimental impacts
on the amount and quality of crop exported, and the price able to be obtained
for it.[31]
5.34
The Doyle family alleged that the receivers managing their dairy farm in
Western Australia made mistakes with the timing of feeding and animal husbandry
tasks, which led to decreased production.[32]
5.35
Mr Doyle stated:
But they [receivers] took it [the dairy] and then, fairly
quickly after the receivers took control, they wouldn't buy feed, and when they
did it was late. The cows started dying....The milk production went shocking.[33]
5.36
Mrs Doyle also stated:
Basically the business went backwards through the receivers.
They had a lot of juniors working there. They didn't really know about dairy
farming at all. They did get a bit of advice from the vets. They didn't heed
any of the advice.[34]
High receiver costs
5.37
The committee was informed of instances where the receiver costs
appeared unwarranted or inconceivably high. The committee was informed that the
hourly rates for a partner in receivership firm are typically in the order of
$650, plus GST.[35]
Due to this very high hourly rate, if receivers do not sell the secured
property in a reasonable period of time, the amount added to the farmer' debt
can increase very dramatically.
5.38
For example, a primary producer in Western Australia advised the
committee that he was charged $650 000 in receiver fees over a 9 month period.
The receiver in question refuted this figure and provided information
demonstrating the fee was $249 000 (including GST and disbursements). The
receiver also noted that this receivership involved extenuating circumstances,
including security threats against receivers that required additional
expenditure to be mitigated.[36]
5.39
Mr Harold Cronin alleged that his receivers charged approximately $700
000 over three years. He provided the committee with an example of what he
considered unreasonable fees charged by his receivers:
...we had no money, nothing, because all the finances were
cut off. When we had to pay an account, a phone bill or something like that, we
had to get their permission to write the cheque out so that they could pay it –
but they charged us $40 for every cheque. Whether it was only a $20 cheque or a
$50 cheque, they charged us $40 on every cheque.[37]
5.40
Mr Andrew McLaughlin detailed one particular case he had come across
with unreasonably high receiver fees:
In one particular case in 11 months the receiver was
appointed and in a lot of cases the farmers have asked the receiver whether
they could remain there as caretakers – make sure the weeds are under control,
do whatever, and present the property as best they can to maximise the return.
And what's happened? They don't let you near the farm. They can charge you with
trespassing, which has happened. And their receiver's costs within
11 months are $1.2 million.[38]
5.41
The committee heard from Dr Graham Jacobs, a former MLA for the region
of Eyre in Western Australia. He outlined a situation which involved exorbitant
receiver fees that he had come across during his time as an elected
representative:
I sat with a farmer east of Ravensthorpe as he told me this
at his kitchen table. The receiver's fees were charged against the remaining
farm asset and reduced all remaining equity. The costs could be exorbitant. In
one case, when they appointed the receiver they took over the spraying program
to knock down weeds. This was ordered by the receiver. That cost $350,000. An
earlier program, which could have been done by the farmer, would have cost
$100,000. The ongoing management fees by the bank receivers and the lawyers can
be up to $50,000 a month.[39]
5.42
On the broader issue of high receiver fees, Dr Jacobs also commented:
...my contention is that following the receiver's fees and
legal costs – which are exorbitant and, tragically, whittle away the remaining
equity that the farmer has – the major insolvency firms and law firms preferred
by the banks have cost structures and charge-out rates that are largely geared
towards big corporate groups. These are not relevant to small businesses and
smaller farms. One could suggest that, by the time the receivership machinery
is put in motion, the remaining equity is known and the process works backwards
in determining fees. I am not a conspiracy theorist, but, if an asset is valued
at $3 million and the debts are $2 million, there is a $1 million equity
left in the business, and I contend that often that equity is eroded until
there's nothing left determining the equity and working backwards.[40]
Possible unlawful behaviour
5.43
The committee also heard allegations of possible unlawful actions by
receivers. For example the committee was told that receivers for a property in
Queensland had illegally removed National Livestock Identification System
(NLIS) tags from cattle:
Mr Jensen: They're not supposed to remove a beast off
a property without a bloody NLIS tag in its ear...
Senator WILLIAMS: Why was the receiver changing the
NLIS tags?
Mr Jensen: Don't ask me.
Senator WILLIAMS: If they have the ownership of the
farm as they should have been—the breeder of them, in the ear, at marking
time—they should stay with that beast until slaughter time. What is the motive
for the receivers to change the original NLIS tag?
Mr Jensen: I have absolutely no idea.
Senator WILLIAMS: There must be some reason or they
wouldn't do it.
Mr Jensen: Yes, there must be. It's illegal to do it.
They must have had some reason to do it.
Senator WILLIAMS: And you are sure that is happening
in this area.
Mr Jensen: That happened out there.
Senator WILLIAMS: When you say 'out there', please clarify
'out there'.
Mr Jensen: Out at Richmond saleyards...[41]
Broader impact
5.44
Primary producers expressed significant distress and frustration that
the receiverships of their properties and assets were not undertaken in what
they deemed a comprehensive or respectful way. Individuals indicated they felt
ignored, deliberately uninformed, and excluded by receivers and the instructing
bank.[42]
5.45
Legal Aid Queensland outlined a general picture of how such feelings of
exclusion arise:
It is not uncommon for the receiver to have minimal contact
with the farmer after serving them with compliance documents etc. Often there
is little information sought from the farmer regarding the operation of the
farm which might be useful in a practical sense regarding the operation of the business.
Often receivers will reinsure the property, change locks, appoint managers and
security over the property, engage contract musters and farmers and other
'experts' to advise them in the conduct of the business. All of these
activities are expensive and added to the debt of the farmer.[43]
5.46
Legal Aid Queensland emphasised that many such issues could be avoided
by civil contact between the farmer and receiver. It was noted that if
receivers and farmers choose to work cooperatively it could avoid significant
costs for the farmer (who is still responsible to the bank for all receiver's
costs incurred), but that such an outcome requires the trust and goodwill of
both parties.[44]
5.47
Mr Denis McMahon, a senior lawyer with Legal Aid Queensland informed the
committee that in some circumstances he has seen, receivers and farmers have
been able to communicate well and work together. However, he also noted that
such a positive outcome depended heavily on the level of conflict between the
parties and the attitudes of the receivers.[45]
He detailed one particular negative incident as follows:
I've had a matter where the clients weren't aware that the
receivers were going to be appointed. They arrived home to find the receivers
there, and they were locked out of their home and were asked to leave the
property. The locks were changed and the gates altered et cetera. We had to
make submissions just for them to get their household goods and clothing and
the like out of the property. In that particular instance, the property had been
in the process of being developed as an irrigation property. There were certain
licences that had to be obtained. Certain licences were in the process of being
obtained.
The clients instructed that the receivers didn't communicate
with them about any of those processes. They [the receivers] made inquiries to
the various departments and took the view that the work was done illegally,
which wasn't the case at the time; there had just been a recent change of
legislation. Some of the infrastructure that had been developed and created was
bulldozed and the property wasn't able to be sold in the way that promoted the
potential of the property as an irrigation property. That was, probably, the
most stark matter I'd had. There seemed to have been quite a deal of mistrust
and failure to communicate between the party, the bank and the receivers.[46]
5.48
In summary, evidence received by the committee indicates that for
primary producers, foreclosure action and being put into receivership are
particularly stressful and emotional experiences. Several receivers the
committee heard from confirmed this assessment. For example Mr Justin Walsh, a
partner at Ernst & Young, observed:
For those who own a business, a receivership is a
tremendously emotional and life-changing event. This is the case for all
businesses, but obviously especially in agriculture.[47]
5.49
Similarly, Mr John Winter, chief executive officer of ARITA commented:
As you well know, we deal with humans at their lowest ebb,
and that is the greatest challenge in this profession [insolvency
practitioners]. People are staring down terrible personal and financial loss,
and we have to come along at the most tragic of points.[48]
5.50
Mr Andrew McLaughlin, a senior consultant mediator, emphasised the
detrimental impact that poor receiver behaviour can have not only on farmers,
but on their broader communities:
There is depression and peer pressure, pressure that you're
going to get back from your creditors, because these are people you have dealt
with in your community and your family before you that have provided you with
the seed or the fertiliser or the fuel, and even in tough times they still
supplied you, they gave you time to pay, perhaps 12 months. They knew that
eventually your family would pay. What happens when the receiver sells all the
assets? There's nothing left. What happens then? You have a divided community.[49]
5.51
Several banks also acknowledged the stressful nature of foreclosure
action on farmers and their families.[50]
Committee view
5.52
The committee is aware that many of the allegations made about the
conduct of receivers are contested or have been refuted. Nevertheless, without
wishing to adjudicate or comment on individual disputes, the general picture
observed by the committee indicates that there is a significant problem with
the way in which some insolvency practitioners interact with primary producers,
and the attitude and methods with which they carry out their duties.
5.53
Additionally, the committee is concerned that the farmers directly
affected by the conduct of receivers, and who suffer the financial and
emotional consequences of receiver behaviour, are generally excluded from the
entire process.
5.54
The committee also holds significant concerns about the potential for
conflicts of interest between receivers and banks inherent in the structure of
the receiver industry. As former chair, former senator Malcolm Roberts observed
to receivers during a public hearing:
You're [the receiver] working for the bank. Your future
engagements will come from that bank, so you must do a good job for them, and
all the costs will be paid for by the farmer. Then, in addition, the bank
contract terms are really detailed and comprehensive and the farmer is in a
position where, with the power of finance and the power of the courts, there is
such an imbalance of power, and you're working under the shadow of that
imbalance.[51]
5.55
The committee observed and is concerned by an apparent inability on the
part of ARITA to consider the possibility that some insolvency practitioners
may act inappropriately or unreasonably while carrying out their duties in
primary production receiverships. When queried by the committee on the issues
with receivers that had come to light during the inquiry, ARITA representatives
were all too willing to underscore that some farmers may lodge 'unnecessary and
inappropriate complaints on many occasions' due to the fact that receiverships
were stressful experiences that led to people being 'at their lowest ebb'.[52]
However, ARITA was seemingly unable to seriously countenance the possibility
that individuals in their industry had behaved improperly and that at times the
complaints from farmers were indeed warranted.
5.56
Additionally, several insolvency firms that appeared before the
committee exhibited similar attitudes. The committee was not impressed by the
indifference on display by certain receivers during hearings, and the vague,
elusive answers given in response to committee questioning. For example, the
responses given by representatives of KordaMentha at the hearing and
subsequently to questions on notice, demonstrated a unwillingness to provide
clear and direct responses to the committee's questions.[53]
5.57
The committee finds such attitudes to be alarming. In the committee's
opinion, this lack of self-awareness as an industry, obfuscation of
responsibility, and dismissive approach to complaints about inappropriate
receiver conduct are not acceptable. The committee strongly rejects ARITA's
inference that in difficult or challenging receiverships the fault more often
than not lies with the behaviour of farmer, with no connection to the behaviour
of the receiver.
5.58
The committee was also highly concerned by the behaviour of a Grant
Thornton representative and his legal counsel. When the committee sought further
information from Mr Stephen Dixon of Grant Thornton on his activities as
trustee for the bankrupt estate of primary producer Mr Lindsay Dingle, Mr
Andrew Behman of CLH Lawyers, legal counsel for Mr Dixon, stated on more than
one occasion that the cost of his and Mr Dixon's appearance at a public hearing
would be charged to the bankrupt estate. As Mr Behman wrote in an email to the
committee, for Mr Dixon to appear would 'unduly deplete the assets of the
Bankrupt Estate'.[54]
5.59
This threat caused great distress to Mr Dingle and his family, and the
committee remains deeply unimpressed by this needlessly provocative behaviour,
which it believes was designed to dissuade the committee from calling the
witness and also intimidate Mr Dingle.
5.60
The committee notes that when ARITA was informed of the situation, Chief
Executive Officer Mr John Winter stated that ARITA, along with ASIC, would
'have a problem with that'.[55]
On this matter, the committee thanks ARITA for promptly commencing a review of
the situation.
5.61
In response to questioning at the 17 November public hearing in
Canberra, Mr Behman advised the committee that his travel from Sydney and
accommodation costs would be paid for by his client (Grant Thornton). Mr Behman
advised that it was only the 'cost of preparation in preparing for the
appearance' that would be billed to the bankrupt estate of Mr Dingle.[56]
The committee was not reassured by this admission, but rather found it
astounding that the intention to charge the bankrupt estate, albeit for fewer
costs, was again repeated.
5.62
After further written questions on notice from the committee, Mr Dixon
subsequently confirmed in writing that the bankrupt estate would not be billed
for 'any costs associated with either Mr Behman or me providing evidence to the
committee'.[57]
5.63
Although the committee acknowledges evidence from banks and insolvency
practitioners noting that the number of agribusiness customers placed into
receivership is low as a percentage of their respective overall loan books, or
receivership engagements, this does not discount or minimise the distress and
frustrations of primary producers who have been placed into receivership and do
experience poor receiver behaviour. Even if agribusiness receiverships only
comprise a very small proportion of files for a bank or a receiver, for those
farmers experiencing that receivership, it is 100 per cent of their lives.
5.64
As such, the committee urges insolvency practitioners to act with
transparency, accountability and empathy when discharging their duties. The
committee agrees with the observation expressed by Mr Justin Walsh from Ernst & Young:
These people [farmers facing foreclosure] have not committed
a crime. They have not murdered someone. They've just run out of money. Going
into receivership is not a punishment. It's just something that is a sad part
of life.[58]
5.65
The committee supports recommendations that seek to bridge the divide
between farmer and receiver, in order to make sure farmers who experience
foreclosure action are as informed as possible in such situations. The
committee is of the opinion that this will assist in easing the frustrations
felt by farmers during receivership situations. By requiring greater
transparency and communication on the part of receivers, the committee hopes
that this will inform and empower the farmers throughout these difficult
situations. More openness and transparency will also mitigate the impacts of
the apparent conflict of interest inherent in the role of receivers.
Recommendation 15
5.66
The committee recommends that:
-
the government introduce higher standards of accountability and
transparency for insolvency practitioners regarding the costs they incur while
conducting receiverships;
-
insolvency practitioners be required to disclose their estimate
of costs of the receivership prior to being engaged;
-
insolvency practitioners be required to account for all incurred
fees and outlays and report these to both the lender and the borrower; and
-
insolvency practitioners be required to provide monthly reports to
the lender and the borrower on their farming management and fees incurred
(including future plans).
5.67
The committee agrees with Dr Graham Jacobs' observation that the major
insolvency firms preferred by the banks have cost structures and fees geared
towards big corporate groups, rather than family farms and small businesses.
5.68
The committee is of the opinion that receivers appointed to family farms
cause unnecessary harm and lead to detrimental outcomes, both in regard to farm
management (e.g. neglected animals and land), and the farmer's ultimate
financial position.
5.69
As Deputy Chair Senator Williams observed:
I am of the opinion that receivers shouldn't go into family
farms. I've got no problem with receivers going into corporate farms – like
when McGrathNicol went in to Cubbie Station – because in a corporate farm the
management is retained. But if you go into a family farm and the farmer is
kicked off – and probably generations of knowledge of how to look after the
animals et cetera is gone – if often turns to tears as far as managing the
property goes.[59]
Recommendation 16
5.70
The committee recommends in the strongest possible terms that the
Australian Bankers' Association revise the Code of Banking Practice to
stipulate that if an amicable agreement between bank and farmer cannot be
reached through farm debt mediation and the bank needs to sell the family farm,
then:
-
receivers not be appointed; and
-
instead the family (if willing) is to remain managing the
property and be paid a wage to maintain it until it is sold.
5.71
However, in extenuating circumstances the banks can use their legal
rights to enforce vacant possession of the land for sale.
5.72
The committee is aware that primary production and farm management is a
specialist field. The committee became increasingly concerned during the
inquiry by evidence indicating that some insolvency practitioners involved in
agribusiness receiverships did not possess adequate experience, nor seek to
utilise the skills and knowledge of the relevant farmer where possible.[60]
5.73
The committee was informed by the Australian Securities and Investments
Commission (ASIC) that receivers do have an element of discretion as to how to
care for assets, which may be problematic if the receiver does not have the
appropriate primary production expertise and experience:
Receivers do have to take basic steps to care for an asset,
but they've got a fair degree of latitude in how they do that, and it's
probably fair to say that they may not always have the expertise in relation to
that. Think about it: they to tend to be receivers for a very wide range of
industries.[61]
5.74
In response to observations that some receivers treated livestock they
were meant to be managing appallingly, Mr Warren Day, Senior Executive Leader
of Assessment and Intelligence for ASIC commented that receivers may have
different attitudes to farmers to what constitutes caring for an asset:
Picking up on the point you were referring to, Senator
Williams, you're right: there is no obligation on a receiver to keep the cattle
to a certain standard. Similarly, if there's a crop out in the paddock and it's
ready to be brought in, on one view there's no real requirement for the
receiver to bring that crop in. They can just let it rot in the paddock if they
need to, because, again, as we know, they've got to spend money to bring that
in and they may decide that they're not, as they might see it, going to throw
good money after bad. But then, again, the farmer would say, 'Well, if you do
that and then you sell it, you're going to make a profit, which'll help offset
some of the problem.'[62]
5.75
In order to avoid detrimental impacts in terms of land management and
animal welfare, as well as the reduction in the value of foreclosed assets, the
committee believes it is imperative that all stakeholders involved in
agribusiness receiverships are equipped with the relevant experience and
knowledge.
Recommendation 17
5.76
The committee recommends that the Australian Restructuring Insolvency and
Turnaround Association ensure receivers appointed to agribusiness cases must be
appropriately qualified in agribusiness and have a strong background and
demonstrated experience in rural management.
Valuations
5.77
Numerous witnesses raised concerns about the cost, use and availability
of valuations in the course of this inquiry.
5.78
Valuations of primary production properties are guided by factors such
as historical sales data, current market conditions, the carrying capacity of
the property, soil types and water infrastructure. However, ultimately
valuations are subjective opinions.[63]
5.79
Legal Aid Queensland identified that the issue of valuations ordered by
receivers (and by extension, the subsequent sale price of properties based on
those valuations) caused significant distress to farmers:
The receivers will engage their own valuers and are not
obliged to provide copies of these valuations to the farmer during the period
of insolvency even though the farmer will ultimately bear the costs of
obtaining the valuation. It is understood that these valuations would be
prepared on the basis of an early sale and not taking into account the period
of time which would normally be required for a property to be on the market to
sell. It is not uncommon for larger western [Queensland] properties to have an
average marketing period of 12 months or more, but a sale by receivers usually
occurs after about a six week marketing campaign. Farmers are not made aware of
discussions between the bank, receiver and valuers during these periods. They
do not receive copies of valuations obtained for sale purposes, yet the outcome
affects them directly as they are the ones responsible for any shortfall.[64]
5.80
This sentiment was echoed by individual primary producers who expressed
frustration and anger that they were not provided with access to valuations
that they would ultimately pay for.[65]
5.81
The Financial Ombudsman Service (FOS) referred to its experience in
investigating lending disputes and noted that in its opinion, fewer disputes
would arise if valuations were provided to borrowers at the earliest
opportunity in the lending process. The FOS submission stated:
Our dispute experience indicates that, where borrowers do not
receive valuations of their property in issues arise in relation to the
provision of the loan, they end up feeling as if they are/were unable to make
an informed decision in respect of their loan application.[66]
5.82
The ASBFEO's submission recognised that the valuation of primary
producing small business assets is localised and industry specific. It also
raised the point that there is a lack of understanding on the part of some
small business owners about the temporary nature of a valuation. International
Valuation Standards state that valuations are only valid for three months.[67]
5.83
In its inquiry into small business loans report, the ASBFEO also made
recommendations relating to valuations for small businesses. These included:
-
All banks must provide borrowers with a choice of valuer, a full
copy of the instructions given to the valuer, and a full copy of the valuation
report. [68]
5.84
The committee notes that at least one major financial institution, the
ANZ, already provides customers with a copy of a valuation and instructions
relating to that valuation where the customer pays for the report.[69]
However, the ANZ appears to be in the significant minority in this regard.
Committee view
5.85
The committee is of the strong opinion that copies of bank or
receiver-ordered valuations should be provided to farmers, given that it is the
farmers who pay for the documents. The committee considers that this would ease
the feelings of exclusion felt by farmers during their receiverships.
5.86
Given the specialised nature of primary production, the committee also
considers it imperative that valuers valuing agribusinesses have the
appropriate qualifications and experience to be able to competently carry out
their duties.
Recommendation 18
5.87
The committee recommends that the Australian Bankers' Association and
the Australian Restructuring Insolvency and Turnaround Association implement
policies to ensure that copies of bank or receiver-ordered valuations are
provided promptly to farmers.
Recommendation 19
5.88
The committee recommends that the Australian Bankers' Association and
the Australian Restructuring Insolvency and Turnaround Association ensure that
banks and insolvency practitioners must only engage independent valuers to
value agribusinesses with appropriate qualifications and demonstrated expertise
and experience in the field.
Achieving market value for forced sales
5.89
As noted above, the committee repeatedly heard evidence that properties
under receivership were often subject to an assets fire sale. This is despite
statutory requirements under the Corporations Act 2001 (Corporations
Act) for receivers to achieve market value of the assets they are appointed to.
Section 420A of Corporations Act states:
Controller's duty of care in exercising power of sale
(1) 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.[70]
5.90
Mr Warren Day, Senior Executive Leader of Assessment and Intelligence
for ASIC set out the basis for section 420A:
The rationale behind the 420A is that, if you go through that
process, you give everyone, wide and large, an opportunity to participate –
that is, all buyers in the market are put on notice if they're interested in
that property and then what that property achieves is what the value is.[71]
5.91
Similarly, a passage in the legal textbook Corporations Legislation
2017 notes the following in regard to establishing a breach of section
420A:
It is important to note the s420A is primarily focused on the
process undertaken by the receiver to sell the property. Judicial consideration
of the section has generally focused on whether the receiver was properly
informed (i.e. did the receiver obtain independent advice regarding the
proposed sale, and if so, did the receiver follow that advice), as well as steps
taken to market the property.[72]
5.92
As set out earlier in this chapter, the committee received evidence that
indicated that some properties were sold by receivers for significantly under
the market value. In the committee's mind, this demonstrates that section 420A
is not operating as intended and its application needs to be reviewed.
5.93
The committee was advised by ASIC that there are examples in state
legislation (for example in Queensland) that may have a tighter regime than
section 420A of the Corporations Act.[73]
5.94
Under section 85 of the Property Law Act 1974 (Qld), the
mortgagee's duty 'to take reasonable care to ensure that the property is sold
at market value' also applies to a receiver acting under a power delegated to
the receiver by a mortgagee. The relevant section reads:
Duty of mortgagee or receiver as to sale price
(1) It is the duty of a mortgagee, including as attorney for
the mortgagor, or a receiver acting under a power delegated to the receiver by
a mortgagee, in the exercise of a power of sale conferred by the instrument or
mortgage or by this or any other Act, to take reasonable care to ensure that
the property is sold at the market value.
5.95
According to a 2009 article published by Cooper Grace Ward Lawyers,
extending the mortgagee's duty to 'take reasonable care to ensure that the
property is sold at market value' to the attorney of the mortgagor and to the
receiver exercising power of sale represented a significant change to the
previous requirements:
This is significant where the mortgagor is not a company as
previously a receiver would not ordinarily have been caught by section 85 PLA
[Property Law Act] or subject to any similar duty under the Corporations Act
2001. The duty of care under section 420A of the Corporations Act 2001
only applies to a controller in relation to property of a company.[74]
5.96
Section 85 of the Property Law Act 1974 (Qld) also sets out a
number of prerequisites for the sale, which are designed to ensure that maximum
value and at least market value is obtained:
(1A) Also, if the mortgage is a prescribed mortgage, the duty
imposed by subsection (1) includes that a mortgagee or receiver must, unless
the mortgagee or receiver has a reasonable excuse –
(a) adequately advertise the
sale; and
(b) obtain reliable evidence of
the property's value; and
(c) maintain the property,
including by undertaking any reasonable repairs; and
(d) sell the property by auction,
unless it is appropriate to sell it in another way; and
(e) do anything else prescribed
under a regulation.
5.97
The Cooper Grace Ward Lawyers article also stated:
The onus will be on the mortgagee or receiver to establish
'reasonable excuse' if they fail to comply with any requirement listed in
section 85(1A)... Complying with the duty under section 85(1) by taking
reasonable care to ensure that the property is sold at the market value may not
provide a defence if the obligations under section 85(1A) are not satisfied.[75]
5.98
McGrathNicol informed the committee that with respect to the provisions
in section 85 of the Property Law Act 1974 (Qld), comparable legislative
requirements apply to the sale of real property in other state jurisdictions.[76]
5.99
McGrathNicol also noted that the term 'market value' is not defined in
either the Corporations Act or the Property Law Act 1974 (Qld).[77]
5.100
KordaMentha advised the committee that the 'market value' of farming
property is subject to many factors:
Farm property values are impacted by international commodity
prices, exchange rate, financial markets, oil prices, interest rates,
competition for alternative land uses, labour costs and many other factors. The
costs of holding a farm property are significant and there is no guarantee that
property prices will improve. In fact, farm property prices can move in
unexpected directions. Recent experience in Queensland shows that grazing
property prices rose significantly during the Millennium Drought...but actually
fell when the drought broke in 2010. Clearly it is not just drought and
flooding rains that impact on farm property prices. Faced with significant
holdings costs and volatile property markets the best, and often only,
available strategy will be to realise the property in a timely and efficient
manner.[78]
5.101
KordaMentha also emphasised that farm property prices can be volatile
and that historic valuations are 'unreliable indicators' of current market
value:
In addition, a valuation is only an opinion as to value and
valuers do not guarantee that the value they place on farming property will be
achieved. This means that the true test of market value is the value a willing
buyer is prepared to pay for the property after appropriate marketing.[79]
5.102
The committee received evidence indicating that receiver-initiated sales
often result in lower prices being achieved compared to normal sales for
similar properties. As Legal Aid Queensland observed:
Buyers are aware that the property is being sold on a forced
sale basis. News that a farm is under the control of receivers travels very
quickly around rural communities.[80]
5.103
Legal Aid Queensland also noted that in depressed markets, an increase
in forced sale numbers appears to exacerbate the 'downward spiral' in prices,
affecting land values within a region which can then impact on the entire
farming community.[81]
5.104
The Corrigin and Lake Grace Zone of the Western Australian Farmers
Federation echoed this point:
The Select Committee on Lending needs to be aware that a
forced sale of land at a heavily discounted price can adversely affect the
value of other farms in the area and set off a chain reaction that would put
other farmers in the area below the banks acceptable equity level in their
farming businesses. This could cause foreclosure on other farmers and nobody
gains from this.[82]
Committee view
5.105
As mentioned earlier in this chapter, the committee heard accounts from
farmers of situations where receivers had sold assets for significantly under
their market value.
5.106
The committee acknowledges the evidence from receivers indicating that
valuations have limitations in regard to predicting sale prices, and that
markets can prove volatile.
5.107
The committee also understands that it is possible that
receiver-initiated sales result in lower prices compared to a normal sale for
similar properties. However, the committee believes that it is unethical for
receivers to sell properties in receivership at well below the market value,
which seems to have been the case in several examples before the committee.
5.108
The committee is greatly concerned by the accounts of assets being sold
for less than market value. The committee is concerned that section 420A of the
Corporations Act is ineffective and not achieving its intended purpose. Although
acknowledging that it is the market that ultimately determines what price an
asset sells for, the committee considers that more effective safeguards must be
implemented to ensure that maximum sale prices are being achieved by banks and
receivers when selling assets.
Recommendation 20
5.109
The committee recommends that the Australian Bankers' Association revise
its Code of Banking Practice and the Australian Restructuring Insolvency and
Turnaround Association revise its Code of Professional Practice to stipulate
that every effort be made by banks and receivers (in circumstances where they
are appointed) to achieve the maximum sale price of an asset.
5.110
In this regard the committee supports the mechanisms set out in section
85 of the Property Law Act 1974 (Qld), which are designed to ensure that
maximum value is obtained.
5.111
Given that ASIC observed that the current legal view is that no private
right of action flows on from when there is a breach of section 420A,[83]
the committee considers it necessary that such a right be established in order
to allow individuals an opportunity for recourse if required.
Recommendation 21
5.112
The committee recommends that the government establish a private right
of action for breaches of section 420A of the Corporations Act 2001.
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