CHAPTER 40
PAPER MEETINGS OF DIRECTORS

 

 

TABLE OF CONTENTS

40.1 CONDUCT OF THE AFFAIRS OF BENEFICIAL FINANCE - "PAPER MEETINGS" OF DIRECTORS
40.1.1 POWER TO CONDUCT THE BUSINESS OF THE COMPANY
40.1.2 CONDUCT OF THE AFFAIRS OF BENEFICIAL FINANCE

40.2 FINDINGS AND CONCLUSIONS

40.3 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
40.3.1 TERM OF APPOINTMENT C
40.3.2 TERMS OF APPOINTMENT A(h) AND E, AND SECTION 25(2) OF THE ACT

 

 

 

40.1 CONDUCT OF THE AFFAIRS OF BENEFICIAL FINANCE - "PAPER MEETINGS" OF DIRECTORS

 

Section 25(2) of the State Bank of South Australia Act 1983 and Paragraphs A(h) and E of my Terms of Appointment, require me to investigate and report to the Governor on matters which involve any possible improper activity on the part of a director or officer of the Bank or a subsidiary of the Bank, and to advise whether any such matter should be the subject of further investigation.

In the course of my examination in accordance with my Terms of Appointment of transactions undertaken by Beneficial Finance, I became aware of certain matters concerning the conduct of the affairs of Beneficial Finance that, in my opinion, fell within the terms of Section 25(2) and Paragraphs A(h) and E of my Terms of Appointment. One such matter, examined in this Chapter of my Report, was the practice of producing minutes to record directors' meetings which, in fact, had not been held.

The creation of minutes purporting to record the proceedings and resolutions of meetings of directors that had not taken place is, prima facie, a contravention of the Companies Code. Section 560 of the Companies Code provides that any director or officer of a company who falsifies any books affecting or relating to the affairs of a company is guilty of an offence. Pursuant to Section 5(1) of the Code, "books" includes any document.

Section 38 of the Companies and Securities (Interpretation and Miscellaneous Provisions) Act 1980 further provides that any person who aids, abets, counsels or procures, or by any act or omission is in any way directly or indirectly knowingly concerned in or a party to the commission of an offence, is deemed to have committed that offence, and is punishable accordingly.

40.1.1 POWER TO CONDUCT THE BUSINESS OF THE COMPANY

The Articles of Association of Beneficial Finance vest the management and control of the business and affairs of the company in its directors. Article 27 provides that, until otherwise determined by the company in general meeting, two directors shall be a quorum for a meeting of directors, and that any director may at any time convene a meeting of the directors.

Article 27(7) provides for the validity and effectiveness of a resolution in writing which is signed by all the directors for the time being entitled to receive notice of meetings of directors, as if that resolution had been passed at a duly constituted meeting of directors.

Article 26(2) allows the directors, from time to time, to confer upon the Managing Director such of the powers and duties exercisable under the Articles by the directors as they think fit. These powers may be conferred for such objects and purposes, and upon such terms and conditions, and with such restrictions, as the directors think expedient.

40.1.2 CONDUCT OF THE AFFAIRS OF BENEFICIAL FINANCE

From November 1982 until August 1990, Mr J A Baker held the position of Managing Director of Beneficial Finance. I have been advised that, apart from authority to give credit approvals, capital expenditure approvals, and to appoint consultants, there were no delegations to Mr Baker pursuant to Article 26(2).⁽⁾

It was the practice of the directors of Beneficial Finance to hold a monthly meeting on the last Friday of each month (other than December) for the purpose of dealing with the business of the preceding month, and to consider recommendations from Management as to the future operations of the company. Board Papers for these monthly meetings were made available to the directors approximately one week before each meeting. The Company Secretary would prepare the minutes of these meetings, which were then included in the Board Papers for the next meeting for certification by the Board as a true and correct record of the proceedings.

Mr B D Barton, who held the position of Company Secretary of Beneficial Finance for several years until September 1988, gave evidence of a practice of preparing minutes of other meetings of directors of Beneficial Finance which in fact had not taken place. He said:

"It was more in the context of lines of credit where the documentation would come through, and would be required in quick response, and the necessity to formulate a resolution that could be advised back to those parties, which was a necessary part of the acceptance of it." ⁽⁾

When asked how this practice originated, Mr Barton said that he thought that "it evolved according to the requirements at the time", but could not say whether it was his idea or not.⁽⁾

Mr P J Erskine held the position of Company Secretary from 29 September 1988. He said that when he commenced in this position his predecessor, Mr Barton, told him of the practice within the company of minuting meetings which had not actually taken place. The practice was continued by Mr Erskine.

Mr Erskine said that the preparation of minutes to record meetings which had not actually taken place usually occurred in response to a need to provide a lender to Beneficial Finance with evidence that a transaction had been approved by the Board of Directors. He said that requests for such minutes would come to him from the Beneficial Finance officer who needed an authorisation for a transaction to be minuted:

"If it was a treasury matter, either Rhys Horwood or Joe Hoogland would come and say that we've got this deal settling tomorrow or the next day or the day after, and need a ratifying or evidencing of this transaction. They would provide the details of that transaction for me, or the agreement to be entered into, and I would prepare the minutes, then arrange for the chairman to sign them, present them with a copy for their settlement and then put a copy of those minutes into the next monthly board folder for all board members to see." ⁽⁾

The Bank's solicitors, in responding on behalf of their clients to my tentative findings, suggested that notwithstanding that "no formal meeting was held in the sense that normal notice was not given to all directors, no papers were issued nor a full Board convened ... it may be assumed that when Mr Barrett came into the office to sign the minutes and held discussions with Mr Baker and Mr Erskine an informal or "instant" meeting took place." This proposition was supported by Mr Erskine when he gave oral evidence responding to my tentative findings.

I am unable to accept that suggestion as reflecting the true position. As pointed out in evidence by Mr Baker, the "instant" meeting would not have been "held" on the day referred to in the minutes.⁽⁾ Even if it had, it would have been a most irregular and unsatisfactory way for a public company to conduct its affairs. The meetings were not properly convened, since most directors received no notice that any such meeting was to be held.

Mr Baker confirmed that the practice of preparing minutes to record meetings of directors which had not taken place existed within Beneficial Finance, and thought that the practice was in existence when he commenced with the company in November 1982.⁽⁾ He said that no notice was given to the directors of what he called these "paper meetings". He said:

"I know at one stage the procedure was tightened up a bit. The company secretary was required to actually ring and make sure people were in town, all that sort of thing",⁽⁾ but that "there was no meeting. Not even would there have been a ring around."⁽⁾

My examination of the minutes and Board Papers of meetings of directors of Beneficial Finance held during the period 1 January 1988 to 30 June 1989 identified twenty three examples of minutes which fit Mr Baker's description of minutes of paper meetings. Set out below is a table indicating the dates of the paper meetings, the names of the directors shown as having attended the paper meetings, and the occasions when the minutes were included in the Board Papers for the subsequent full Board meeting:

Table of Paper Meetings 1 January 1988 to 30 June 1989
Date of Paper Meeting	Directors in Attendance	Copy Found in Board of Papers
5 January 1988	Mr Barrett, Mr Baker	No
4 February 1988	Mr Barrett, Mr Simmons	No
9 March 1988 (8-35am)	Mr Baker, Mr Matthers	No
9 March 1988 (2-00pm)	Mr Barrett, Mr Williams	No
25 March 1988 (9-45 am)	Mr Barrett, Mr Baker	No
21 April 1988 (11-30 am)	Mr Barrett, Mr Simmons	No
21 April 1988 (11-40 am)	Mr Barrett, Mr Simmons	No
6 June 1988	Mr Barrett, Mr Baker	No
5 September 1988	Mr Barrett, Mr Williams	Yes
8 September 1988	Mr Barrett, Mr Baker	Yes
5 October 1988	Mr Barrett, Mr Baker	No
22 December 1988 (2-30 pm)	Mr Barrett, Mr Baker	Yes
9 January 1989	Mr Barrett, Mr Baker	Yes
13 January 1989	Mr Barrett, Mr Baker	Yes
24 January 1989 (9-30 am)	Mr Barrett, Mr Baker	No
7 March 1989	Mr Barrett, Mr Baker	Yes
28 March 1989	Mr Barrett, Mr Baker	Yes
31 March 1989	Mr Barrett, Mr Baker	Yes
10 April 1989	Mr Baker, Mr Simmons	Yes
28 April 1989	Mr Barrett, Mr Baker	No
1 May 1989	Mr Barrett, Mr Baker	No
1 June 1989	Mr Barrett, Mr Baker	Yes
15 June 1989	Mr Barrett, Mr Baker	Yes

It will be seen from the Table that from September 1988 onwards, most minutes of paper meetings were included among the Board Papers for subsequent full Board meetings, but that this was not the practice before that date. In only six of the twenty three cases, however, was there any reference to the minutes of the paper meetings included in the minutes of any subsequent full Board meeting.

Mr Erskine and Mr Barton told the Investigation that the practice was for them as Company Secretary to prepare the minutes recording the particular transaction or business, and for Mr L Barrett as Chairman to sign those minutes either at the subsequent full Board meeting, or earlier if the circumstances required it.⁽⁾ Some Treasury transactions required formal Board Minutes signed by the Chairman to be provided to third parties as part of the settlement of the transaction. In many cases, these minutes were provided to the party which was entering into the transaction with Beneficial Finance because that party needed to be satisfied that the transaction had the formal approval of the Board. There is no evidence to suggest that such third parties were aware of the internal irregularity involved.

An analysis of the business recorded in these minutes as having been conducted at the paper meetings reveals that it falls into one of the following three broad categories:

(a) Borrowing by Beneficial Finance: eight of these minutes record resolutions by the Beneficial Finance Board to accept, enter into or renew finance facilities, and contain authorisations for various officers of the company, including at times Mr Baker, to execute the relevant facility agreements.

(b) Lending by Beneficial Finance: two of these minutes contain resolutions by the Board to lend amounts of $5.0M, $49.0M and $67.0M to associated companies, together with resolutions to appoint Attorneys to execute the loan agreements (the last two amounts relate to the acquisition of a portfolio of receivables from the Equiticorp Group).

(c) Provision of Guarantees by Beneficial Finance for the financial obligations of third parties: seven of these minutes record resolutions by the Board to guarantee, underwrite or underpin financial obligations of third parties, together with authorisations for certain officers to execute the required documentation on behalf of the company.

The remainder of the minutes record various resolutions and authorisations. Among the most significant of these are recorded in a minute dated 22 December 1988, which states that at a meeting held at 2-30 pm on that day, attended by Mr Barrett, Mr Baker and Mr Erskine, it was resolved to declare dividends on preference share capital and an interim dividend on the ordinary share capital, to redeem specified preference shares, and to allot to the Bank 20 million ordinary shares of $0-50 each.

Mr Erskine confirmed that this minute records a meeting which did not take place.⁽⁾ He explained that a half yearly dividend was required to be declared on the preference and ordinary shares to enable it to be paid to the State Bank. The paper meeting was necessary because there was no formal Board meeting in December and Mr Erskine had omitted to have the matter dealt with at the November meeting. He told the Investigation that the preference dividend was a fixed requirement and the ordinary dividend would be recommended by Management after discussions between the accounting departments of Beneficial Finance and State Bank. There was, he said, a general policy that a certain percentage of Beneficial Finance's net profit was to be paid to the Bank by way of dividends.⁽⁾

On the evidence before the Investigation, in December 1988 a document was prepared by Mr Erskine purporting to record a resolution to declare interim dividends, the amount of which was determined by persons other than the directors, and to alter the company's capital structure, when in fact no such resolutions had been passed by the directors. Indeed, the directors, other than the Managing Director and Mr Barrett who signed the minutes, would not have learned of the purported declaration of the dividends and alteration of the capital structure until they received the Board Papers for the January 1989 meeting.

Mr Erskine put it to me that if the directors had objected to the dividends, they could have revoked the resolution of the 22 December 1988. In my opinion, this submission demonstrates a complete misunderstanding of the status of the minutes of the paper meetings. The purported resolutions documented in those minutes are, of course, not resolutions of the Board of Directors at all. The minutes were false documents purporting to record decisions that were in fact not made by the directors. The minutes could not, by themselves, and even though signed by the Chairman, constitute a valid decision of the Board.

I am prepared to accept that in those situations where the minutes of paper meetings are referred to in the minutes of a subsequent full Board meeting, the full Board at that time effectively adopted and approved the resolution documented in them. Even so, two problems remain:

(a) First, many of the paper meeting minutes were not, according to the minutes of subsequent full Board meetings, even considered by the directors. Of the twenty three examples examined, only six are referred to in the full Board Minutes, and twelve were not even included in the Board Papers.

(b) Second, even where the paper meeting resolutions were adopted by the Board, that sometimes occurred after Beneficial Finance had legally committed itself to the transaction purportedly authorised by the paper meeting.

A good example of the second problem is the paper meeting on 5 September 1988 at which Mr Barrett and Mr K D Williams are recorded as having been present. Mr Barton confirmed that this was a non-existent, paper meeting. These minutes, which refer to a debenture program for $200.0M, were provided to the full Board at its meeting on 29 September 1988. Among the Board Papers was Special Submission No 239, which was described in the minutes of the regular Board meeting on 29 September as follows:

"Special submission 239: Medium Term Wholesale Debenture Issuance

Programme: Details of the submission previously approved by a meeting of two directors on 5 September 1988 was submitted for the information of the full board. An initial $76 million of the $200 million programme had been raised and it was likely that the balance will be raised over coming months in accordance with the company's funding requirements and market conditions."

As I stated earlier, I am prepared to accept that this reference amounts to an adoption of the documented resolution by the full Board of Directors. Even so, this minute shows that by the time the full Board was informed of the debenture program, Beneficial Finance had already committed to the $200.0M issue, and actually raised $76.0M.

These two examples highlight the inappropriateness of the practices which, in my opinion, resulted in a failure by the directors to properly assess and review some important transactions undertaken by Beneficial Finance. In many cases, the transactions were not reviewed or approved at all by the directors.

Of the directors, both Mr Baker who advised the Investigation of the existence of the practice, and Mr Barrett who signed the minutes of the paper meetings, were aware of and condoned the practice. Mr Baker, Mr Erskine and Mr Barton all told the Investigation that they believed that the "Board" of Beneficial Finance would have been aware of this practice, but that belief appears to be based upon an assumption or impression only.⁽⁾ Mr Erskine acknowledged to the Investigation that there is nothing on the face of what is shown in the minutes of these paper meetings which might alert a director who is not named in them as having been present to the fact that the minutes record meetings which did not occur.⁽⁾

Nevertheless, on those occasions when the minutes of the paper meetings were provided in the full Board Papers, those directors who were not shown as being present would have known that they had not received any notice of those meetings. In April 1989, Mr T Clark informed Mr Erskine that the Board had requested that proper notice be given to all directors of all meetings, including these "special" meetings. Mr Erskine then established procedures whereby all directors received notices and details of business to be passed at meetings to be held outside of monthly Board meetings.

 

40.2 FINDINGS AND CONCLUSIONS

 

Based on the material and evidence available to me, I find that:

(a) there was a practice within Beneficial Finance of preparing minutes to record meetings of directors of the company which had not taken place, either formally or informally;

(b) this practice developed as a convenient alternative to convening a Board meeting at short notice;

(c) the practice was of long standing; and

(d) that accordingly the affairs of the company were not always conducted in accordance with its Articles of Association, in that matters which required approval by a properly convened meeting of directors were not put to such a meeting, either for initial approval or for ratification.

Directors were provided with copies of these minutes at subsequent full Board meetings, and therefore should have been aware of the fact that meetings at which only two directors were present were taking place without them having received any prior notice thereof.

Irregularities, whether in breach of the Articles of Association or of the provisions of statute or common law, may be the result of ignorance or slovenliness, or may be expedients to overcome practical, day-to-day difficulties in running the company's business. In either case, they allow for the establishment of practices that circumvent the processes that are in place for the proper assessment and review of proposals affecting the company.

The persons concerned in producing each set of minutes, made, or caused or procured to be made, a false document which purported to be an important company record. It was false in that it purported to be a formal minute of a meeting which did not take place. The result was that Beneficial Finance entered into a variety of transactions which were not reviewed or approved by the Board of Directors. The unsatisfactory nature of that situation hardly needs to be pointed out.

There is nothing to suggest, however, that there was some ulterior purpose in holding these `paper meetings', nor is there any evidence before me to suggest that the Bank Board or of Beneficial Finance were misled as a result of the practice.

 

40.3 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

 

40.3.1 TERM OF APPOINTMENT C

In my opinion:

(a) The directors who were aware of the practice, particularly Mr L Barrett and Mr J A Baker, condoned a practice which had the effect of allowing Beneficial Finance to engage in transactions involving significant obligations without the approval, or often even the knowledge, of the other directors.

(b) Mr B D Barton and Mr P J Erskine did not adequately or properly perform their functions as Company Secretary of Beneficial Finance, in that they created false documents which had the effect of facilitating Beneficial Finance entering into transactions and being subject to liabilities that had not been reviewed or approved by the Board of Directors.

40.3.2 TERMS OF APPOINTMENT A(h), E, AND SECTION 25(2) OF THE ACT

In my opinion, the practice of documenting meetings of directors that had not occurred did amount to improper activity in the very narrow sense that it was an expediency adopted in respect of the internal affairs of the company which had the effect of permitting Management to undertake transactions without the approval of the Board of Directors.

There is no evidence, however, that the creation of the minutes was done with any intent to deceive, mislead or defraud any party, or to obtain any unfair advantage for Beneficial Finance or the persons involved.

Having regard to all the circumstances, I do not recommend any further investigation in respect of this matter.