VOLUME SIX THE MANAGEMENT OF CREDIT: CASE STUDIES

CHAPTER 12
CASE STUDY IN CREDIT MANAGEMENT: HALWOOD

TABLE OF CONTENTS

12.1 REFERENCE INFORMATION
12.2 BACKGROUND TO THE ACCOUNT
12.2.1 COMPANY HISTORY
12.2.2 BACKGROUND TO THE FACILITY

12.3 CHRONOLOGY

12.4 COMPLIANCE WITH POLICIES AND PROCEDURES
12.4.1 MAY 1986 PROPOSAL - INITIATION OF FACILITY
12.4.2 MAY 1987 PROPOSAL
12.4.3 SEPTEMBER 1987 PROPOSAL
12.4.4 JUNE 1988 PROPOSAL
12.4.5 OCTOBER 1988 PROPOSAL - THE "AUSTRALIS CENTRE" PROJECT
12.4.6 NOVEMBER 1988 PROPOSAL - THE "HENRY WAYMOUTH CENTRE" PROJECT
12.4.7 FEBRUARY 1989 PROPOSAL - ASPENAIR PTY LTD

12.5 MANAGEMENT OF NON-PERFORMING FACILITY
12.5.1 INTRODUCTION
12.5.2 PROVISIONING FOR HALWOOD CORPORATION IN THE 1989 ACCOUNTS OF THE BANK
12.5.3 PROVISIONING FOR HALWOOD CORPORATION IN THE 1990 ACCOUNTS OF THE BANK

12.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
12.6.1 TERMS OF APPOINTMENT A
12.6.2 TERM OF APPOINTMENT C
12.6.3 TERM OF APPOINTMENT D

12.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

12.8 APPENDICES
A Group Structure Halwood
B Henry Waymouth Centre Funding Structure
C Summary of Movements in Facilities
D Chronology of Events

12.1 REFERENCE INFORMATION

The following information on the Halwood Corporation Limited group facility is set out for reference purposes:

REFERENCE INFORMATION
Account Name	. Halwood Corporation Ltd (formerly Hooker Corporation Ltd - under scheme of arrangement); . Blanche Pty Ltd (Receiver and Manager Appointed); and . Aspenair Pty Ltd (Receiver and Manager Appointed, mortgagee in possession).
Directors at May 1986 (ie date of referral of facility to Lending Credit Committee for approval)	. Mr G Herscu; . Mr T P Carter; . Mr D E Halstead; . Mr R G McCrossin; and . Mr A R Pearce.
Industry Sector	. Property Development
Facility Type	. Commercial bills; . Letter of Credit; . Cash advance; . Foreign currency advance; and . Overdraft.
Principal Outstanding at 31 March 1991	. Halwood Corporation Ltd . Blanche Pty Ltd . Aspenair Pty Ltd	$M 51.60 98.36 6.50 156.46
Unrecognised Income at 31 March 1991	. Halwood Corporation Ltd . Blanche Pty Ltd . Aspenair Pty Ltd	$M 16.9 2.6 1.3 20.8
Provision for Loss at 31 March 1991	. Halwood Corporation Ltd . Blanche Pty Ltd . Aspenair Pty Ltd	$M 40.0 37.0 1.5 78.5
Estimated Loss at 31 March 1991	. Halwood Corporation Ltd . Blanche Pty Ltd . Aspenair Pty Ltd	$M 40.0 37.0 1.5 78.5

12.2 BACKGROUND TO THE ACCOUNT

12.2.1 COMPANY HISTORY

The company was founded as a real estate agency business in 1928 under the name of L J Hooker Pty Limited. It converted to public company status on 9 July 1947 as L J Hooker Limited and subsequently changed its name to L J Hooker Investment Corporation Limited. On 28 June 1968, the company again changed its name, on this occasion to Hooker Corporation Limited. The company changed its name to its present name, Halwood Corporation Limited ("Halwood Corporation"), on 12 February 1990.⁽⁾ For convenience, this Chapter refers only to Halwood Corporation.

In November 1985, through a partial takeover offer, GSH Investments Pty Limited ("GSH Investments"), a company controlled by Mr G Herscu, gained effective control of Halwood Corporation by acquiring a 44 per cent shareholding. In March 1988, GSH Investments made a further takeover offer for the shares it did not own. At the close of the offer on 29 June 1988, GSH Investments had increased its entitlement to ordinary shares to 54.2 per cent. Following the assumption of control of Halwood Corporation by GSH Investments, the Board and key management of the company were changed. Halwood Corporation then commenced a significant expansion program which included major acquisitions of retail businesses as well as a vigorous property development program in both Australia and the United States of America.

Following adverse press articles on Halwood Corporation's financial position and performance, on 8 April 1988 Mr P A Phin, Halwood Corporation's Chief Financial Officer issued a statement to all lenders to the company. In the statement, Mr Phin stated that press reports and comment had been:

"... poor, sometimes totally incorrect and often full of conjecture." ⁽⁾

Mr Phin's statement advised the following:

(a) that in the last two years, 1986 and 1987, Halwood Corporation had expanded considerably, particularly in the United States. The expansion had, however, plateaued in late 1987 and management had commenced a period of consolidation;

(b) in March 1988, the company had undertaken a review of its next three year profit plan. The plan recognised the probability of a downturn in various markets in which the company operated;

(c) non-recourse finance had been arranged for two "Super Mall"⁽⁾ developments in the United States with funds to be in place by 30 June 1988. This financing arrangement provided flexibility to finance and hold these assets independently of the "pool" of borrowings secured by the Company's Negative Pledge arrangements. The three year plan did not budget for the sale of these malls, nor did it assume any profit contribution;

(d) the equity/debt ratio under the Company's Negative Pledge arrangement was being improved through an active program of asset management coupled with non-recourse funding as appropriate. It was the company's intention to have a minimum ratio of 35 per cent/65 per cent by 31 December 1988;

(e) taxation problems surrounding a debt defeasance arrangement were being addressed; and

(f) no privatisation of the company would be undertaken by GSH Investments, despite rumours to the effect that such an action would provide GSH Investments the opportunity to access Halwood Corporation cashflow and also sell its own assets into Halwood Corporation.

A year after the change in control of Halwood Corporation, the company was again the subject of media speculation regarding its financial stability and viability. Halwood Corporation met with its forty seven bankers on 20 April 1989 and during this meeting, Halwood Corporation acknowledged its urgent need to reduce its gearing and to generate significant profits for its shareholders. It further advised that no new major developments had been planned thus stemming the outflow of capital expenditure.⁽⁾

Within a month, the company again felt constrained to respond to media speculation about the company's financial position. On 16 May 1989, Halwood Corporation, in response to newspaper articles appearing that day, advised the Australian Stock Exchange that the "Company is ... carrying out a major review of its operations." ⁽⁾ Shortly thereafter, on 29 May 1989, the company made a public announcement that:

(a) the company was embarking on a debt reduction programme;

(b) it would in future concentrate on its core business; and

A further public announcement followed on 20 June 1989. On this occasion, the company announced that:

(a) Mr R Grellman of Messrs Peat Marwick Hungerfords had been appointed by the company to "assist Management in the preparation and implementation of [a] business plan with a view to satisfactorily restructuring the company"; and

(b) the company was calling a meeting of its Negative Pledge Lenders⁽⁾ "seeking their agreement to leave their existing facilities in place for a period of 12 months." ⁽⁾

The following day, 21 June 1989, at a meeting attended by representatives from some 40 banks, Mr Grellman announced that he had requested an informal meeting of the company's unsecured negative pledge lenders to support a twelve month moratorium.⁽⁾ Mr Grellman advised that a meeting of lenders to consider the moratorium proposals was scheduled for 23 June 1989. Mr Grellman stressed however, that control of the company remained with the directors and that all the company's divisions would continue normal business functions. A public announcement was made on 21 June 1989, by Mr Grellman, that the company's lenders had been requested to support a four month moratorium "in order to achieve a planned, constructive debt reduction programme." ⁽⁾ The length of the moratorium was publicly announced as four months as the lenders present at the meeting had indicated that they would only consider a moratorium for this period, and not twelve months as had been requested.

Halwood Corporation's unsecured lenders met on 23 June 1989 and agreed to support a four month moratorium. The agreement was reached largely by the Australian bankers to Halwood Corporation. Due to complications with United States of America Banks, however, the moratorium was delayed. It became effective on 7 July 1989. A public announcement of the four month moratorium was made on 23 June 1989.⁽⁾

On 27 June 1989, the Australian Stock Exchange announced that the shares of Halwood Corporation would be forthwith suspended from short selling because the company's market capitalisation had fallen to less than $100.0M. This was below the minimum prescribed by Business Rule 2.18(13)(b).⁽⁾ The company's listed securities were, however, still able to be traded.

Two days later, on 29 June 1989, it was announced that all the banks required to sign the moratorium agreement had now signed, except for one overseas bank which was unable to sign for reasons arising from the law in force in the United States of America.⁽⁾ Mr Herscu announced, on 12 July 1989, that he was resigning as Chief Executive of Halwood Corporation, but was remaining as Chairman of the Board of Directors.⁽⁾ On the following day, the company advised the Australian Stock Exchange that GSH Investments still controlled the majority of voting shares (approximately 50.54 per cent).⁽⁾

The company's debt moratorium was short lived, and on 25 July 1989, the four month debt moratorium signed on 7 July 1989 was terminated.⁽⁾ On 26 July 1989, Mr J B Harkness was appointed Provisional Liquidator of the company. Following the appointment of the Provisional Liquidator, the Australian Stock Exchange announced that as from the commencement of trading on 27 July 1989, the listed securities of the company would be suspended.⁽⁾

Provisional liquidators were soon appointed to two of Halwood Corporation's major subsidiaries:

(a) on 1 August 1989, to Hooker Multiplex Constructions Pty Ltd, Halwood Corporation's Building Construction Manager⁽⁾; and

(b) on 9 August 1989, to Hooker Investments Pty Ltd, Halwood Corporation's subsidiary which, in turn, owned all the common stock in the United States operations holding company, L J Hooker Corporation Inc.⁽⁾

On 3 November 1989, the Provisional Liquidator announced that he had received a report as to the affairs of the company from three out of four of Halwood Corporation's directors. The report as to the affairs can be summarised as follows:

Consolidated Book Values as at 6 November 1989 Overseas
	Australia $M	USA $M	Other $M	Total $M
Total Assets *	730.1	1,917.1	0.9	2,648.1
Total External Liabilities	(1,279.4)	(852.2)	(47.5)	(2,179.1)
Net Assets	(549.3)	1,064.9	(46.6)	469.0
Adjustment to Book
Values by Directors **	290.0	(587.0)	-	(297.0)
Adjusted Net Assets	(259.3)	477.9	(46.6)	172.0

* Book Value excluding inter-company advances

** Estimated realisable value as estimated by Directors as at 26 July 1989.

On 20 December 1989, the Australian Stock Exchange announced that, as of close of business on that day, the company would be removed from the official list for failure to pay its annual listing fees for the year commencing 1 July 1989. On the following day, 21 December 1989, the Provisional Liquidator published a Report to Lenders which disclosed that the Provisional Liquidator's estimated deficit as at 26 July 1989 was:

(a) optimistic - ($256.0M); and

(b) pessimistic - ($920.0M).

Thirteen months later, on 28 February 1991, Halwood Corporation entered into a scheme of arrangement with its creditors. Under the scheme of arrangement, there were three classes of creditors:

(a) Negative Pledge Creditors, which included all the Australian banks. Negative pledge creditors were to receive a payment in the ratio of 3:2 as against other unsecured creditors, but subject to the priority of creditors such as the Australian Taxation Office.

(b) Non-Negative Pledge Creditors, which included those creditors both within Australia and overseas, who had claims against Halwood Corporation or other Halwood Corporation subsidiary companies included in the scheme. These include claims by the Australian Taxation Office and trade creditors.

(c) Inter-Group Creditors, ie those wholly owned Halwood Corporation subsidiaries or sub-subsidiaries which had advised that they proposed to make a claim against Halwood Corporation.

As noted in a memorandum to the Bank's Head of Group Asset Management division, dated 26 June 1991, the Scheme Administrator, Mr A MacIntosh of Peat Marwick , had advised that the best estimate of the return to the negative pledge creditors over a period of two to five years would be approximately 50.66 cents. This estimate was, however, dependent on the success of asset sales over that time period.

12.2.2 BACKGROUND TO THE FACILITY

The following Section of the Report provides a brief history of the Halwood Corporation facility and serves as a background to the detailed consideration of the various approvals of movements in the facility in Section 12.4 below.

(a) 1986 - 1987

The Bank commenced its relationship with Halwood Corporation in May 1986 when it participated, to the extent of $20.0M, in a syndicated facility led by the State Bank of New South Wales.⁽⁾ The Bank's participation in this syndicate would not, in the normal course of events, be disclosed to Halwood Corporation. A year later the Bank again participated in a syndicate, this time in the sum of $US 10.0M.⁽⁾ On this occasion, the Lending Credit Committee noted that "... it would be in the Bank's best interest to participate on a fully disclosed basis ... in order to enhance our relationship with the Company." ⁽⁾

An increase of $20.0M in the facilities made available by the Bank to Halwood Corporation was approved in September 1987.⁽⁾ On this occasion, the Bank was the sole lender to Halwood Corporation. With the approval of this increase, in conjunction with the capitalisation of interest under the $US 10.0M facility to which I have referred, and taking into account some principal reductions under the 1986 facility, the Bank's exposure to Halwood Corporation became $54.5M.

(b) 1988

On 29 June 1988, the Lending Credit Committee approved the Bank's $9.0M participation in a $19.0M syndicated project financing facility for a unit trust to be formed by Hooker Property Funds Management Limited.⁽⁾ The facility was being established to assist the project to develop a twelve level investment property in Castlereagh Street, Sydney. This transaction was stated to be non-recourse to Halwood Corporation. The Lending Credit Committee qualified its approval in that it stipulated that, if the trust was not both in place and sufficiently funded to provide for cost overruns on the project, Halwood Corporation would be called upon to guarantee any cost overruns. The minutes of the Lending Credit Committee record no discussion of the implications for lenders of Halwood Corporation's "Statement to our Lenders" noted in Section 12.2.1 above.

A proposal to increase Halwood Corporation's facilities from a stated $52.5M⁽⁾ to $70.625M was presented to the Lending Credit Committee on 2 August 1988. The stated purpose of the facility was to release half of a $US 29.0M equity which Halwood Corporation had in a shopping mall development in Colombia, South Carolina, United States of America.

The Committee deferred a decision on the proposal pending clarification and further information from the Bank's Sydney office. The proposal came back before the Lending Credit Committee on 16 August 1988, at which time the Committee declined the proposal. The minutes of the meeting record that:

"... Members reviewed the US corporate holdings of [Halwood Corporation] closely and came to the conclusion that they were widely spread throughout the U.S.A. and that we had little knowledge as to their saleability and earning capacity. Members were further informed that the Bank is currently investigating the joint venturing of some developments within S.A. in conjunction with [Halwood Corporation] and that the approval of this exposure could jeopardise our involvement in these developments.

Members felt that due to the uncertain knowledge of the U.S. corporate market and in particular the Supermalls within the [Halwood Corporation] portfolio that we should reserve our exposure to undertake developments within this State subject to satisfactory assessment." ⁽⁾

This proposal was again brought back before the Lending Credit Committee on 13 September 1988, when the Committee was presented with a submission from the Executive Vice President, United States of America, that the proposal be reconsidered. The Lending Credit Committee again declined the proposal. The minutes of the Committee record that:

"Members considered the matters raised in the submission, however, on balance were not comfortable with the additional exposure. [Executive Vice President United States of America] to be advised of the concerns of the members regarding an increase in exposure to [Halwood Corporation]." ⁽⁾

On 6 October 1988, the Committee recommended to the Bank Board that it approve a proposal to fund to 100 per cent the development of a major office/retail complex at 75-85 Grenfell Street Adelaide⁽⁾ which later became known as the "Australis Centre". Whilst the Australis Centre project was to be funded through a wholly owned subsidiary of Halwood Corporation, known as Blanche Pty Ltd, Halwood Corporation was to remain liable for all cost, interest and fees overruns in relation to the project in excess of the limit of the facility.

On 12 October 1988⁽⁾ the Bank Board approved the facility in favour of Blanche Pty Ltd and also approved the establishment of a $12.0M contingency limit in relation to Halwood Corporation. As is noted below⁽⁾, at the time of approving the facilities in relation to the Australis Centre project, the Lending Credit Committee and the Bank Board were also on notice of a potential over-supply of office space in Adelaide's Central Business District at about the time of projected completion of that project.Members present at the meeting of the Lending Credit Committee, on 16 August 1988, when the increase in facilities of $US 14.5M was declined for the first time were Mr K S Matthews, Mr D C Masters, Mr S G Paddison, Mr G S Ottaway, Mr V R Pfeiffer, and Mr R L Wright. Members present at the meeting of the Lending Credit Committee on 13 September 1988 when the increase in facilities of $US 14.5M was declined for the second time were Mr Ottaway, Mr J B Macky, Mr Masters, Mr Pfeiffer and Mr Wright. Of these, only Mr Masters and Mr Pfeiffer were present at the meeting of the Lending Credit Committee held on 6 October 1988, when the Australis Centre facility was recommended to the Board.

Within a month, another proposal concerning Halwood Corporation came before the Lending Credit Committee, this time to approve a facility of $33.0M to enable the company to develop the "Henry Waymouth Centre" at 100 Waymouth Street Adelaide.⁽⁾ The Lending Credit Committee recommended to the Bank Board that it approve the proposal.⁽⁾

The proposal to provide a facility to fund the Henry Waymouth Centre project was submitted to the Board Sub-Committee which approved the proposal. On 24 November 1988, the Bank Board confirmed the Board Sub-Committee's decision. Once again, the Lending Credit Committee and Bank Board acted notwithstanding that they were also on notice⁽⁾ as to the potential over-supply of office space in the Central Business District at about the time of projected completion of this particular project. Both the Australis Centre project and the Henry Waymouth Centre project were expected to be constructed and completed within time-frames which would see the buildings competing against one another for tenants in the Adelaide Central Business District. In the supporting papers presented to the Lending Credit Committee (but not to the Bank Board), it was noted that, prior to any approval for finance for the Henry Waymouth Centre project, Corporate Banking division's exposure to the Adelaide Central Business District property market totalled some $234.0M representing 27.9 per cent of Corporate Banking division's total property market portfolio.⁽⁾ This information should not have been omitted from the Board Paper.

The facility offered by the Bank was to fund development costs of Stage 1 of the project, plus the purchase of land for Stage 2. Beneficial Finance was also to assist by funding the remainder of the project ($14.0M). This facility was to be non-recourse to Halwood Corporation, other than that Halwood Corporation was liable for cost, fees and interest overruns beyond the facility limits.⁽⁾ On this occasion, the Bank, with the assistance of its subsidiary Beneficial Finance, would fund 100 per cent of the project.

In a paper dated 20 December 1988, a proposal was put forward to the Lending Credit Committee as part of an annual review of the Halwood Corporation facilities. At this review, the Lending Credit Committee was to consider the continuance of Halwood Corporation's existing facilities, together with an increase of $10.0M in Short-Term Money Market lines of credit, and $40.0M in foreign exchange facilities ("Forex"). The provision of the latter two facilities was to assist Halwood Corporation in its day to day treasury operations. In addition, it was requested that existing direct facilities be converted to a "two year evergreen" basis.⁽⁾

In total, the Bank's proposed and existing exposure to Halwood Corporation, as at 20 December 1988, may be summarised as follows:

Existing Facilities		$M
Direct
Syndicated CBA/Endorsement or Letter of Credit		20.0
CBA/ Endorsement		20.0
Contigent
Standby Letter of Credit (USD 10.0M)		12.5
Blanche Pty :TD (Halwood Corporation’s Guarantee)		12.0
		64.5
Proposed Increase
Short-term Money Market		10.0
Forex		40.0
	Total	114.5

In addition, the Bank, by this time, had advanced facilities to the following Halwood Corporation subsidiaries and associated ventures:

Hinterwood (Non-recourse)		9.0
Hooker Fidelity Trust (Halwood Corporation to meet cost overruns)		9.0
Blanche Pty Limited (Halwood Corporation guaranteed cost overruns and interest cover beyond Facility limit)		73.0
Henry Waymouth Centre (Halwood Corporation to meet interest and cost overruns)		33.0
Glendale Shopping Centre Facility		10.0
Operating Lease - Corporation Motor Vehicle Fleet (approx.)		3.0⁽³⁷⁾
	Total	137.0
	Total Exposure	251.5

The proposal of 20 December 1988 summarised Halwood Corporation's financial performance as follows:

"The results of the company for 1987/88 were disappointing with a decrease in profits from $81 million in 1986/97 to $71 million in 1987/88. Hooker's loss makers were primarily new acquisitions of retail stores and domestic real estate in the USA. The company has reported taking a long-term view of the opportunities in the USA and recent significant investments are expected to provide the base for substantial profit generation in the future." ⁽⁾

In addition, the company's financial position in relation to its negative pledge covenants was reported to be as follows as at 30 September 1988:

(a)	Liability to Asset Ratio (max 70 per cent)	69.8%
(b)	Secured Liabilities (max 15 per cent of assets reducing to 12.5 per cent by 1 January 1989)	6.7%
	Minimum Equity $300.0M	$531.0M

The proposal of 20 December 1988 as presented to the Lending Credit Committee made the following general observations concerning Halwood Corporation:

"Whilst still a strong company with substantial first class assets [Halwood Corporation's] balance sheet and trading results have nevertheless deteriorated over the period to June 1988. [Halwood Corporation] acknowledges its high gearing and has already taken steps to sell certain assets in order to reduce debt." ⁽⁾

In a handwritten note, dated 28 December 1988, at the foot of the paper submitted to the Committee, Mr Masters, General Manager, Corporate Banking, wrote the following:

"I cannot support provision of STMM and Forex lines in view of company's performance. Also pricing should be 75 to 80 cents." ⁽⁾

The last line of Mr Masters' comment refers to conversations which the Bank had held with Halwood Corporation regarding the acceptance fee payable by the company on its current facilities. The Bank was of the view that Halwood Corporation represented an increased risk because of its deteriorating profit performance and increased gearing levels. The Bank accordingly sought to compensate for this increased risk by increasing the acceptance fee from its then current sixty cents.

At its meeting on 3 January 1989, the Lending Credit Committee noted the following in relation to the proposal contained in the paper dated 20 December 1988:

"Members were not uncomfortable with [Halwood Corporation] and supported the continuation of current facilities, however, it was agreed that Committee was not in a position to fully assess or understand the US operations of the company and to monitor the asset sales.

Accordingly, an increase in facilities was not agreed to. Members were informed that General Manager Corporate Banking may approve the establishment of Foreign Exchange facilities under his discretion to the level of $40m on a needs basis." ⁽⁾

This last comment, in relation to the General Manager Corporate Banking's discretion to approve foreign exchange facilities, is paradoxical. It is at odds with the Committee's decision not to approve an increase in facilities. No further explanation of this matter is found in the minutes of the Lending Credit Committee. The Lending Credit Committee did, however, note that, in view of Halwood Corporation's "reduced performance" an information paper was to be prepared for the Bank Board.

The information paper presented to the Bank Board by Mr Masters, on 26 January 1989, noted the following salient points:

". Results of the company for 1987/88 were disappointing with a decrease in profits from $81 million in 1986/87 to $71 million in 1987/88. [Halwood Corporation's] loss makers were primarily newly acquired retail stores and domestic real estate in the USA. [A repeat of wording in the original proposal.]

. Current ratio has declined, hence the request for facility 2 (Bill facility on evergreen basis) to be extended. Gearing has deteriorated following asset growth and also NCSC ruling on debt defeasance requiring the transfer of $106 million deferred profit from shareholders funds to debt.

. The company's three year plan projects Bank lines to reduce from A$1044 million at June 1988 to around A$560 million by June 1989. Profits are projected at A$95 million for 88/89." ⁽⁾

In the summary of the noting paper were the following comments:

"[Halwood Corporation] is still considered to have substantial first class assets. Steps have been taken to sell certain assets in order to reduce debt ...

The Company is confident USA assets will generate substantial future profits ... We believe that the expansion phase of [Halwood Corporation] assets has peaked and a consolidation phase is being administered." ⁽⁾

At its meeting on 26 January 1989,⁽⁾ the Bank Board "noted" the Lending Credit Committee approval to extend Halwood Corporation's facilities totalling $64.5M for a further year.

Five days later, on 31 January 1989, the Lending Credit Committee considered a proposal seeking approval for a variation to the terms and fee structure of certain existing facilities:

"Since the annual review [of Halwood Corporation's facilities] State Bank of N.S.W. on behalf of [Halwood Corporation] and as Agent for this Bank's $20 Million participation in the Syndicated Facility, has requested the Bank to convert the respective facility to a term of two year evergreen." ⁽⁾

Initially, the facility was established as a three year term due to expire on 29 September 1989. The variation was recommended "... in view of the [Lending Credit Committee's] satisfaction with the existing exposure and in consideration of increased margins." In discussion, it was noted, in approving the variation, that: "Members were satisfied with the risk and regarded a two year "evergreen" as acceptable subject to an annual review." ⁽⁾

Subsequent to this approval (but before 7 February 1989)⁽⁾, however, the variation was withheld, at the insistence of Mr Masters, and the Sydney office was advised of this at the request of Mr Masters. The reason stated for this action was "... to assess the cashflow liquidity of the Group and negative pledge covenants as to the suitability of a two year "evergreen" facility. This assessment will then be conveyed to the Lending Credit Committee in due course." ⁽⁾ In his submission to the Investigation⁽⁾, Mr Masters said that he "took this action as upon inquiry to Sydney office they could not substantiate future cash sources as assets were becoming harder to sell nor could they confirm the covenants as Halwood did not have and could not provide such information".

Any information of sufficient importance to warrant this course of action which was known at the time of the Board meeting on 26 January 1989 (when the Bank Board noted the extension of the facilities), should have been reported to the Bank Board on that occasion. No evidence made available to the Investigation tends to suggest that any information raising doubts concerning Halwood Corporation's "cash flow liquidity" was presented to the Bank Board on that occasion.

Moreover, there was no evidence made available to the Investigation to the effect that the Bank Board was, at any stage, informed about the Lending Credit Committee's re-appraisal on 31 January 1989, of the "risk" involved in the Bank's exposure to Halwood Corporation. I am of the opinion, having regard to the Lending Credit Committee's previous observations concerning Halwood Corporation's financial position, that it was incumbent on that Committee to bring to the Bank Board's attention information to the effect that Bank management had been asked to "assess" Halwood Corporation's "cash flow [sic] liquidity." Mr Masters was present at all meetings of the Lending Credit Committee at which concerns were voiced about Halwood Corporation's financial position, particularly its United States of America exposure and he should have taken steps to ensure that the concerns being voiced, over what was now a substantial period of time, about this matter, were brought to the Bank Board's attention.

In his submission to the Investigation, Mr Masters said that he could "recall expressing his concerns [about Halwood Corporation's financial position] to the Bank Board on a number of occasions." Mr Masters was, however, not specific as to the precise information conveyed to the Board on those occasions, nor as to the dates of those occasions. I do add, however, that there was no suggestion that at this stage, Mr Masters had reason to think that Halwood Corporation had committed a breach of its Negative Pledge covenants when in February 1989 he directed the withholding of the varied facility.

A proposal for the establishment of a $6.0M project finance facility in favour of Aspenair Pty Ltd, a wholly owned subsidiary of Halwood Corporation, was considered by the Lending Credit Committee on 14 February 1989. The facility was sought to assist Aspenair Pty Ltd with the acquisition and redevelopment into an "upmarket fashion retail complex" ⁽⁾of the former Demasius building and carpark in Greenhill Road, Glenside. This facility, as in the case of the facilities for Blanche Pty Ltd (the Australis Centre), and Halwood Corporation (the Henry Waymouth Centre) was provided on a stand alone basis, non-recourse to Halwood Corporation, except in relation to interest and costs overruns beyond the facility limits. The Lending Credit Committee approved this proposal.⁽⁾ In my opinion, the Lending Credit Committee erred in approving this proposal, given that Halwood Corporation's financial position was relevant to its ability to meet its guarantee for interest and cost overruns beyond the facility limits. At the time of this approval, the Lending Credit Committee had not yet received the required report on Halwood Corporation's cash flow liquidity position. Indeed, the required "assessment" was not presented to the Lending Credit Committee until 21 March 1989.

On 14 March 1989, a memorandum was sent by Mr B J Parker, Senior Manager, Corporate Banking, to Mr Masters noting the details of facilities provided to Halwood Corporation. This memorandum recorded that the Lending Credit Committee's decision of 31 January 1989 in relation to the conversion of the $20.M Syndicated facility to a two year "evergreen basis" was withheld pending the General Manager Corporate Banking's "assessment of [Halwood Corporation's] cashflow liquidity and negative pledge covenants to determine the suitability to (sic) a two year evergreen facility." This memorandum also noted that:

"Contact has been made with [Halwood Corporation] on several occasions and we await information from the company's three year strategic plan and cashflow projections."

This memorandum was considered at the Lending Credit Committee meeting of 21 March 1989, at which it was noted that no information regarding cash flow or the company's strategic plan had been received. Further, the Committee noted that Australian Ratings had downgraded Halwood Corporation's credit rating.⁽⁾

In a memorandum to the General Manager Corporate Banking (Mr Masters), dated 24 April 1989 from Mr Parker and Mr C H Andrew (each of whom attended the meeting with Halwood Corporation on 20 April 1989 to which I have previously referred) ⁽⁾, regarding Halwood Corporation's compliance with its negative pledge covenants, the authors referred to "recent adverse media reports," and observed:

"It is acknowledged that [Halwood Corporation] over the past 12 - 18 months has made significant changes to its asset structure which detrimentally affected both profitability and performance. Whilst corrective action has been taken we consider that the company is some 6 months away from providing clear evidence of a turnaround.

...

At this point we are unable to independently assess whether or not [Halwood Corporation] is outside of the negative pledge covenants as suggested in one of the media reports."

Notwithstanding all the adverse indications reported in this memorandum, the authors, Mr Parker and Mr Andrew, in a spirit of almost reckless optimism recommended the extension of the State Bank of New South Wales syndicated facility which was to expire on 29 September 1989 to 29 September 1990. The authors make the following significant observation which is indicative of their approach to Halwood Corporation:

"The recent postponement of the LCC approval for the variation [of the State Bank of New South Wales facility] highlighted the Bank's concerns with this company. It is understood that the major concerns related to the USA activity and current debt levels. Both of these factors have been addressed by the company and save any major world recession or downturn in the property market, we expect evidence of turnaround for improved profitability."

It is difficult to take seriously the assertion by the authors of this memorandum that the Lending Credit Committee's "concerns" had been "addressed" in light of the observations on the Company's financial position noted above. Indeed, on 17 May 1989, Mr Masters responded to this memorandum. It is clear from his reply that the views expressed by Mr Parker and Mr Andrew severely strained his own credulity:

"Thank you for your ... memo which has done nothing to allay my concern for this account. In fact, it confirms that [Halwood Corporation] has still not resolved to take the hard decision to actually sell assets. If he [sic] does not move soon he [sic] will be caught in a declining market with little hope of sales.

I do not share the faith that you have in [Halwood Corporation's] management and would suggest that the proposed plans for debt reduction are formulated by the crisis that exists within the Company rather than a strategic plan.

...

This account is not enjoying any positive press at this stage and is an account to which the Bank should reduce its exposure or move to a secure position. The financials as they now stand do not justify unsecured lending, particularly at the margins being offered."

Mr Masters stated that the Bank's position would be:

". We will not be extending the $20M facility beyond the present expiry date of 29th September 1989 on an unsecured basis.

. Continuance of other facilities until maturity(ies) must be within the Negative Pledge Covenants and no waiver of any breach will be granted.

. Financial accounts when produced for year end are to be analysed in depth with verification of assets and liabilities to ensure that ratios are not being manipulated to achieve the desired Covenants." ⁽⁾

In a very short space of time, the concern expressed by Mr Masters' in his memorandum of 17 May 1989 were proven to be fully justified. On 21 June 1989, Mr Parker attended the meeting, referred to in Section 12.2.1 above of Halwood Corporation's unsecured bank lenders. In a file note dated 21 June 1989 prepared by Mr Parker, the proceedings of the meeting were summarised. The key points were:

(a) The investigation headed by Mr Grellman had prepared a comprehensive report on Halwood Corporation's financial position, largely on information provided by Halwood Corporation management.

(b) A forced sale scenario of Halwood Corporation assets was not part of the report.

(c) Mr Grellman advised the Banks in attendance that Halwood Corporation's financial position was particularly weak and stressed the need for Bank support. The alternative was the appointment of a provisional liquidator.

(d) Under the proposed moratorium, the company would begin an "aggressive" asset sales program.

(e) The moratorium agreement proposed by Mr Grellman would have the following features:

(i) a task force of four or five banks would be appointed to protect the interests of Unsecured Lenders;

(ii) a financial adviser would be appointed to the company; and

(iii) existing funding lines would be maintained for at least twelve months. ( As noted in Section 12.2.1 above, the meeting was prepared to consider only a four month moratorium "pending the acceptance of a satisfactory business plan").

On 22 June 1989, a proposal was presented to the Lending Credit Committee, seeking approval for the Bank to join in the moratorium agreement. The proposal was prepared and recommended by Mr Parker, and supported by Mr Andrew, State Manager, New South Wales. The Lending Credit Committee decided that:

(a) the Bank would join the moratorium for a period of four months, at which time it would consider its position following the presentation of a final business plan;

(b) the Bank would be prepared to advance a further $10.0M in facilities, if called upon by the Committee of Lenders, on a fully secured basis; and

At the meeting of the Lending Credit Committee of 11 July 1989, the Committee was asked to ratify a previous decision of the General Manager Corporate Banking to grant an indemnity to Mitsubishi Bank Australia Ltd in relation to a payment by Halwood Corporation under a syndicated letter of credit facility. This indemnity increased the Bank's contingent liability to Halwood Corporation by a net $US 0.499M.⁽⁾ The indemnity arose out of the Bank's participation in a $US 10.0M letter of credit facility which was established as a debt defeasance transaction.

Perceiving a risk that payments made to it by Halwood Corporation might have to be repaid in the event that Halwood Corporation went into liquidation, Mitsubishi Bank sought to withdraw from the facility. This withdrawal had the potential to jeopardise the tax effective nature of the transaction. In addition to the possible taxation liability, the unwinding of the transaction would require the participants in the existing letter of credit facility to fund directly. This could have exposed them to the need to disgorge payments received by them, as being preferential payments, in the event of liquidation of Halwood Corporation. In order to retain Mitsubishi Bank's participation in the scheme, syndicate members were requested to provide an indemnity in favour of Mitsubishi Bank, against the event that any repayments received by that Bank were required to be repaid by it in the event of the liquidation of Halwood Corporation.

At this same meeting, the Committee was also asked to note the current status of the Halwood Corporation project finance facilities.⁽⁾ Corporate Banking division had undertaken a review of the current exposure to the Halwood Corporation facilities to determine:

(a) current project status;

(b) security documentation to determine default mechanisms and remedies available to the Bank should an event of default occur; and

The Committee noted the following:

(a) loan documentation for all facilities provided for standard "Events of Default" conditions;

(b) in relation to Blanche Pty Ltd ("Blanche"), Aspenair Pty Ltd ("Aspenair") and Henry Waymouth Centre facilities, Halwood Corporation had provided guarantees to meet all cost overruns beyond the facility limits;

(c) Corporate Banking recommended completion of all projects, as originally planned, as the best course of action, in order to minimise cost increases which would result from delays and to ensure that the Bank's security was in its most saleable state; and

(d) it was recommended that an external review of all loan documentation be obtained from a recognised building law legal adviser, to confirm the view of the Legal department that all securities were in order, and to determine what further legal action would be necessary or desirable to protect the Bank's interests.

At the meeting on 11 July 1989, the Lending Credit Committee was also asked to approve a secured facility in favour of Halwood Corporation in the amount of $10.0M of which $3.0M was required urgently by Halwood Corporation for working capital.⁽⁾ The Committee resolved to recommend the proposal to the Bank Board. On 12 July 1989, the Bank Board resolved to approve the $10.0M secured facility in favour of Halwood Corporation.⁽⁾

On 28 July 1989, an information paper was prepared for the Lending Credit Committee recommending the classification of the Halwood Corporation facilities as non-accrual. This action was considered necessary as Mr Grellman had, on 26 July 1989, been appointed as provisional liquidator following the collapse of the Lenders' Moratorium. The paper noted that it was not possible to determine the potential loss of the Bank at the time because the company's financial position had not been fully established by Mr Grellman.

The Lending Credit Committee further considered the status of the Halwood Corporation facilities at its meeting on 1 August 1989, and approved the classification of two of the facilities as non-accrual.⁽⁾ It was also noted, in the discussion held at the meeting that Mr S E Young and Mr J H Heard of Arthur Andersen & Co, had been appointed Joint Receivers and Managers of Blanche Pty Ltd, the developer of the Australis Centre in Grenfell Street which the Bank funded. In respect of the Australis Centre, the Lending Credit Committee was informed that the estimated cost to complete the project had been reassessed at $91.0M, compared to initial estimates of $73.0M, and that the Bank was considering various options to protect its investment. A full assessment of the project would, it was recorded, be made once all the strategy options had been examined.

On 8 August 1989, a paper was presented to the Lending Credit Committee noting the status of the property developments being undertaken and funded by the Bank at the Australis Centre (Blanche), The Boulevard, Burnside (Aspenair) and the Henry Waymouth Centre (Halwood Corporation). In summary:

(a) An approval was sought to increase the facility limit of Blanche from $73.0M to $91.5M in order to allow for the completion of the project.

(b) The Committee was requested to note the previous approval of the General Manager Corporate Banking to increase by $0.5M to $6.5M the facility in favour of Aspenair to allow The Boulevard, Burnside project to be completed. The Committee was advised that the development was almost complete, that the Bank was the anchor tenant, and that the project was 50 per cent pre-committed. Jones Lang Wootton had been instructed to proceed with the sale of the property and, if the property were not sold within the month, to put the site up for auction.

With respect to the Henry Waymouth Centre, members were advised that Beneficial had appointed Mr R England, of Ernst and Young, as Receiver under the Charge over the Building Contract, and had entered the property as mortgagee in possession. The project was 70 per cent pre-let and Stage 1 of the project was due to be completed in October 1989. Stage 2 was unlikely to be commenced at this time.

The Committee noted all the above and "was comfortable" with the Bank's security arrangements. The Committee requested further investigation into the alternatives available to the Bank in respect of the Australis Centre.⁽⁾

The Bank Board considered a report on the current situation concerning Halwood Corporation on 21 August 1989. This report informed the Board of the appointment of a provisional liquidator to Halwood Corporation, of the non-accrual status of three of the facilities extended by the Bank to Halwood Corporation, of the appointment of a receiver and manager to Blanche Pty Ltd (Australis Centre), and of the appointment of a receiver and manager to the Henry Waymouth Centre by Beneficial Finance. It was noted that "the true financial position of [Halwood Corporation] and its subsidiaries is yet unknown." What was known, however, was that two of Halwood Corporation's wholly owned retailing subsidiaries in the United States had filed for bankruptcy protection under Chapter 11 of the United States Bankruptcy Laws, and that Mr Harkness had been appointed provisional liquidator to Halwood Corporation and fifteen of its Australian subsidiary companies.

This report contained a recommendation that, so far as concerned the Australis Centre, the Bank should increase its limits from $73.0M to $91.5M in order to complete the project. This recommendation was duly approved by the Bank Board.⁽⁾

On 22 August 1989, a paper recommending the classification of the Societe Generale Letter of Credit facility as non-accrual was presented to the Lending Credit Committee. The limit under this facility was $11.6M. The paper noted that this facility, which was to be converted to a foreign currency advance, would be fully drawn down on 14 August 1989. This paper also dealt with a related exposure to the Hooker Fidelity Trust under a $9.0M facility (drawn to $3.9M) for the development of the Castlereagh Street, Sydney property referred to above. The facility was a syndicated facility.The paper noted that the syndicate agent had issued a notice of demand on Halwood Corporation for repayment of the total debt, then approximately $8.5M. Halwood Corporation had one month to repay the debt, failing which the syndicate could take over the property as mortgagee in possession. The Lending Credit Committee approved the recommendation to classify the facility in respect of the Castlereagh Street property as non-accrual.⁽⁾

A further interim report on the Halwood Corporation facilities was submitted to the Bank Board on 23 October 1989 for noting. The salient points of the paper were as follows:

(a) Direct Recourse Facilities (Halwood Corporation): Provisional Liquidator, Mr Harkness, had been granted court approval to extend the provisional liquidation of Australian assets to 5 December 1989. This extension allowed the Hong Kong based Richfield International Investments Group ("Richfield International Investments") the opportunity to assess whether it would make an offer for the Halwood Corporation assets. Richfield International Investments' investigation was due for completion by 30 November 1989.

(b) Non-Recourse, Blanche Pty Ltd: tenders had been called from 8 construction companies to submit proposals for the completion of the Australis Centre on a "fixed price design and construction basis". Final decision as to contractor would be made by 26 October 1989.

(c) Non-Recourse, Aspenair Pty Ltd: refurbishment of the property had been completed. The property was currently for sale by tender, with tenders closing on 30 November 1989. The Receiver and Manager had advised that the projected proceeds of sale should be sufficient to repay the Bank's debt in full.

(d) Non-Recourse, Henry Waymouth Centre: Jones Lang Wootton and L J Hooker had been appointed joint leasing and selling agents of the building. It was considered that proceeds from the sale of the building would be sufficient to repay the Bank's debt in full.

(e) Non-Recourse, Hooker Fidelity Trust: an insurance company had submitted an offer to purchase the existing site for $13.0M. The offer had been accepted, and the facility would accordingly be repaid in full.

On 8 December 1989, the Lending Credit Committee agreed to raise a provision of $5.7M in respect of the Halwood Corporation exposure.⁽⁾ On 14 December 1989, Societe Generale advised the Bank that the appointment of a provisional liquidator to Halwood Corporation effectively terminated the syndicated arrangement and its role as agent. Accordingly, each bank which was a member of the syndicate became individually responsible for lodgment of claims in respect of outstanding principal and costs.

(d) 1990

On 9 May 1990, the Lending Credit Committee agreed to raise a further provision of $8.0M, increasing the provision to a total of $13.7M.⁽⁾ On 19 July 1990, the Lending Credit Committee considered a paper seeking a further increase of $12.8M in the provision for Bad and Doubtful Debts in relation to Halwood Corporation. This recommendation followed a report, on 2 July 1990, by the provisional liquidator which indicated that the prospects for recovery by the negative pledge bankers had deteriorated significantly. The paper to the Lending Credit Committee noted that, if a scheme of arrangement were not entered into in relation to Halwood Corporation, the negative pledge banks in Australia would receive only 18.4 cents in the dollar, whereas, under a scheme of arrangement there were prospects of a return of 30.6 cents in the dollar. The proposed provision against the direct Halwood Corporation exposure, if approved, would be increased to $26.5M or 50 per cent of the principal then outstanding ($53.0M).

In the event, the Lending Credit Committee, at its meeting of 27 July 1990, approved an additional provision of $9.3M, increasing the total provision to $23.0M. The Investigation identified no explanation for the Lending Credit Committee's decision not to increase the provision by the amount recommended ($12.8 M). Nor is it apparent why provisioning of 43.3 cents in the dollar was made when, according to the paper before the Committee, the projected best case scenario (Scheme of Agreement) would have required provisioning of 69.4 cents in the dollar.⁽⁾

On 3 August 1990, a memorandum was sent from L K Hall, Chief Manager, Finance, to the Controller, Corporate Credit, advising him of the provision approved by the Lending Credit Committee and of Bad Debt write-offs as at 30 June 1990. In the case of Halwood Corporation, the General Ledger Provision for Doubtful Debts raised was $22.7M⁽⁾, with $5.7M written off as a bad debt. Accordingly, as at 1 July 1990, the General Ledger Provision for Doubtful Debt in respect of Halwood Corporation was $17.0M.⁽⁾

A proposal was submitted to Mr Masters, on 21 August 1990, by Mr S J Turner, Manager Corporate Banking (supported by Mr Andrew, State Manager, New South Wales) seeking approval in principle to the Bank becoming a party to the scheme of arrangement proposed by the Provisional Liquidator, Mr Harkness. The scheme of arrangement was to run for a minimum term of two years and a maximum of five years. Formal documentation was to be completed during October 1990 prior to submission to the courts for formal approval. This request was approved by Mr Masters on the day upon which it was received. The recorded reason for approval was:

"We [the Bank] don't really have any other avenue which would improve our position over this timeframe." ⁽⁾

Shortly afterwards, a further memorandum was sent to Mr Masters, responding to comments made by the Chief General Manager, Australian Banking, concerning the impact, on the Bank's provisioning, of the decision in principle to enter the Scheme of Arrangement. In summary, the memorandum stated that:

(a) the latest information available indicated that the Scheme of Arrangement would return in the vicinity of 45 cents in the dollar (future value);

(b) provisioning by the Bank to date equated to a return of 56.6 cents in the dollar; and

(c) "The current provisioning for the Halwood Corporation facilities may therefore be marginally insufficient in the medium term, however, it may be several years before a clearer picture crystallizes [sic]." ⁽⁾

Mr Masters noted the above comments, and suggested that the provision be reviewed "prior to close of December 1990 accounts ... based upon hopefully more accurate detail as to the total picture." ⁽⁾

On 7 December 1990, the Lending Credit Committee was advised by the State Manager, New South Wales, that estimates from the provisional liquidator indicated a return of approximately 40 cents in the dollar. Based on this report, the Committee approved an increase in the specific provision of $9.0M, to a total of $26.3M. This represented a 60 cents in the dollar provisioning.

(e) 1991

A proposal was presented to the Lending Credit Committee, on 24 January 1991, seeking approval for the Bank formally to enter the Australian Scheme of Arrangement ("the Scheme"). The Committee approved the Bank's participation in the Scheme subject to:

(i) the provision of a schedule of projected and past asset sales including details relating to the disbursement of the proceeds by the provisional liquidator;

(ii) confirmation as to whether the assessments and forecasts provided to the Bank fully considered all possible contingent liabilities; and

(iii) the recommendation of Corporate Credit in Sydney as to revised provisioning (if necessary) and specific bad debt write-off following acceptance of the Scheme by all creditors.⁽⁾

On 20 February 1991, the Bank's valuer, Mr G Goodyear, prepared a valuation report on the Australis Centre. Mr Goodyear assessed the fair market value of the project at $54.0M. A few days later, on 25 February 1991, the Blanche facility was classified as non-accrual.

On 21 March 1991, the Lending Credit Committee approved a further increase in specific provisions in relation to Halwood Corporation, of $13.7M, to a total of $40.0M. Further, provisions were raised of $37.0M against the Blanche facility, and of $1.5M against Aspenair.

On 28 March 1991, the decision was made to scale down the role of the Receiver/Manager of Aspenair. While retaining the Receiver, the Bank strengthened its position by becoming mortgagee in possession.

12.3 CHRONOLOGY

Appendix C of this Section of this Chapter contains a summary of movements in the facility and, where applicable, details of amendments to financial covenants and security.

Appendix D of this Section of this Chapter sets out a detailed chronology of events in respect of the facility.

12.4 COMPLIANCE WITH POLICIES AND PROCEDURES

The following Section of this Chapter analyses the various movements in the Halwood Corporation facilities. In particular, issues regarding prudential lending practices are examined.

Chapter 8 - "Credit and its Management: Guidelines, Policies, Processes, Procedures and Organisational Delivery Mechanisms" of this Report provides details of the lending policies and procedures which should have been followed by the Bank at each stage of the loan cycle. The following Section identifies and comments upon departures from the policies and procedures that should have been followed at each stage of the loan cycle. Other departures from the Bank's policies and procedures were noted by the Investigation, but were of a minor nature, not warranting mention in this Report.

12.4.1 MAY 1986 PROPOSAL - INITIATION OF FACILITY

(a) Background

In May 1986, the Bank was approached by the State Bank of New South Wales, which had been retained by Halwood Corporation to arrange a syndicated facility of between $75.0M and $125.0M.

According to the proposal prepared, on 12 May 1986, for the Lending Credit Committee, other banks approached by the State Bank of New South Wales were the Rural and Industries Bank of Western Australia, and the State Bank of Victoria. The State Bank of New South Wales reserved the right to syndicate the facility with other banks that were acceptable to Halwood Corporation. Each participant's share of the facility was estimated to be approximately $20.0M.

The purpose of the facility was to provide additional funding for Halwood Corporation's property development and investment interests, as well as general working capital. The term of the facility was three years, with the company having the choice of either:

(i) Bank bill acceptance/endorsement; or

(ii) Letters of credit to support fixed interest and/or other capital market transactions.

Security was to be in the form of first charge Debenture Stock, but the proposal stated Halwood Corporation's intention, within six to twelve months, to convert existing Debenture-secured borrowings to unsecured borrowings, with a negative pledge cover, subject to appropriate terms and conditions.

From the Bank's files, the financial information on which the proposal based its recommendations comprised:

(i) extracts from Halwood Corporation's annual report for the year ended 30 June 1985;

(ii) extracts from the Part B Directors' response to a takeover offer by Mr Lee Ming Tee dated January 1985; and

(iii) unaudited extracts from the company's financial accounts, as at 31 December 1985. No source of these accounts was identified.⁽⁾

With respect to servicing capacity and repayment, it was stated that the facilities were to be serviced from the company's "internally generated cashflow", with repayment to be provided by "retained earnings, sale of investment assets and/or other assets", which were not specified.

Additional "support" for the proposal was put forward in the following extract relating to Halwood Corporation's own forecast of future profits:

"In the Part B Statement by [Halwood Corporation] with respect to the initial Lee Ming Tee takeover offer in January, 1985, Directors provided future profit forecasts as follows:

	1984/85	1985/86	1986/87
Profit after Tax (AUD million)	30.0	38.0	43.0

The actual result for 1984/85 was AUD 34.8 million, 16 pct. above the net profit estimate.

[Halwood Corporation] subsequently issued revised forecasts when responding to Mr Herscu's revised (and successful) offer in late 1985 as follows:

	1985/86	1986/87
Profit after tax (AUD million)	50.0	54.0

The 1985/86 interim result has recently been announced with a net profit of AUD 26.08 million, putting [Halwood Corporation] on track for the estimated AUD 50 million net profit for 1985/86. The interim result is believed to have only included a portion of the AUD 24 million profit from the sale of [Halwood Corporation's] share of the Gateway project which will be brought to account as the cash is received."

The changes in the Board of Directors of Halwood Corporation, which occurred with the entry of Mr Herscu with effect from January 1986, were referred to in the proposal. It was noted that "most new members are said to be associates of Mr Herscu".

The proposal was considered and recommended by the Lending Credit Committee on 15 May 1986, and was approved by the Board Sub-Committee on 16 May 1986. In approving the facility, the Board Sub-Committee limited the Bank's exposure in the facility to $20.0M. The Board confirmed the granting of the facility on 22 May 1986.⁽⁾

The following items of information were found in the Lending Credit Committee paper, but were omitted from the Bank Board Paper:

(i) the identity of other syndicate members was not stated;

(ii) break-down of ratio of total secured liabilities to total tangible assets was not included;

(iii) break-down of ratio of external liabilities to total tangible assets was not included;

(iv) break-down of trading stock under non-current and current assets was not included;

(v) the financial commentary did not include the last paragraph of the financial commentary submitted to the Lending Credit Committee as extracted above; and

(vi) a general commentary on the activities of the company was not included.

(b) Deficiencies in the Loan Proposal

I am of the opinion that the loan proposal to the Lending Credit Committee was unsafe and lacked merit in the following respects:

(i) The financial information relied upon to assess the ability of Halwood Corporation to repay the facility was predominantly based upon an assessment of its balance sheet and assumptions (without evidence) as to the continuing value of those assets in the balance sheet over the life of the facility. The proposal did not include a future cash flow analysis. In addition, the inclusion of references to profit forecasts contained in Part B Statements in relation to previous take-over offers was unacceptable. The repayment ability of Halwood Corporation was particularly important, as the Bank was acting through an agent in the conduct of the facility, and thus could not take action unilaterally in case of need.

(ii) The supporting profit forecasts were, in one case, sixteen months old, and in the second, over six months old. They were made in circumstances of a then current take-over, and not for the use of a proposed lender.

(iii) The reliance in the proposal on the security being offered by Halwood Corporation (ie First Charge Debenture Stock) was misconceived, given the indication that it was Halwood Corporation's "advised intention to (within six to twelve months) to seek approval to convert" debenture-secured borrowings to unsecured borrowings with Negative Pledge cover. This indication reinforced the importance of obtaining full details of future cash flows of Halwood Corporation.

(iv) The proposal failed to direct attention to the implications of the change in control of the company, and the change in the composition of the Board. A full consideration of this issue was required, given the intimation of a change in the basis of the borrowing from secured to unsecured, and given that the Bank, as a participant in a syndicate, could not act unilaterally should it happen that strategic and operational decisions by the Board of Halwood Corporation were assessed by the Bank as being detrimental to the company's position, or as otherwise exposing the Bank to risk of loss in respect of the facility.

(v) Whilst the proposal referred to invitations to the Rural and Industries Bank of Western Australia and State Bank of Victoria to participate in the facility, it was noted that State Bank of New South Wales reserved the right to further syndicate the facility with parties acceptable to Halwood Corporation.

(vi) Whilst the proposal foreshadowed the conversion of the facility from a secured to an unsecured basis, the proposal did not recommend (and the Lending Credit Committee did not require) terms and conditions of commitment to the facility which would have enabled the Bank to remain on a secured basis or to withdraw from the facility without loss if the proposed conditions of the conversion to unsecured status were not acceptable to the Bank. Again, this is important where the Bank is part of a syndicate and thus not in a position individually to negotiate the terms of such an arrangement unless this is specifically provided for.

(c) Lending Credit Committee

On 15 May 1986, the Lending Credit Committee considered and recommended, for Board approval, the Bank's participation in a syndicate being arranged by the State Bank of New South Wales.⁽⁾ Members present at the meeting were Mr T M Clark, Mr Masters, Mr J T Hazel, Mr Macky, and Mr Ottaway.

In its consideration of the proposal, the Committee:

"... recognised the standing of Mr George Herscu whose Company GSH Investments has a 44% shareholding in [Halwood Corporation]. Committee noted that Mr Herscu is a very wealthy man with an impeccable reputation in the business community."

It is reasonable to infer from this comment that the involvement of Mr Herscu in the affairs of Halwood Corporation was of some significance to the Lending Credit Committee. There was, however, no information in the Lending Credit Committee paper as to the financial standing of either Mr Herscu, or his company. The minutes of the Lending Credit Committee also record its acknowledgment of the proposal to convert the facility from a secured to an unsecured basis. No directions, however, were given by the Committee to address the issues noted in (b) above in relation to the Bank's position as a syndicate member if such a matter was put to the syndicate by Halwood Corporation. Given the pronounced lack of merit in the lending proposal, the Lending Credit Committee should not have recommended the proposal to the Board.

I have formed this view notwithstanding the involvement in the syndicate of the State Bank of New South Wales, from which, no doubt, the Lending Credit Committee derived comfort.⁽⁾

(d) Board Sub-Committee and the Bank Board

The Board Sub-Committee approved the granting of the $20.0M facility to Halwood Corporation on 16 May 1986. Those present at the meeting were Mr L Barrett, Mr D W Simmons, and Mr Clark.⁽⁾

The Board Sub-Committee decision was confirmed by the Bank Board on 22 May 1986. Present were Mr Barrett, Mr K J Hancock, Mr R P Searcy, Mr Simmons, Hon Donald W Simmons, Mr K Smith, and Mr Clark.⁽⁾

With the exception of the matters noted above as having been omitted from the Bank Board Paper, that paper contained the same information as presented to the Lending Credit Committee. Given the clear lack of merit in the proposed transaction, the Sub-Committee should not have approved the proposal, and the Board should not have confirmed that approval.

12.4.2 MAY 1987 PROPOSAL

(a) Background

In May 1987, the Victorian office of the Bank was approached by Societe Generale Australia Limited ("Societe Generale") to participate to the extent of $US 10.0M (equivalent to $A 14.5M) in a $US 110.0M syndicated stand-by Letter of Credit facility in favour of Halwood Corporation being lead-managed by Societe Generale. The facility was established as a debt defeasance facility, which was to amortise over a ten year period. Other members of the syndicate were not known at the time of the proposal, but when it was finally organised were found to be:

(i) State Bank of New South Wales;

(ii) Westpac Banking Corporation Limited;

(iii) Societe Generale;

(iv) NZI International Acceptance Limited;

(v) Scandinavian Pacific Limited; and

(vi) The R&I Bank.

Support for the facility was to be by way of Negative Pledge covenants by the borrower, with the major covenants being:

(i) Ratio of consolidated liabilities to shareholders' funds not to exceed 70:30.

(ii) Minimum shareholders' funds to be $300.0M.

(iii) Prior encumbrances not to exceed 15 per cent of total assets. From 1 January 1989, this ratio was to reduce to 12.5 per cent.⁽⁾

The proposal was considered by the Lending Credit Committee on 5 May 1987. In the discussion on the facility, members of the Lending Credit Committee noted that:

"... all facilities are to be changed to an unsecured/Negative Pledge basis ...

... the Negative Pledge covenants require the gearing ratio not to exceed 70:30, such ratio being higher than that normally accepted. However, members of the Committee were satisfied with the performance of the company and accordingly felt that the approval should be conditional on the Bank's acceptance of the final negotiated Negative Pledge covenants.

The bulk of the company's assets comprise investments in property and that the letter of credit exposure will be amortised every six months and repaid in full in 10 years.

It would be in the Bank's best interest to participate on a fully disclosed basis to Hooker Corporation, in order to enhance our relationship with the company." ⁽⁾

The proposal was recommended to the Board Sub-Committee by the Lending Credit Committee subject to:

(i) final negative pledge covenants being acceptable to the Chief Manager, Corporate Banking; and

(ii) disclosure of the Bank's participation in the syndicate to Halwood Corporation.

(b) Deficiencies in the Loan Proposal

I am of the opinion that the facility proposed to the Lending Credit Committee plainly lacked merit for the following reasons in combination:

(i) The lending was to be unsecured.

(ii) The purpose of the facility was to facilitate a debt defeasance of Halwood Corporation's secured borrowings by means of debentures. The major benefit of a defeasance transaction relies on obtaining tax effective financing for the borrower. As such, the ultimate success of the transaction is dependent on acceptance by the Australian Taxation Office for its cost effectiveness. Taxation consequences of the transaction, however, were not considered in the proposal.

(iii) In particular, the possibility that the Australian Taxation Office or another regulatory authority (such as the National Companies and Securities Commission), might not acquiesce to the company's accounting and tax treatment of the transaction was not addressed⁽⁾.

(iv) The information on which the financial condition of Halwood Corporation was assessed did not include any projections of future profits or cash flow to enable the Bank to assess Halwood Corporation's capacity to service the syndicated facility, which was to be $US 110.0M. The proposal implicitly assumed continuing value of assets in the balance sheet. Cash flows and profit projections were required to be included in proposals to the Lending Credit Committee. This requirement was made clear in a memorandum, on 9 October 1986, from Mr Masters to senior managers, corporate managers, corporate officers, and analysts on the topic of preparation of Lending Credit Committee and Bank Board Papers. The subject proposal to the Lending Credit Committee was, therefore, in breach of Mr Masters' direction. The gravity of this omission is magnified by the fact that ( as recognised by the Lending Credit Committee) the gearing ratio under the proposed Negative Pledge Covenants was "higher than that normally accepted." ⁽⁾

In 1986, Halwood Corporation was primarily a property development and investment company. As such, it would, when seeking to repay monies borrowed, look not merely to its retained profits, or to its anticipated profits, but also to proceeds of sales of real estate, improved and unimproved, whether bought on revenue account or capital account. It would also look to refinancing by way of borrowing from other sources. As Halwood Corporation was a company which had borrowed substantial funds from the public through debenture raisings, and as those debentures imposed ceilings on the sums which the Corporation was able to borrow, one matter relevant to a loan to Halwood Corporation was its ability to borrow further funds without breaching the covenants in the applicable debenture trust deeds. The Investigation received evidence that Bank officers did scrutinise the relevant debenture trust deeds to ensure that Halwood Corporation did have an ability to borrow, as part and parcel of preparation of lending submissions from time to time.⁽⁾ In addition, the Investigation received evidence that the Bank at least in 1987 was generally ill-equipped (when the Bank was dealing under negative pledge arrangements with a company such as Halwood Corporation which had many subsidiaries all contributing to group cashflow) to carry out a worthwhile sensitivity analysis. It was, therefore, submitted to the Investigation that the more pertinent inquiry - and that which was made by Bank officers - was as to historical trading results, as to the trend of those results and as to whether those results justified the particular lending submission.⁽⁾

I accept that, in the case of a real estate developer and real estate trader such as Halwood Corporation was, there were reasons for a departure from the direction of Mr Masters to which I have referred. In particular, in the mid 1980's, real estate assets of the kind traded by Halwood Corporation were able to be sold at ever-increasing prices. This led the Bank, along with other banks, to engage in asset-based lending rather than cash flow lending. I accept that, in the case of corporations like Halwood Corporation, their continuing transactions of purchase and sale of real estate would make it difficult to pinpoint, with any certainty, which sales were on revenue account and which sales were on capital account. Accordingly, the Bank, along with other banks, relied on the perceived strength of Halwood Corporation's asset surplus in approving facilities to Halwood Corporation, rather than on cash flow analysis.⁽⁾ I have taken these matters into account in formulating the conclusions which appear in this Chapter of the Report.

(v) No details were given as to the action to be taken in the event of default or of disagreements between syndicate members, nor were periodical reporting requirements set out.

(c) Lending Credit Committee

The proposal was recommended to the Board Sub-Committee by the Lending Credit Committee on 5 May 1987. Members present were Mr K S Matthews, Mr Ottaway, Mr Paddison, Mr Masters, Mr T L Mallett, and Mr Pfeiffer.

The Lending Credit Committee's recommendation was subject to:

(i) the final Negative Pledge Covenants being acceptable to Mr Masters; and

(ii) disclosure of the Bank's participation in the syndicate to Halwood Corporation.

Having regard to Mr Masters' memorandum of 9 October 1986, which emphasised the need to support loan proposals with cash flow and profit projection information, his failure to call the Committee's attention to this deficiency in the subject proposal is particularly disturbing.

At the same meeting, the Lending Credit Committee approved a facility in favour of a joint venture between Halwood Corporation and another company in relation to a construction project. The facility involved a $10.0M exposure by the Bank which was non-recourse to each of the joint venturers other than by way of letter of comfort for prudential purposes. Exposure to each joint venturer was recorded at $5.0M.

Given what I consider to be a plain lack of merit in the proposed loan, the Lending Credit Committee should not have recommended it to the Board.

(d) Board Sub-Committee and the Bank Board

The Board Sub-Committee approved the granting of the $14.5M ($US 10.0M) facility to Halwood Corporation on 6 May 1987. Those present at the meeting were Mr A G Summers, and Mr Clark, assisted by Mr Ottaway.⁽⁾

The Board Sub-Committee action was confirmed by the Bank Board on 28 May 1987. Present were Mr Barrett, Mrs M V Byrne, Mr R P Searcy, Mr Simmons, Mr W F Nankivell, Mr Summers, and Mr Clark.⁽⁾

The Board Paper seeking Board's confirmation included most of the information provided to the Lending Credit Committee as to the repayment ability of Halwood Corporation, albeit that this information was limited to statements of revenue, net profit before tax and net profit after tax for the years ended 30 June 1984, 1985, and 1986, and for the six months ended 31 December 1986. Information was also included, in respect of the years ended 30 June 1984, 1985, and 1986, in relation to shareholders funds, current liabilities, total liabilities, current assets, and total assets. Information included in the proposal presented to the Lending Credit Committee, which was omitted in the Bank Board Paper was information for the same periods in relation to gearing, interest cover and current ratio.

The Bank Board Paper did not substantiate the future ability of Halwood Corporation to repay the facility and was deficient in the respects indicated above. This is particularly concerning given that the facility was to be unsecured under a Negative Pledge arrangement. Given the deficiencies to which I have referred, the Sub-Committee should not have approved the proposal, and the Board should not have confirmed the approval.

12.4.3 SEPTEMBER 1987 PROPOSAL

(a) Background

On 22 September 1987, a proposal was submitted to the Lending Credit Committee to provide a further $20.0M in the form of a direct (ie non-syndicated) Bill Acceptance/Endorsement facility in favour of Halwood Corporation, thus increasing the Bank's exposure to $54.5M. The facility was to satisfy Halwood Corporation's general working capital requirements, and was to be supported by Halwood Corporation's global Negative Pledge arrangement. The proposal noted that the company's Australian Stock Exchange Release indicated that, as at 30 June 1987, the Negative Pledge had been complied with comfortably. A copy of the Stock Exchange release was not appended to the proposal, nor was there included in the proposal any calculation of the compliance by Halwood Corporation with the Negative Pledge ratios.

The proposal did not contain any detailed cash flow or profitability forecasts. The following table was, however, submitted as supporting evidence of Halwood Corporation's ability to repay:

Year Ended 30 June	1985	1986	1987* (Interim)
	$M	$M	$M
Revenue	608.7	618.5	847.7
Net Profit (B/Tax)	45.6	65.2	85.6
Net Profit (A/Tax)	34.8	54.3	75.7
Net Profit & Extraordinaries (B/Tax)	N/A	N/A	79.7

	1985	1986	1987* (Interim)
Year Ended 30 June	$M	$M	$M
Shareholders’ Funds	185.6	262.0	520.0
Current Liabilities	151.8	215.2	146.0
Total Liabilities	370.5	516.0	502.0
Current Assets	362.6	568.8	892.0
Total Assets	556.1	778.0	1,022.0
Gearing (times)	1.99	1.96	0.70
Interest Cover (times)	2.39	2.42	2.37
Liquidity (times)	2.38	2.64	6.11

* Unaudited, based on figures released to the Australian Associated Stock Exchange. Annual report not available before November 1987.⁽⁾

The proposal contained the following comments:

"The significant geographic and product diversification undertaken by [Halwood Corporation] in the past 18 months has seen a further strengthening of its balance sheet and increasing profitability.

[Halwood Corporation's] thrust into the U.S. through housing, retail stores and project activities is continuing and concentrating on areas of existing expertise." ⁽⁾

In addition, historical information concerning Halwood Corporation was included in an "Operating Commentary" annexed to the proposal. In this annexure, the "prospects" for Halwood Corporation were commented upon in the following way:

"[Halwood Corporation's] Directors are confident that "the strong performance of recent years will not only be maintained but be substantially improved upon".

Diversification appears well planned and will continue into the non-real estate area. Notwithstanding this, [Halwood Corporation's] core of project development in both Australia and the USA represents 117 projects totalling $3.7billion in sales value on completion."

Management's failure in this proposal to present substantiation of Halwood Corporation's ability to repay existing and proposed facilities, and the general optimistic tenor of its statements concerning this matter, reinforces the inference noted above that Management was more concerned to cement a relationship with Halwood Corporation than it was rigorously to consider prudential aspects of the risk profiles inherent in that relationship.

The proposal considered by the Lending Credit Committee (and by the Board in its "Round Robin" approval and its later confirmation of that approval) noted the following:

"The current proposal represent (sic) an opportunity to consolidate our relationship with [Halwood Corporation] on a direct basis rather than through syndication."

The perception, on the part of Management, that a close relationship with Halwood Corporation was desirable, is also reflected in a memorandum, dated 15 June 1987, from Mr Kloot (who prepared the May 1986 proposal to the Lending Credit Committee, and recommended the May 1987 proposal to the Lending Credit Committee) to Mr C Taylor (no position designated). In this memorandum, Mr Kloot notes, in relation to the attendance by Mr K S Matthews (Chief General Manager), at the opening ceremony of the Halwood Corporation headquarters in Adelaide on 11 June 1987:

"I have already discussed with him [ie Mr K S Matthews] the possibility of getting involved in their [Halwood Corporation] S.A. operations notwithstanding the Lending Credit Committee's view of our prudential limit.

Mr Matthews is quite agreeable and mentioned that he would obtain from Mr Bob Bakewell [a director of the Bank], who is also an adviser to [Halwood Corporation] on Government relations, the name of their South Australian Chief Executive whom I should contact. We would approach them for their funding requirements in South Australia if the Sydney approach is not fruitful." [Emphasis Added]

(b) Deficiencies in the Loan Proposal

I am of the opinion that the transaction proposed to the Lending Credit Committee was unsafe and lacked merit for the following reasons in combination:

(i) The information on which the financial condition of Halwood Corporation was assessed did not include any projections of profits or future cash flow analysis essential to enable the Bank to assess Halwood Corporation's capacity to service the facility. The assessment of Halwood Corporation's ability to repay the facility was predominantly based upon an assessment of its balance sheet and past performance, and implicitly assumed a continuation of value of assets in the balance sheet over the life of the facility. As noted in Section 12.4.2 above, cashflows and profit projections were required to be included in proposals to the Lending Credit Committee in accordance with Mr Masters' memorandum of 9 October 1986.

(ii) There was no explanation for the substantial increase in revenue and profits as well as the 30 per cent increase in total assets, at the same time as a reduction in total liabilities.

(c) Lending Credit Committee

The proposal was recommended to the Bank Board for approval by the Lending Credit Committee, on 22 September 1987. Members present were Mr K S Matthews, Mr Ottaway, Mr Masters, Mr Mallett, and Mr Pfeiffer.⁽⁾

The Lending Credit Committee's deliberations on the proposal are recorded in the minutes of that Committee as follows:

"Members noted the significant geographic and product diversification undertaken by [Halwood Corporation] in the past 18 months, its increasing profitability and the strengthening of its balance sheet."

(d) Bank Board

On the basis that there was a "need to respond [to Halwood Corporation] as early as possible"⁽⁾, on 25 September 1987, the Directors of the Bank were circulated with the proposal based on that submitted to the Lending Credit Committee, and requested to telephone Mr Masters, by 28 September 1987, with their individual decisions. No reason was provided in the memorandum to Directors for the supposed urgency for a response to the company. A letter of offer was forwarded to the customer on 8 October 1987.

The directors who responded were Mr Barrett, Mr Simmons, Mr Bakewell, Mrs Byrne, Mr Nankivell, and Mr Summers. These were named in a Board Paper entitled "Proposal for Confirmation", dated 6 October 1987,⁽⁾ recommending that the Bank Board confirm the "Round Robin" approval of 28 September 1987 for an increase in facilities from $34.50M to $54.50M.⁽⁾

The information formally provided to the Bank Board, at its meeting on 22 October 1987, was the same as that presented to the Directors for the purposes of the "Round Robin" approval. The information contained in each of the papers presented to the Bank Board contained essentially the same information as that presented to the Lending Credit Committee, save that the historical "Operating Commentary" was not annexed, and that financial information was a slightly abridged version of that presented to the Lending Credit Committee. The financial information presented to the Bank Board did not include the details concerning shareholders' funds, current assets, gearing, interest and liquidity, which had been presented to the Lending Credit Committee. The papers presented to the Bank Board on each occasion suffered from the same deficiencies as those identified above in relation to the Lending Credit Committee paper. Once again,the future ability of Halwood Corporation to repay the facility was not addressed in the proposal. The Bank Board should have been alerted to the need to call on Management to substantiate the Company's ability to repay. Subsequently, at the Board meeting, on 22 October 1987, the "Round Robin" approval was confirmed. Members of the Board at that meeting were Mr Barrett (Chairman), Mr Bakewell, Mrs Byrne, Mr R E Hartley, Mr Nankivell, Mr Searcy, Mr Summers, and Mr Clark.⁽⁾ In my opinion, the Board members should have declined this proposal, which was unmeritorous and unsafe.

In all the circumstances of this proposal, the inference is justified that Management's recommendations were being driven, more by considerations of "relationship building", than by prudential lending factors. Support for this inference is found in the Bank's attitude to pricing the facility. In a letter, dated 8 October 1987, addressed to the Assistant General Manager, Finance, of Halwood Corporation, from Mr Andrew, the State Manager (New South Wales and Queensland) Corporate Banking - the "Letter of Offer" to Halwood Corporation - stipulated an acceptance fee of 0.65 per cent per annum, an endorsement fee of 0.55 per cent per annum, and an unused commitment fee of 0.25 per cent per annum in relation to the increased facility. This pricing was based upon the determination of the Lending Credit Committee, on 22 September 1987, that pricing for the facility be increased to these levels from the previous acceptance fee of 0.60 per cent per annum, and endorsement fee of 0.50 per cent per annum.

This pricing was not acceptable to Halwood Corporation. It rejected the offer. On 16 October 1987, a further letter of offer was forwarded to Halwood Corporation with pricing adjusted back to an acceptance fee of 0.60 per cent per annum, and an endorsement fee of 0.50 per cent per annum, with the unused commitment fee remaining at 0.25 per cent per annum. Whilst it is apparent that the Lending Credit Committee directed an increase in pricing to reflect the risk in the substantially increased facility, having regard to the available evidence, I am satisfied that the Bank was more concerned to "do the deal" with Halwood Corporation than to take a position prudentially based upon reasoned risk/return considerations. It is not clear that the reduced pricing was approved by the Board or the Lending Credit Committee. Somewhat ironically, at the Board meeting on 22 October 1987, at which the round robin approval was confirmed, the Board received a report (87/307) indicating that the interest margin as at 30 September 1987 was "again substantially below budget".

12.4.4 JUNE 1988 PROPOSAL

On 28 June 1988, the Lending Credit Committee considered an application to participate in a $19.0M syndicated facility relating to a unit trust to be formed by Hooker Property Funds Management Limited. The lending proposal could not be located in the Bank's files. Hambros Australia Limited ("Hambros Australia") had underwritten the total facility, but sought to reduce its exposure to $5.0M. Sao Paulo Bank, Singapore, had committed to a $5.0M participation, with the Bank being requested to provide the remaining $9.0M.

The proposed unit trust was to be formed by Hooker Property Funds Management Limited as part of an arrangement intended to return the full original investment of the unit holders in five existing unit trusts that were "suffering investment losses".⁽⁾ Under the scheme "Hooker Projects", a division of Halwood Corporation, would on behalf of the new trust, develop a property at 60-62 Castlereagh Street, Sydney, in Sydney's Central Business District. Halwood Corporation would not participate in any profits generated from the development. The transaction was to be non-recourse to Halwood Corporation.

Members of the Lending Credit Committee raised a number of questions in regard to the proposal, and agreed to defer the submission to enable the questions to be answered. The proposal returned to the Lending Credit Committee on 29 June 1988, following answers, provided by Mr Andrew, to the questions raised. The proposal was approved subject to:

(a) the Trust being in place to acquire the property and being sufficiently funded to provide for any cost overruns and not being geared beyond the covenants contained in its Trust Deed, including its commitment to take the property in question into the Trust; and

(b) Halwood Corporation guaranteeing any cost overruns, if the Trust was not in place.⁽⁾

This approval by the Lending Credit Committee is notable for two reasons. First, no quorum of four was present at the time of the making of the decision. Only Mr Masters and Mr Wright (Chief Manager, Institutional Banking) were present. The minutes do record, however, that "Messrs K S Matthews, J B Macky and G S Ottaway gave their consent to the proposal Ex Post Facto". Secondly, the minutes of the meeting do not record discussion by the Lending Credit Committee of Halwood Corporation's ability to meet its guarantee of cost overruns. The minutes of the Committee note that, at that time, the Bank's exposure to Halwood Corporation was $54.5M, and, in addition, the Bank had an exposure to the joint venture construction referred to in Section 12.4.2(c) above, which had risen to $23.5M from $10.0M at the date of its approval in May 1987. The minutes do not record that the Committee considered cash flow projections or other evidence to substantiate Halwood Corporation's ability to meet the guarantee if called upon. Moreover, the minutes do not record any deliberation by the Committee on matters pertaining to Halwood Corporation's "Statement to our Lenders," issued only some two months earlier, on 8 April 1988.

For the reasons indicated I am of the opinion that the proposed transaction lacked merit and that the members of the Lending Credit Committee should not have approved the facility in favour of Hooker Property Funds Management Ltd's unit trust.

12.4.5 OCTOBER 1988 PROPOSAL - THE "AUSTRALIS CENTRE" PROJECT

(a) Background

On 4 October 1988, a proposal was presented to the Lending Credit Committee requesting a $73.0M facility for Blanche Pty Ltd, a wholly owned subsidiary of Halwood Corporation. Blanche Pty Ltd was a special purpose company established by Hooker Projects (a division of Halwood Corporation) for the purpose of constructing an 18 storey office/retail complex to be known as "Grenfell Plaza". Ultimately, the project was named the "Australis Centre". The proposal entailed the Bank funding 100 per cent of costs of acquisition of the land and construction of the building with no recourse to Halwood Corporation except for Halwood Corporation's guarantee of completion plus cost overruns and interest cover beyond the facility limit. At the same time, a proposal was submitted to the Lending Credit Committee that, for prudential purposes, that Committee approve the allocation of a $12.0M contingency limit against Halwood Corporation in relation to its guarantee to meet cost and interest overruns in relation to the project.

Following discussion by the Lending Credit Committee, a formal decision was deferred, subject to a further submission to be completed addressing Committee concerns. In summary, the areas of major concern were:

(i) a discrepancy between the Bank`s valuation of the project on completion and that prepared by Halwood Corporation's valuers, Baillieu Knight Frank;

(ii) the lending proposal contained no assessment of the Bank's risk and "ways out" should Halwood Corporation default on its security arrangements; and

(iii) a fee structure which properly reflected the "risk reward.⁽⁾

On 6 October 1988, the proposals were resubmitted to the Lending Credit Committee. The loan proposal noted that Halwood Corporation had "approached the Bank to fully fund the land acquisition and development costs of the complex". The introduction to the loan proposal noted that Halwood Corporation's "strong preference is for 100% funding, and should the Bank not wish to commit to this level of exposure the deal could be lost".

The enthusiasm of Management for this proposed transaction with Halwood Corporation is evident, not least in the loan proposal's comment that Beneficial Finance could take "the top-end risk", that this had been canvassed with Halwood Corporation who had responded negatively, and that the Bank could alternatively "seek silent underpin from Beneficial for a portion of the debt, e.g. $15/20M". What benefit would flow to the Bank by having its 100 per cent controlled subsidiary take up part of the risk is neither indicated nor apparent. It is of interest to note that the allusion to Halwood Corporation's "strong preference" in the "Introduction" to the loan proposal developed into the following statement in the "Conclusion" to the loan proposal:

"[Halwood Corporation] has stated 100% funding is critical to its possible acceptance of Bank funding [Emphasis Added]."

The salient features of the transaction, as indicated in the loan proposal, were as follows:

(i) The facility was a multi-option facility and would be for a period of three years and three months, being the construction period plus one year following completion, to 31 December 1991.

(ii) Halwood Corporation was to guarantee completion plus provide cost overrun and interest cover beyond the $73.0M facility.

(iii) The total funding required would be disbursed on the following basis:

	$M	$M
Land Acquisition	16.59
Vacant Possession	4.35
Construction Costs	35.82
Fee & Commissions	4.07
Sundry Development	0.30
Net Holding Costs	0.20
Contingencies	0.44
		61.77
Interest Capitalised		11.09
Total Costs		72.86

(iv) Under the proposed fee structure, the Bank would receive substantial success fees as follows:

. $0.7M on sale price of project up to $80.0M; plus

. 7 per cent on difference from $80.0M - $85.0M;

. 9 per cent on difference from $85.0M - $95.0M;

. 10 per cent on difference from $95.0M - $100.0M; and

. 15 per cent - 20 per cent above $100.0M.

In the event that no sale of the project occurred, the Bank's success fee would be payable by Halwood Corporation based upon the valuation by a valuer acceptable to both parties;

(v) Halwood Corporation was to undertake to enter into any contract of sale on a commercial and arms length basis only.

(vi) No sale of the property was to be made below $73.0M without the Bank's consent unless the Bank's debt is cleared in full at settlement.

(vii) Following practical completion of the building, the Bank was to have the option to fix a project valuation "strike price" within fourteen days of completion, such valuation to provide the basis for success fee calculations; alternatively, the Bank was to be provided with the option to defer the calculation of its success fee until the sale of the project.

(viii) By way of security, the Bank was to be provided with:

. a registered mortgage over the development site at 75-86 Grenfell Street, Adelaide;

. first registered Mortgage Debenture over all the assets and undertakings of Blanche;

. first registered share mortgage over all the issued shares in Blanche, together with lodgement of signed blank share transfer forms;

. construction completion guarantee from Halwood Corporation, incorporating an undertaking to meet all cost overruns above the estimated $73.0M project construction costs, interest and fees;

. first registered charge over the construction contract with Hooker Multiplex Constructions Pty Limited;

. letter of comfort from Halwood Corporation; and

. appropriate insurance policies each recording the Bank's interest as mortgagee.

The Bank's valuation of the project was $78.1M. Accordingly, the Extended Loanable Amount was $54.67M.⁽⁾ In this regard, it was noted that the Baillieu Knight Frank valuation, in September 1988, suggested an end value of $89.0M while Halwood Corporation's estimated completion value was $91.0M. This value was advised to Halwood Corporation by another firm of valuers, Colliers International. Further, although repayment of the Bank's facility was dependent on sale of the project on completion, it was considered that the two years it would take to complete the project should afford sufficient time to market and sell the project.

In addition, a "significant feature" of the security package was the guarantee being provided by Halwood Corporation undertaking to provide a cash injection to cover any construction cost overruns and interest costs on amounts beyond the facility limit. Although this guarantee was said to have no security value in itself, its effect was noted as limiting the Bank's direct exposure to the project at $73.0M, while at the same time ensuring that the building would be completed.

With respect to repayment of the facility, the following options were put forward:

(i) Pre-sale of project prior to completion of construction. Should this occur, the Bank's funding would be refinanced or renegotiated with the purchaser of the building. The minimum success fee of $0.7M would be earned.

(ii) Pre-commit tenancies during construction period, and sell on completion on the basis of a partially pre-let building.

(iii) if the attempts to sell are unsuccessful by completion, the company may choose to hold the project for a further twelve month period.

(iv) Should Halwood Corporation not be able to sell the property, the Bank could assume ownership. The worst case sensitivity analysis showed that the value of the building would be in the order of $65.66M by 31 December 1991. On this basis, the Bank would need to hold the building until market conditions improved. It was felt unlikely that this scenario would eventuate, given the view that there was a strong outlook for rental increases in the Adelaide market, despite a possible oversupply in the short term.

(b) Analysis of the Risk Factors

I have noted above the Bank's eagerness to transact business with Halwood Corporation. This eagerness is further evident in the loan proposal's analysis of the risk factors involved in the transaction, given the Bank's 100 per cent funding commitment as recommended.

The loan proposal observed that a "significant feature" of the security package was the guarantee to be provided by Halwood Corporation in relation to cost overruns and excess interest beyond the facility limit. As was noted above, the Bank's contingent exposure in this respect was recognised in a separate submission seeking approval for the recognition, for prudential purposes, of a $12.0M contingency exposure to Halwood Corporation. As the loan proposal observed, repayment of the Bank's debt was dependant upon the sale of the project on completion. Thus, if Halwood Corporation failed to meet its commitments in respect of cost and interest overruns, then the Bank would have been required to fund these costs in order to complete the project. In this event, the Bank would be required to meet any shortfall on recovery against Halwood Corporation out of sale proceeds in order to fully recover the debt.

Whilst this "package of securities" included a "letter of comfort" from Halwood Corporation, the proposal itself noted that this was not an "enforceable obligation" of Halwood Corporation. The authors of the proposal, however, put forward the observation that "it is unlikely that [Halwood Corporation] would risk damage to its reputation in the market place, particularly with this high profile development" as offering a measure of security for the Bank's 100 per cent exposure to the project.⁽⁾

At various points, the proposal referred to the Bank's exposure being "capped at $73.0M". The assertion is true perhaps in the sense of the facility approval itself. The assertion was, however, misleading when one had regard to the possible course of events including the possible inability of Halwood Corporation to meet its commitments to complete the project beyond the funds provided by the Bank.

As the value of the Bank's security, in all practical terms, was dependant upon the value of the building on completion (and this in turn depended on the extent to which the building was the subject of enforceable agreements for lease) a pivotal consideration, from a risk point of view, was the state of the property market in the Adelaide Central Business District, particularly in respect of surplus office space. As the proposal noted, approval of this project would lift the Bank's Corporate Banking division's exposure to the Adelaide Central Business District (other than the Bank's own investments, for example the State Bank Centre) to $253.0M.

Annexures to the proposal included a projection of the level of unlet office space in the central business district at about the time of anticipated completion of this project (December 1990). Annexure C to the proposal projected a surplus of some 40,000m² of lettable office space in 1990 dropping to 14,000m² in 1991. The precise basis on which this reduction in surplus space would be achieved is not explained. More to the point, however, annexure B to the proposal noted that "due to the up-market image of the project which is designed for Blue Chip tenants, the building will not be considered by Government Departments." Other factors affecting the saleability of the building on completion were stated in the proposal and its annexures as including:

(i) The "premium price" paid on acquisition of the land.

(ii) The need to set high rental levels "for a building which is only marginally higher than the 15 storey ceiling limit in Grenfell Street".

(iii) The high cost of building outgoings.

(iv) "No present commitments and end takeout uncertain."

(v) "Grenfell Street precinct is a major busway corridor with commuters queuing on foot paths outside major buildings detracting from entrance foyers."

(vi) Recent taxation rulings on property unit trust tax effective structures which could result in "some dampening of investor interest in the short term."

As noted above, contemporaneously with the loan proposal for Blanche Pty Ltd, a proposal was put forward to the Lending Credit Committee, seeking an allocation of an internal (undisclosed) contingency limit for Halwood Corporation. This limit was to recognise a contingent liability on the part of Halwood Corporation by virtue of its provision of a guarantee to the Bank for the completion of the building and for undertaking to meet all cost, fees and interest overruns above the estimated $73.0M construction costs.

The basis for the contingency limit assumed that the building would be held by Halwood Corporation for a period of twelve months following completion. Having assumed that the completion cost would be $73.0M, an interest rate of 16 per cent was applied to arrive at a contingency limit of $12.0M.

There was no contingency limit sought for the payment by Halwood Corporation to the Bank of its success fee. As to the cost overruns on the project, the funding proposal for Blanche indicated that these were estimated to be approximately 20 per cent of the total project cost, implying an amount of $8.0M (20 per cent of $40.0M). The proposal, however, noted that this number was for `recording purposes only'. With respect to the success fee, in the event of the building not being sold, the Bank had a right to request Halwood Corporation to meet this obligation with the fee calculated by reference to an independent valuation.

The proposal submitted to the Lending Credit Committee with respect to the contingency limit annexed an analysis of financial statements in relation to Halwood Corporation for the year ending 30 June 1989. This analysis, according to an observation made by the Lending Credit Committee and recorded in its minutes, showed a deterioration in Halwood Corporation's financial position.⁽⁾ Amongst other things, this analysis indicated a deterioration in Halwood Corporation's net profit before tax ($85.9M as at 30 June 1987 down to $74.9M as at 30 June 1988).

Whilst the proposal in relation to the contingency limit did not, in itself, necessarily give rise to the establishment of a facility, the information contained in this proposal was of vital importance, given that the loan proposal did not analyse Halwood Corporation's financial ability to meet this liability should it arise.

(c) Deficiencies in the Loan Proposal

I am of the opinion that the loan proposed to the Lending Credit Committee lacked merit and was unsafe for the following reasons in combination:

(i) The project cost of $73.0M was to be 100 per cent debt funded. The Bank's value for the project on completion was $78.1M, giving an Extended Loanable Amount of $54.67M. The funding to be provided was, therefore, in excess of that prescribed for prudential lending purposes under the Bank's lending guidelines. While these guidelines were only that, and were not rigid and inflexible, they should not have been departed from except in cases where the proposed loan was at the low end of the spectrum of risks associated with secured lending. Here, no sufficient ground for departure from the guidelines was set out in the lending submission.

(ii) The proposal indicated that, although the Extended Loanable Amount was to be exceeded, a "significant feature" of the security package was to be a Halwood Corporation guarantee to provide a cash injection to cover any construction cost overruns and interest costs beyond the facility limit. The proposal did not, however, discuss or demonstrate Halwood Corporation's capacity to meet this obligation. This would be critical to the safety of the proposed loan, as Halwood Corporation's financial position was already the subject of considerable speculation, as evidenced by the need for Halwood Corporation to issue the "Statement to our Lenders" in the previous April.

(iii) The facility involved limited recourse against Halwood Corporation.

(iv) The Bank was dependent for repayment of its principal on the sale of the project on completion. Although a number of scenarios were considered, the most important, that no sale occurred, was not adequately addressed. The Bank's own analysis indicated that a worst case value for the building on completion would be $65.66M. The proposal observed that, in this situation, the Bank would need to hold the building until market conditions improved. Furthermore, it was noted that by the time the building was completed, there would be "... a possible over-supply in the short-term." ⁽⁾ This statement was not expanded upon.

(v) No sale of the building had been negotiated by the borrower.

(vi) No enforceable letting arrangements had been entered into.

(vii) The secured property was not income-producing.

(viii) There was, in this case, as in the case of all development projects, a real risk of cost overruns, against which the Bank would be unsecured.

I am of the opinion that the proposal to the Lending Credit Committee in relation to the $12.0M contingency limit was deficient. The financial information relied upon to assess the financial ability of Halwood Corporation was predominantly based upon an assessment of its balance sheet and historical financial results. The proposal implicitly assumed continuing value of assets in the balance sheet over the life of the contingent exposure. The proposal did not include a future cash flow analysis. Substantiation of Halwood Corporation's future position was critical in light of the deterioration in its financial position indicated in the annexure to the proposal.

(d) Lending Credit Committee

The proposal was recommended to the Bank Board by the Lending Credit Committee on 6 October 1988. Members present were Mr Masters, Mr Mallett, Mr Pfeiffer, and Mr Mullins.

The minutes note that "Members took comfort from the optimistic predictions by both Colliers and Baillieu Knight Frank as to the rise in prime rentals anticipated for 1991 which support the development."

The minutes further record that:

"While recognising that the Bank was being requested to fund 100% of the development, Members were satisfied with the credit risk on the basis that the Bank will be relying on the unsecured risk against [Halwood Corporation] for the Balance of our margin. Members were comfortable in placing reliance on [Halwood Corporation's] servicing capacity until such time as the value of the property equates with the debt of $73M and considered the proposal acceptable in view of the risk reward."

The minutes of the Lending Credit Committee, in relation to the proposal to allocate the $12.0M contingency limit in respect of Halwood Corporation's guarantee of cost and interest overruns, record the following:

"Members noted that while there had been a deterioration in [Halwood Corporation's] financials, members were aware of proposals to introduce equity into the Company and of a restructuring which will improve its financial strength so that the Bank could safely rely on a contingent exposure of $12M against this major company.

"It was acknowledged that ... the development was a stand-alone transaction and the Bank will have the power under the documentation to exercise total control over the project in the event of a default by [Halwood Corporation]." ⁽⁾ [Emphasis Added]

Notwithstanding that the Lending Credit Committee was on notice as to the deterioration in Halwood Corporation's financial position, it was prepared to rely on Halwood Corporation's unsecured guarantee of cost and interest overruns as a basis for supporting the proposal. Halwood Corporation's enforceable guarantee was confined to cost and interest overruns on the project. The general "letter of comfort" given by Halwood Corporation in relation to the project as a whole was, as was acknowledged in the loan proposal, not enforceable against Halwood Corporation. In my opinion, this application was unsafe and should not have been recommended to the Board by the Lending Credit Committee.

Given all the matters of concern which had been expressed at the meetings of the Lending Credit Committee held on 16 August 1988 and 13 September 1988, as noted in Section 12.2.2(b) above, and in light of the information provided to support Halwood Corporation's ability to meet the guarantee and the extent of the Bank's exposure to the project, the Committee should not, in my opinion, have recommended the proposal to the Bank Board for approval. The minutes of the Committee's meeting, held on 6 October 1988, do not record Mr Masters or Mr Pfeiffer, who were present at the meetings held on 16 August 1988 and 13 September 1988, as reporting on the Committee's deliberations at those meetings.

For the reasons given above, and on the evidence, I am of the opinion that the members of the Lending Credit Committee referred to above failed to exercise proper care and diligence in recommending approval of the loan facility to Blanche Pty Ltd.

(e) Bank Board

The Bank Board approved the $73.0M facility to Blanche Pty Ltd on 12 October 1988. Those present at the meeting were Mr Barrett, Mrs Byrne, Mr Searcy, Mr Simmons, Mr Nankivell, and Mr Clark.⁽⁾

At the same time, the Bank Board also resolved to approve the allocation of a $12.0M contingency limit "to enable Hooker Corporation to provide its guarantee" to the Bank in relation to the project.⁽⁾

The Blanche Pty Ltd proposal, which was presented to the Bank Board by Mr Mallett (General Manager, Treasury and International) followed along the lines of the proposal submitted to the Lending Credit Committee, with a number of deletions which I do not regard as material to the lending decision. It suffered from the same deficiencies as those identified above in relation to the proposal presented to the Lending Credit Committee. The proposal made it clear to the Bank Board that approval of the facility was not without a material degree of risk, particularly given the 100 per cent funding for the project which was said to be "critical to its [Halwood Corporation's] possible acceptance of Bank funding". The proposal also referred to the "realistic view taken by the Bank in its valuation and market outlook [which] suggests there still exists a modest safety margin against security cover together with [Halwood Corporation's] completion and additional costs guarantee."

The proposal concluded on a note that was, as appears below, proven to be discredited:

"We believe the risk/reward ratio recommended is appropriate and will provide the Bank with an excellent return on a project that while not without risk, represents one of the prime redevelopment sites in Adelaide. As our exposure to property reaches the limit of our prudential guidelines we wish to make the most of our available capacity by financing only the best opportunities."

The Bank Board Minutes record that in approving the facility in favour of Blanche Pty Ltd:

"Directors expressed concern that there may be an over supply of office space in the Adelaide Central Business District in the near future, as there were a number of office developments taking place in and around the Adelaide Central Business District. Even though this was considered to be a prime site it was agreed that the Bank would continue to closely monitor its exposure to development in the Central Business District."

Mr Searcy gave the following evidence⁽⁾ in relation to the Bank Board's discussion as to potential oversupply of office space in the Adelaide Central Business District:

"Question: ... although you went along with the proposal, you stressed the need for the Bank to examine the [Halwood Corporation] guarantee in this regard?

Mr Searcy: Certainly, the [Halwood Corporation] guarantee that - just in case all these optimistic statements were not correct that [Halwood Corporation] had the capacity and the ability to fund the shortfalls that they guaranteed because there's a chance they may have an empty building and we didn't want to be the ones that would suffer any loss.

... In fact, management discussed some recent reports that they had received which were - were fairly - well, I wouldn't say bullish but - that indicated that there were prospects for further leasing of premises in Adelaide CBD. I don't believe the Board was convinced by that - took it bit of comfort from it (sic) but, more importantly, we quizzed the management on the papers that they produced to us in respect of the Halwood transactions.

We were told by management that they had assessed the ... financial position of [Halwood Corporation] and that they were comfortable that [Halwood Corporation] could stand behind them. I think they were covering cost overruns. The interest was capped ...⁽⁾

...

Well, I felt pretty sure in my mind ... we'd finish up with an empty building so, therefore, it was very important to ... to know that there is some substance behind it. In fact, I think the comment was made, as regards the Australis Centre, that - you know, bit of a casual aside at the Board Meeting - that we think [Halwood Corporation] will finish up with an empty building.

...

I said that was a casual aside but I - there was some substance to my - my thinking on that basis so - I'm not an expert in CBD property but just in Adelaide, just walking around, you had the feeling at the time that there's a lot of building going on and this one was coming on at the very end. So there was a good chance that ... that [Halwood Corporation] might have an empty building.

...

As I said, it was casually said at the meeting but all would have heard - I think [Halwood Corporation] could finish up with an empty building."

As will appear from the next Section of this Chapter, the Bank, within a space of no more than four weeks, moved to take a further $33.0M exposure to Halwood Corporation in respect of its development of the "Henry Waymouth Centre". This latter exposure was clearly in the contemplation of management and the Lending Credit Committee when the Australis facility was proposed.

The proposal in relation to the undisclosed $12.0M contingency limit was also presented by Mr Mallett and followed along the lines of the proposal as presented to the Lending Credit Committee. It suffered from the same deficiencies as those indicated above in relation to the proposal presented to the Lending Credit Committee. In my opinion, the Board should not have approved the facility granted in favour of Blanche Pty Ltd.

For the reasons indicated I am of the opinion that the members of the Bank Board, referred to above, at the meeting of 12 October 1988, failed adequately and properly to supervise, direct, and control, the affairs, operations, and transactions, of the Bank in relation to approval of the loan facility to Blanche Pty Ltd.

12.4.6 NOVEMBER 1988 PROPOSAL - THE "HENRY WAYMOUTH CENTRE" PROJECT

On 1 November 1988, a proposal dated 31 October 1988 was submitted to the Lending Credit Committee seeking the grant of a new facility to Halwood Corporation of $33.0M.

This invitation to provide further facilities was extended by Beneficial Finance Corporation Limited ("Beneficial Finance"). The Bank was being asked jointly to fund a package to finance Stage 1 of the development of "Henry Waymouth Centre", a multi-storey 3 tower office complex and adjoining car park. Beneficial Finance would be prime lender to the development, with the Bank achieving priority under a Security Sharing Agreement.

Stage 1 of the project encompassed construction of a single 13 storey office tower together with a 680 space car park, as well as acquisition of the land for Stage 2 of the project. The second stage planned for the development comprised two further office towers; however, Stage 2 of the project would not proceed until a major tenant had been secured prior to commencement of construction.

Under the arrangement proposed by Beneficial Finance, the Bank was to provide $33.0M of the total $47.0M development costs of Stage 1, plus the purchase price of Stage 2 land. Beneficial Finance would fund the remaining requirements.

Beneficial Finance was to provide Risk Underpin to the Bank to the extent that, at all times, Beneficial Finance would underpin 30 per cent of the total funds advanced by the Bank, other than when Beneficial Finance itself advanced funds, in which case 30 per cent of total joint funds advanced would be underpinned. Further, the Bank would have first call on any proceeds of sale. The structure of the facility is illustrated diagrammatically in Appendix B to this Chapter of the Report. The proposal noted that, the Bank would allocate, against Beneficial Finance, an "initial contingent liability of $5.0M ... from the unallocated Special Finance Line". The proposal went on to state that "the contingency will be increased to $8.0M following annual review of Beneficial's funding requirements".

Interest costs and fees were to be capitalised from within the facility limit. The facility was to be extended for a term of eighteen months. In addition, the facility was to be non-recourse to Halwood Corporation, other than that company's guarantee to complete the project and to provide cost overrun and interest cover beyond the total estimated project cost.

Security for the facility was primarily a first registered mortgage over the development site. The estimated value of the complex was as follows, as determined by the Bank's valuers on 22 July 1988:

			$M
Stage 1	-	Office	28.4
	-	Car Park	13.0
Stage 2	-	Land Only	9.0
			50.4

Accordingly, the Extended Loanable amount, at 70 per cent of the above value, was $35.28M. Additional to the above security was the Risk Underpin agreement with Beneficial Finance as well as Halwood Corporation's guarantee in respect of cost overruns and interest cover.

Repayment of the Bank's debt was dependent entirely on Halwood Corporation's ability to sell Stage 1 on completion. As part of the worst case scenario in the proposal, it was noted, as a mitigating circumstance, that the Bank had already made an offer to acquire the car park for $13.95M and the proposal observed that it appeared likely that the Bank's offer for the carpark would be accepted. Accordingly, the Bank's lending exposure would be reduced to $19.05M. It is not apparent, however, from the proposal or from any other evidence made available to the Investigation, as to why the Bank was prepared to pay almost $1.0M more for a carpark which it had valued in July 1988 at $13.0M. I am, however, satisfied that the officers responsible for the preparation of the proposal, and the Bank's Corporate Banking division, were in no way involved in negotiations in relation to the purchase of the car park.

As in the case of the proposal relating to the Australis Centre Project, this proposal identified Halwood Corporation's "guarantee to complete the project and to provide cash injection to meet any possible construction cost overrun and interest costs beyond the approved facility limits of $47.0M" as a "significant feature of the security package". Annexed to the proposal was a "Company History Sheet," which set out virtually the same information as that contained in the Annexure to the proposal to the Lending Credit Committee. It was, in my opinion, similarly deficient. The "Company History Sheet" did, however, include information relating to Halwood Corporation's compliance with its Negative Pledge Covenants as at 30 August 1988. This indicated that Halwood Corporation was within 0.6 per cent of its "70/30 Borrowing Ratio," due to changed accounting treatment in relation to its Debt Defeasance arrangement. The proposal also observed that:

"A weakness in the project is that stage 1 is being developed purely on speculation without any precommitment and during a period of potential over supply of lettable office space."

Annexure "C" to the proposal pointed out that the Bank's then exposure to Central Business District property, before approval of the facility for the Henry Waymouth Centre project, stood at $234.0M. In addition, the proposal pointed out that, on approval of the subject facility, the total Bank Group exposure to Halwood Corporation would be $193.5M. As in earlier proposals concerning this company, there was no substantiation of the company's ability to meet the guarantee in support of the project nor was any cash flow analysis appended.

One particular feature of the proposal is a number of references to actions which were "intended" to be taken by Halwood Corporation and hence affect the risk assessment for the proposal. For example, the proposal pointed out that Halwood Corporation "intends to raise $250M in new equity within the next 6 months from the United States markets which will improve balance sheet ratios". There is, however, no analysis of any factors which would indicate that Halwood Corporation would be successful in carrying out its "intention". This is particularly relevant, given the Lending Credit Committee's prior admission of its lack of knowledge as to the "saleability and earning capacity" of Halwood Corporation's United States assets.⁽⁾

On the basis of the available evidence, and having regard to the information presented in the proposal, I am of the opinion that , in this case, management permitted enthusiasm to write new business to cloud the negative features of the proposal. The proposal should never have been put to the Lending Credit Committee. In this regard, it is worthwhile noting that, in the Conclusion to the proposal, the authors observed:

"We also believe our relationship with Hooker Projects [a division of Halwood Corporation] is progressing well and that the Bank will be offered the opportunity to fund the major redevelopment of the Unley Shopping Centre."

(b) Deficiencies in the Loan Proposal

I am of the opinion that the proposal to the Lending Credit Committee was seriously flawed and lacked merit for the following reasons in combination:

(i) The proposed facility should have been considered, and the proposal should have been formulated, in the light of the Bank Group's exposure to Halwood Corporation, not simply as a project funding exercise. In addition, it was inappropriate to contend that the provision of a Halwood Corporation completion guarantee, and its guarantee in respect of cost overruns and interest cover, was adequate to secure and minimise the Bank's exposure to the project.

(ii) In reality, the facility was of a limited recourse nature.

(iii) There was a real risk of cost overruns.

(iv) The financial information presented in relation to Halwood Corporation suffered from the same deficiencies as indicated above in relation to the "Australis Centre" project.

(v) Inadequate consideration was given to "ways out" of the facility. Repayment of the facility was solely dependent on Halwood Corporation's ability to sell the project on completion. Halwood Corporation had stated that it had not yet considered how it would sell the complex.

(vi) Nor had enforceable letting arrangements been entered into. There was an acknowledgment of a potential over-supply of office space at the time of completion, and the Bank already had a significant exposure to this potential surplus of office space by way of the Australis Centre project.

(vii) The secured property was neither income-producing nor, in its then condition, was it capable of producing income.

(viii) The implications of total Bank Group exposure, which approximated 100 per cent of the project's estimated end value, were not considered or, if considered, were given insufficient weight. The proposed Bank Group exposure to the project should have deterred its authors from advancing the proposal. I acknowledge however, that at the time the Bank had a policy of treating Beneficial Finance as being at arm's length. I have commented in the Report on Somerley on the imprudence of that policy.

(c) Lending Credit Committee

The proposal was recommended to the Board by resolution of the Lending Credit Committee passed on 1 November 1988. Members present were Mr Ottaway, Mr Masters, Mr Wright, and Mr Mullins. The deficiencies in the lending proposal were patent. They clearly called for further detailed and substantiated assessment of the proposal. In addition, there was no evidence made available to the Investigation to demonstrate that the members of the Lending Credit Committee could reasonably have been satisfied that the concerns expressed at previous Committee meetings in relation to Halwood Corporation's financial position had been overcome by Halwood Corporation's successfully achieving the "proposals" noted by the Committee on 6 October 1988, or by any other means. The Committee should not have recommended the proposal which was plainly unsafe to the Board.

It has been submitted to the Investigation that the Lending Credit Committee took "a fall back view" in that "they believed that at worst the Bank and Beneficial Finance would end up with a major building in Adelaide at cost. In the interim, the Bank would be providing for development within South Australia in accordance with its Charter, ...it was to some extent assumed by the Lending Credit Committee that Beneficial Finance had made a full analysis of this proposal as they had the second mortgage position.⁽⁾ I am not persuaded by these submissions to accept the contention that the Lending Credit Committee was right to recommend the proposal. First, given the attitude of the Bank to lending jointly with Beneficial Finance, which attitude I have referred to previously, it is an unacceptable delegation of responsibility for bank officers to assume that they are exonerated from the performance of a duty because officers of Beneficial Finance may have scrutinised the merits of a particular project. Secondly, it was no part of the Bank's business to engage in risky lending transactions merely because the transaction relates to a development within the State of South Australia. The "accepted principles of financial management" clearly require otherwise, to say nothing of the further passage (Section 15(2) of the State Bank of South Australia Act 1983) "... and with a view to a profit." . The Bank is a money lender. It was not in the business of purchasing and holding property as an end in itself. It should not undertake transactions calculated, or likely, to leave it in possession of unproductive assets.

For the reasons indicated, I am of the opinion that the members of the Lending Credit Committee referred to above failed to exercise proper care and diligence in recommending approval of the loan facility to Halwood Corporation.

(d) Board Sub-Committee and Bank Board

The Board Sub-Committee approved the granting of the $33.0M facility to Halwood Corporation on 2 November 1988. Those present at the meeting were Mr Barrett and Mr Clark, assisted by Mr Ottaway.⁽⁾

The Board Sub-Committee action was confirmed by the Bank Board on 24 November 1988. Present were Mr Barrett, Mrs Byrne, Mr Hartley, Mr Searcy, Mr Simmons, Mr Summers, and Mr Clark.⁽⁾

The Bank Board Paper, is notable for the amount of information omitted from the proposal as presented to the Lending Credit Committee. In particular, the Bank Board Paper was presented without any of the annexures to the proposal that were submitted to the Lending Credit Committee. Those annexures had contained detailed information dealing with, amongst other things:

(i) history, organisational structure, business strategy, and analysis of financial statements, of Halwood Corporation;

(ii) project description and feasibility;

(iii) industry review/market analysis; and

(iv) history, performance history, building contract arrangements, and organisation profile, of Hooker Multiplex Constructions Pty Ltd (the building construction manager).

The failure to present this information resulted in the Board is not being made aware that:

(i) no analysis had been carried out on Halwood Corporation's future ability to service the guarantee;

(ii) Halwood Corporation's borrowing ratio at 69.4 per cent was virtually at its maximum (ie 70 per cent);

(iii) even before approval of the proposal, Corporate Banking division's exposure to the Adelaide Central Business District property market totalled $234.0M, or 27.9 per cent of the division's total property market portfolio; and

(iv) the Henry Waymouth Centre was located in an area removed from the principal core of the Adelaide Central Business District, and that recent office building developments in this area had "met with mixed reactions from tenants." ⁽⁾

The Bank Board Paper did not refer to the proposed fee structure for the facility. Furthermore, the Bank Board was not informed that Halwood Corporation had targeted the Australian Taxation Office by "purpose building" stage one of the project, but had been unsuccessful in obtaining a commitment by the Australian Taxation Office to occupancy of the building. (By contrast, the Lending Credit Committee proposal asserted (page 4) that, up to the date of preparation of the submission, "... Hooker has not been successful ..." in its overtures to the Australian Taxation Office.) Furthermore, the Bank Board Paper did not include the statement as to the "weakness" of the project, as had been noted in the proposal to the Lending Credit Committee.

The proposal presented to the Bank Board was superficial and deficient. The Board Sub-Committee should not have approved the proposal. The Bank Board should not have confirmed the Board Sub-Committee's approval of the proposal given the apparent deficiencies in the proposal. For the same reason, the Board Sub-Committee should not have approved the proposal.

It is a matter of significant concern that the Board Sub-Committee and the Bank Board approved the proposal, notwithstanding the concerns voiced at the Bank Board meeting one month earlier, in relation to the "Australis Centre" Project on the topic of the potential over supply of office space in the Adelaide Central Business District.

In the proposal relating to the "Australis Centre" Project, it was noted that "absorption of new and refurbished CBD office accommodation is expected to lag supply through 1989/90 due to a number of new major projects coming on stream." As at November 1988 (when the proposal in relation to the Henry Waymouth Centre was presented to the Bank Board), construction was "well advanced".⁽⁾ In addition, the term of the financing facility was eighteen months up to April 1990. In light of what was indicated in the Board Paper concerning the Australis Centre Project and Mr Searcy's evidence in relation to this issue, in my opinion, it was highly imprudent for the Bank Board to continue to undertake exposure in the Adelaide Central Business District. In my view, the Bank Board should have taken a "Group" perspective, ie had regard to the fact that the Bank Group was taking 100 per cent exposure to the project. It should not have adopted what, in my opinion, was an artificial perspective differentiating between the risk to the Bank, on the one hand, and the risk to Beneficial Finance, on the other.

Mr Searcy gave evidence to the Investigation⁽⁾ in respect of this issue:

Question: you didn't believe that now one month after approving Australis, with what you have told us you then suspected to be the case - that is, that [Halwood Corporation] could end up with an empty building ... didn't you see that called for something more than reliance on some assurances [from management]?

Mr Searcy: Well, Henry Waymouth was seen as a different part of the CBD with a different type of tenancy.

Question: And certainly nothing would have happened in that month for you to change this feeling that you had about that prospect of Australis Centre being an empty building at its completion date?

Mr Searcy: Not really, not in a month."

Notwithstanding the views of Mr Searcy that the Henry Waymouth Centre was seen as a "different part of the CBD with a different type of tenancy" I am of the opinion that the Bank Board was clearly on notice of the potential oversupply of office space in the Adelaide Central Business District, including that part of the District containing the Henry Waymouth Centre.

In my opinion, given the superficiality of the Bank Board Paper, the absence of detail or substantiation in respect of critical matters noted above, the exposure of the Bank to Halwood Corporation and to the Adelaide Central Business District (at least through the Australis Centre project), and the concerns which were both apparent and being voiced in relation to oversupply of office space in the Adelaide Central Business District, the Bank Board and the Board Sub-Committee, in their respective decisions, failed to act with the care and diligence which in my opinion was necessary to protect the interests of the Bank, and failed, in approving this facility, properly and adequately to supervise, direct, and control, the affairs, operations, and transactions, of the Bank.

This is exacerbated by the fact that the Bank Board, by the time of its meeting on 27 October 1988, had been presented with the minutes of the Lending Credit Committee of 6 October 1988⁽⁾ as well as those of the meetings of the Lending Credit Committee of 16 August 1988 and 13 September 1988.⁽⁾ Although, in their submission to the Investigation, the non-executive Directors asserted that expressions of concern by the Lending Credit Committee about the financial stability of Halwood Corporation were not reported to the Board, I do not accept this. The Bank Board either knew, or ought to have known, of these expressions of concern by reference to the minutes of the Lending Credit Committee referred to which had been presented to the Bank Board.

For the reasons, indicated, I am of the opinion that the members of the Board Sub-Committee, referred to above, at the meeting of 2 November 1988, and the members of the Bank Board, referred to above, at the meeting of 24 November 1988, in relation to the approval and confirmation of the loan facility to Halwood Corporation, failed properly and adequately to supervise, direct, and control, the affairs, operations, and transactions, of the Bank.

12.4.7 FEBRUARY 1989 PROPOSAL - ASPENAIR PTY LTD

(a) Background

On 14 February 1989, the Lending Credit Committee considered a proposal to provide a $6.0M project finance facility to Aspenair, another wholly owned subsidiary of Halwood Corporation. The purpose of the facility was to finance the acquisition, redevelopment, and refurbishment, of the former "Demasius" building on Greenhill Road, Burnside.

Hooker Projects had submitted an offer to the existing owner to purchase the building and car park for $4.58M, with the intention of injecting a further $0.84M to upgrade the site. The projected profit on sale of the project, seven months from commencement of construction, was $1.3M. This profit was determined after construction costs and capitalisation of interest and holding costs. At the time of the proposal, Halwood Corporation had not begun to seek an end purchaser for the project.

Although the term of the facility requested by the borrower was seven months, the proposal requested a further five month term in case a purchaser had not been identified within the initial seven month period. It was, however, stated in the proposal that the borrower would not be informed of this extension option.

The principal security for the funding was a first registered mortgage over the development site. On 8 February 1989, the development had been valued by the Bank's valuers in the range of $6.8M to $7.25M. This, in turn, implied an Extended Loanable Amount of between $4.76M and $5.075M. In addition, Halwood Corporation was to provide a guarantee to meet any interest, fees and holding costs beyond the facility limit. An undertaking was also secured from Halwood Corporation that it would not sell the project for less than the Bank's outstanding liability without the Bank's consent.

The proposed facility of $6.0M exceeded the Extended Loan Amount of between $4.76M and $5.075M, and was therefore outside the prudential lending policies of the Bank.

Repayment of the facility was dependent on the ability of Halwood Corporation and Aspenair to sell the project on completion. It was noted that there was no pre-commitment to acquire the property at the time of the proposal. It was also noted that the Bank's fall back position in the event that the project was not sold within the twelve month term of the facility would be either to require Aspenair Pty Ltd to refinance, or to call on Halwood Corporation to provide full recourse support. Nor had any tenants committed themselves to the redeveloped site.

The proposal noted that "the latter course would require full exposure to be recorded against [Halwood Corporation]". Financial information in support of Halwood Corporation's ability to meet this potential liability was limited to historical information for the three years ended 30 June 1986, 1987 and 1988 as to total shareholders' equity, total assets, total liabilities, total revenue, net profit after income tax and extraordinary items, current ratio, gearing ratio, and "interest times earned". This information indicated a drop in net profit after income tax and extraordinary items from $85.9M in 1987 to $74.6M in 1988. The proposal thus demonstrated deficiencies in substantiation of information, and lacked projected cashflow, as had all other loan proposals relating to Halwood Corporation.

The Bank's fee structure would allow the payment, by Halwood Corporation, of a $0.1M "success fee" on sale of the complex. Success fees in relation to trading bank lending have been discussed earlier herein, in relation to "Australis Centre" Project proposal. The facility was approved by the Lending Credit Committee on 14 February 1989.⁽⁾ Having regard to the Bank's own valuation of the security, the approved facility represented a Loan to Security Ratio of between 82.76 per cent and 88.23 per cent. A letter of offer was forwarded to the customer on 15 February 1989.

On 14 March 1989, a letter was forwarded to Mr E L Wilson, State Manager, Hooker Projects South Australia, by Mr P J White (Senior Manager, Corporate Finance) outlining revised terms and conditions different from those in the Bank's initial letter of offer on 15 February 1989. The key amendments to the terms which had been approved by the Lending Credit Committee concerned repayment and security. With respect to repayment, the Bank allowed for partial discharge of the facility in the event that the project was strata titled and not sold in totality, on the following basis:

(i) 100 per cent of proceeds of sale until the outstanding liability has been reduced to $4.0M; and

(ii) 80 per cent thereafter, provided at all times the loan security ratio as assessed by the bank does not exceed 70 per cent.

With regard to security, Halwood Corporation was no longer required to guarantee interest, fees and holding costs beyond the facility limit . All that was now required was an "undertaking" to meet these cost overruns.

(b) Deficiencies in the Loan Proposal

I am of the opinion that the loan proposed to the Lending Credit Committee was unsafe and lacked merit. The proposal did not substantiate Halwood Corporation's ability to meet interest, fees and holding costs beyond the facility limit nor the contingent liability to take on full exposure to the project in the event that the project was not sold within twelve months of completion.

(c) Lending Credit Committee

The proposal was approved by the Lending Credit Committee on 14 February 1989, members present being Mr Mallett, Mr Macky, Mr Mullins, and Mr Wright. Given the deficiencies in the proposal, it should not have been approved by the Lending Credit Committee. For the reasons indicated , I am of the opinion that the members of the Lending Credit Committee referred to above failed to exercise proper care and diligence in approving the loan facility to Aspenair Pty Ltd. It has been submitted to the Investigation that:

"... while the amount of the facility exceeded the Bank's prudential guidelines for loan to security ratios, the expected short term of the facility, the nominal construction work involved and the ongoing servicing guarantee of Halwood were seen as mitigating features. Through other sources the Bank were (sic) also "familiar" with the rentals being achieved by the adjoining Burnside Village Complex and its strong tenant demand.

Repayment was clearly to come from sale of the project either as a whole or on a Strata titled basis. While no prospective purchaser had been identified at that stage, industry experts contacted and the Bank's valuers considered the project would sell quite readily at or above valuation." ⁽⁾

I accept that there is some force in this submission. Having regard, however, to the fact that the proposed loan exceeded the Bank's Extendable Loan Amount, and to the existing exposure of the

Bank to Halwood Corporation, I remain of the opinion that the facility should not have been approved by the Lending Credit Committee.

12.5 MANAGEMENT OF NON-PERFORMING FACILITY

12.5.1 INTRODUCTION

At 28 July 1989, the date upon which the Bank appointed Joint Receivers and Managers to Blanche and Aspenair, facilities extended by the Bank to the Halwood Corporation stood at $185.7M, made up of the following:

Entity		$M

Halwood Corporation
State Bank of New South Wales syndicated facility		20.0
Societe Generale Letter of Credit syndicated facility		11.6
Bill line		20.0
Hambros Australia syndicated facility		9.0
Contigent limit re Blanche Pty Ltd (Australis Centre project)		12.0
Henry Waymouth Centre project		19.0
Societe Generale Letter of Credit Facility indemnity		1.1
		106.7
Blanche Aspenair		73.0 6.0
	Total	185.7

On 1 August 1989, the Lending Credit Committee agreed to classify, as non-accrual accounts, the State Bank of New South Wales syndicated facility, and the Bill Line. On 22 August 1989, the Societe Generale syndicated facility was also classified non-accrual. Aspenair Pty Ltd was classified as a non-accrual account on 16 February 1990. Blanche Pty Ltd was not classified as a non-accrual account until January 1991.

12.5.2 PROVISIONING FOR HALWOOD CORPORATION IN THE 1989 ACCOUNTS OF THE BANK

No provision for doubtful debts was created in respect of the Halwood Corporation facilities at the time when the statutory accounts of the Bank for the year ended 30 June 1989 were approved by the Bank Board and published. Prior to the Bank Board's approving the June 1989 accounts of the Bank on 24 August 1989⁽⁾, a number of significant events had occurred in this context. The topic of provisioning is to be examined in a later Report but it is appropriate to record the following events which occurred in the period from 1 July 1989 to 24 August 1989:

(a) Mitsubishi Bank withdrew from the Societe Generale syndicate, due to concerns that a liquidator would be appointed to Halwood Corporation. This development was brought to the attention of Mr Masters in a memorandum from Mr Parker (Senior Corporate Manager) and Mr Andrew (State Manager, New South Wales) dated 5 July 1989. This development was considered by the Lending Credit Committee on 11 July 1989⁽⁾.

(b) At a meeting with Bank officers on 18 July 1989, Halwood Corporation representatives questioned the viability of the Australis Centre Project undertaken by Blanche Pty Ltd, due to cost overruns. Present at this meeting were Mr Masters, Mr White, and Mr N Matthews (Credit Controller, Corporate Banking).

(d) A Provisional Liquidator was appointed to Halwood Corporation on 26 July 1989.

(e) On 27 July 1989, Australian Stock Exchange suspended Halwood Corporation's listed securities.

(f) On 28 July 1989, the Bank appointed Joint Receivers and Managers to Blanche Pty Ltd and to Aspenair Pty Ltd.

(g) On 4 August 1989, the Receivers & Managers of Blanche wrote to Mr Masters indicating that:

"... irrespective of whether the building works proceed or not a loss in the order of $10 million seems unavoidable in the current circumstances. The loss will be recoverable in part against Hooker Corporation." ⁽⁾

(h) Mr Masters approved an increase in facilities in favour of Aspenair Pty Ltd to $6.5M in order to secure completion of the project.

(i) A Receiver was appointed by the Bank under the Charge over the Building Contract for the Henry Waymouth Centre project. Beneficial Finance (as lead manager) appointed a Receiver and Manager to the Henry Waymouth Centre project, and entered into possession of the property as mortgagee in possession.

(j) Three direct recourse facilities in favour of Halwood Corporation were classified by the Bank as non-accrual.

(k) An increase in the facility limit to complete the Australis Centre project was sought from, and approved by, the Bank Board.

(l) On 12 August 1989, Mr K L Copley, General Manager, Group Finance, submitted a memorandum to the Board of Directors "for information" on the topic of the 1988/89 profit. The memorandum referred to the meeting of directors which had been held on 27 July 1989, and to discussion at that meeting in regard to the level of provisioning for doubtful debts for the fiscal year 1988/89. The memorandum referred to the provisional level of profit struck at that meeting and to the level of provisioning agreed at the meeting subject to the auditors completing their review of all risk assets. The memorandum asserted that the auditor's review had been completed, and that, "following further discussions with the auditors, additional provisions are required."

"The changes are as follows:

...

4. L J Hooker and subsidiaries

After due consideration of the known position of L J Hooker, and comments made by the Liquidator that he would expect to provide a full return to shareholders thereby ensuring a full recovery to (sic) creditors, it has been agreed by the Auditors that no specific provision is required at this time.

(m) On 18 August 1989, the external auditors of the Bank wrote to Mr Clark following their review of the Bank's loan portfolio. Specific comment was directed to Halwood Corporation in the following terms:

"1. L J Hooker Group

No provision has been made for possible loss on either the unsecured or the secured exposure of this Group. We realise that it is not possible at this time to estimate the likely outcome of the liquidation of this Group and that preliminary indications are that all creditors will be paid in full; we have therefore accepted the Bank's decision to make no provision. However, in view of the fine margin of net tangible assets available on stated book figures before adjustment to liquidation conditions, we believe some provision could have been contemplated in order to take a conservative position."

(n) In Appendix 1 to the letter, the auditors made further reference to the facility in favour of Blanche and commented:

"To date an indepth analysis of the secured loans has not been completed, which would provide management with a better estimate as to whether a loss is imminent on any of the development projects. The problem with the secured loans is that the security comprises several development projects at various stages of completion, which will require the Bank to provide a certain amount of funding to complete the projects. Of the secured debt, only one project appears at this stage to be cause of any concern, Blanche Pty Ltd (Australis Centre). Based on current information Blanche Pty Ltd could result in a loss of $5-10M to the Bank (Current balance outstanding to Blanche Pty Ltd is $32.90M).... were appointed receivers and managers of Blanche Pty Ltd on Friday 28 July 1989, and in their report dated 4 August, 1989, they have advised in summary that irrespective of whether the building works proceed or not, a loss in the order of $10M seems unavoidable in the current circumstances. This loss will be recoverable in part against Hooker Corporation".

...

"Messrs Matthews and Copley have advised that it is the Bank's intention to complete the project. It is then proposed that the property will be auctioned and if a satisfactory price is not obtained, the property will be held in a Trust structure until full recovery is achieved. They have also advised that the Facility Agreement provides for Hookers to pay any cost overrun in excess of $73M. This overrun will be a claim against the Liquidator.

Accordingly, management expect no loss and have not provided against Hooker at this point".

(o) On 1 March 1990, the external auditors wrote to Mr K S Matthews, Chief General Manager, Group Risk Management, having completed their interim audit review of the Bank for the half year ended 31 December 1989, in the course of which they reviewed the status of debts in Corporate Banking division. In Appendix 1 to the letter, it was noted that, as of 12 February 1990, the report of the provisional liquidator on the topic, among others, of the likely return to creditors, was still awaited by the Bank, and that Corporate Banking was unable better to assess the Bank's position at that stage. In relation to Blanche Pty Ltd and the Australis Centre, the auditors expressed the view in Appendix 1 that "While the Bank has not made a provision at the 31 December 1989 we believe that consideration should be given to a provision prior to the 30 June 1990."

Detailed information relating to these developments was known by, or presented to, both Management and the Bank Board, and it is to this issue that this Section of the Report now turns.

On 12 July 1989, the Bank Board was informed that the Lending Credit Committee had approved the Bank entering into a four month moratorium against realisation action on the debts of Halwood Corporation.⁽⁾ At the same time, the Bank Board was requested to approve the provision of a $10.0M Secured facility to "assist [Halwood Corporation] whilst an organised asset sale program is pursued". The Bank Board approved the proposal subject to certain conditions being satisfied. ⁽⁾

On 8 August 1989, the Lending Credit Committee⁽⁾ considered a paper⁽⁾ which dealt with a number of matters relating to the Bank's exposure to Halwood Corporation. This paper noted that, subsequent to the appointment of the provisional liquidator to Halwood Corporation, a review of the company's projects in South Australia had been completed by "Corporate Division" and a status report on each of the Australis Centre, The Boulevard, Burnside, and Henry Waymouth Centre, projects was annexed.

So far as concerned the Australis Centre project, the paper noted that an initial assessment had concluded that the cost to complete the contract work had risen to $91.34M "with net sales values after inducements and vacancy allowance ranging from $65M to $80M, which clearly indicates that an unsecured claim against [Halwood Corporation] will occur on the project [Emphasis Added]." The paper went on to summarise estimated sales values which had been given to the Bank by property consultants engaged for the purpose, which indicated the following sales values on completion of the project:

	$M
Bank’s valuation	$80.9
Halwood Corporation	$92.0
Bailieu Knight Frank	$87.3
Colliers	$83.5
Jones Lang Wootton	$73.7

The paper went on to state that holding costs on the project were $1.275M per month. Having recognised the inevitability of a claim as an unsecured creditor against Halwood Corporation, the paper concluded in relation to the Australis Centre Project:

"At this time it is too early to quantify the amount of claim if any on this exposure, other than to suggest that a specific provision for doubtful debts over the next two financial years would be prudent."

So far as concerned the Aspenair Pty Ltd facility, the Lending Credit Committee was requested to simply note the decision of Mr Masters to provide an increase in the facility limit from $6.0M to $6.5M to complete the redevelopment of the building.

In relation to the Henry Waymouth Centre, the paper noted that the commitment of Workcover Corporation to take up space in the building was "essential if the anticipated $36.7M sale price is to be achieved". It was observed "with a security cover of 200%, it is unlikely that the Bank will need to lodge a claim against [Halwood Corporation]".

The assertion by the authors of this paper that the Bank had "security cover of 200%" under the Henry Waymouth facility can only be read with a considerable degree of scepticism. The Bank's exposure was $19.0M, against an anticipated selling price of $36.7M. But the real point is that a sale was not confirmed. Workcover Corporation had not committed itself to take up a tenancy within the building. No party had actually expressed an interest in purchasing the building.⁽⁾ The Australian Taxation Office had indicated that it was not interested in taking up occupancy of the building. This latter point was significant given the assertion in the original proposal to the Lending Credit Committee seeking its recommendation that the Bank Board approve the facility, that Halwood Corporation had "been targeting the [Australian Taxation Office] by "purpose building" Stage 1 and eventually Stage 2" of the project.

On 21 August 1989, the Bank Board considered a paper presented by Mr Masters.⁽⁾ The paper reported a number of developments in relation to Halwood Corporation and, in particular, sought the Bank Board's approval to increase facility limits for the Australis Centre project from $73.0M to $91.5M in order to provide for the completion of the project. The Bank Board resolved to approve the increase in limits. The minutes record, however, that the Bank Board "considered [it] appropriate to establish a specialist team to manage this project [the Australis Centre] and report to the Board."

The paper presented to the Bank Board stated that the "true financial position of [Halwood Corporation] is yet unknown". The following developments were, however, reported in relation to Halwood Corporation:

(a) the moratorium had been terminated;

(b) a provisional liquidator had been appointed to Halwood Corporation;

(d) Beneficial Finance had appointed a Receiver and Manager in relation to the Henry Waymouth Centre project, and was currently assessing the need to provide an additional $5.6M to complete the project;

(e) total Bank Group exposure to Halwood Corporation (prior to approval of the facility increase in respect of Blanche Pty Ltd) was $205.49M of which the Bank itself carried an exposure to Halwood Corporation of $172.49M;

(f) three direct recourse facilities had been recognised as non-accrual; and

(g) Halwood Corporation's two wholly owned subsidiaries in the United States had filed for bankruptcy protection.

In relation to the Australis Centre project, an annexure to the paper presented to the Bank Board outlined a number of options for the Bank including: "Stop project and sell site in, say twelve months"; "Hold project in abeyance, sell site and project in say 3 months"; "Continue with construction and sell the project as soon as possible"; "Hold [the completed building] for up to 12 months following completion". So far as concerns the option of continuing with construction and selling the project as soon as possible, the paper noted that the shortfall would be $1.6M (best case), $11.6M (medium case) and $36.0M (worst case). In arriving at these figures, net sale proceeds were shown as $85.0M (best case), $80.0M (medium case) and $79.0M (worst case). These figures are inconsistent with the net sales values indicated in the paper submitted to the Lending Credit Committee (which ranged from $65.0M up to $80.0M). No explanation for these discrepancies appears in the subject papers, nor in any other evidence obtained by the Investigation.

The annexure to the Bank Board Paper concluded by noting:

"Although current indications from the provisional liquidator of [Halwood Corporation] are for a full recovery it is useful to consider the situation which would exist based on a 50c dividend and the worst case for each option."

In relation to the option of the sale of the building at completion, the loss to the Bank, in that event, would be $18.0M. Notwithstanding all the obvious warning signs, including Management's own admission that it did not know Halwood Corporation's "true financial position", the Bank Board Minutes record no challenge by any director to the unsubstantiated proposition that there would be a "full recovery" for unsecured creditors. Moreover, the Bank Board Minutes record no observation as to the necessity or otherwise of the Bank's making a provision in respect of its exposure to Halwood Corporation. The Bank Board was to be presented with the accounts of the Bank for the year ended 30 June 1989 at its next meeting only three days later, on 24 August 1989. I am satisfied that, as of 21 August 1989 (when it was considering Mr Masters' paper), the Bank Board was fully aware that no provision was proposed to be made in respect of Halwood Corporation in the 1989 accounts. At the Bank Board's meeting on 27 July 1989, it had been presented with a paper on the matter of the Bank's provision for bad and doubtful debts.⁽⁾ This paper, indicated that the Bank was not proposing to make any provision in respect to the Bank's exposures to Halwood Corporation. The Bank Board's decision to not make a specific provision in relation to Halwood Corporation will be further considered in a subsequent report.

On all the evidence available to the Bank Board and Management, the Bank's exposure to Halwood Corporation was shaping as a problem of substantial proportion. Yet notwithstanding all the indications, no provision for loss was made in the 1989 accounts of the Bank. The Bank did have a policy in relation to provisioning for construction projects, to which I have referred in the Report on Somerley. This policy was ill-defined and lacked logic. Nevertheless, it obviously contributed to the decision of the Bank not to provide in relation to Halwood Corporation. It is not appropriate that I report in this Chapter on the adequacy or otherwise of the Bank's provisions in relation to Halwood Corporation. I merely narrate some of the facts elicited by the Investigation which bear on the matter. As appears from Mr Simmons' diary notes which were produced to the Investigation, on 21 July 1989, he had a telephone conversation with Mr Bakewell, in relation to which the following is recorded:

"Bob Bakewell saying that he thought the [Halwood Corporation] situation was getting worse. He said he had told Tim Clark. I said that he couldn't do anything more. I said that as I saw the situation the matter would go from bad to worse." ⁽⁾

In the weeks following this conversation, and leading up to the approval of the accounts on 24 August 1989, Mr Simmons' diary records a series of telephone conversations and meetings during which the matter of the Bank's provisioning for Halwood Corporation, and the potential impact of a provision on the Bank's profits were discussed. These attendances and telephone conversations involved, in brief outline, the following:

(a) On 27 July 1989 Mr Simmons attended on Mr B Edwards and Mr T Whimpress (the auditors). In the context of a discussion on the Bank's provisions, Mr Simmons recorded in his diary: "I said one of my problems was that we had to present a profit and Clark was mad on profit and he was scared the Treasury would complain if there was no profit." Mr Simmons recorded that, during this meeting, he discussed the possibility of establishing a specific provision for Halwood Corporation. His diary contained an observation on the pressures driving the Bank to report profits rather than to establish prudent reserves: "I said that the problem that we had was the fact the Bank was a new bank, there were political pressures, the other bank's [sic] had been able to sock away reserves for years, and we were copping it pretty heavily."

(b) Mr Simmons recorded that, on 31 July 1989 in a telephone conversation with Mr Bakewell,: "I said that possibly the best way of handling the matter might be to get the Government to tell Clark that they were keen to make sure we had adequate provisions because even though the profits might be embarrassing this year it would be worse if there were less profits the following year."

(c) In a telephone conversation with Mr K S Matthews on 8 August 1989, Mr Simmons suggested listing Halwood Corporation for discussion with the Government.

(d) Mr Simmons, records that in a telephone discussion with Mr Searcy on 9 August 1989: "I couldn't understand why Tim [Clark] didn't back down the [sic] profitability and start socking away reserves. I said that the high cost of profit would undo the [Bank]."

(e) In a telephone discussion with Mr Young the receiver and manager of Blanche Pty Ltd, on 9 August 1989, Mr Simmons refers to the fact there were "real problems" in relation to the Australis Centre project.

(f) On the same day, in a telephone conversation with Mr Bakewell, Mr Simmons' refers to "severe problems" with the Australis Centre project.

(g) Mr Simmons' diary records that on 10 August 1989, in a telephone conversation with Mr Young, "Young said that he believed that there should be a provision made for [Halwood Corporation]."

(h) Mr Simmons' diary records that, in a telephone conversation with Mr Bakewell on 10 August 1989, Mr Bakewell said that "he believed it [Halwood Corporation] was worse than he had thought although in subsequent papers prepared by Copley [Mr K C Copley] which I received on 12th there is a claim that the liquidator believes that everything will be re-paid."

(i) Mr Simmons' dairy records that, in a telephone discussion with Mr K S Matthews on 11 August 1989, "I said that I also had worries about the letting up [ie letting of office space] in South Australia. The Black Stump [25 Grenfell Street building] was not leased neither was Pirie Centre."

(j) The diary records that, in a meeting with Mr Paddison on 12 August 1989, Mr Simmons was shown a feasibility study "and it is likely that all things being equal we could have a $20 million shortfall [in relation to the Australis Centre]."

(k) In a telephone conversation with Mr Young on 14 August 1989 Mr Young is recorded as saying that "he thought it [ie recovery on the Australis Centre] would be 80 cents in the dollar."

12.5.3 PROVISIONING FOR HALWOOD CORPORATION IN THE 1990 ACCOUNTS OF THE BANK

The Bank first made provision against the Halwood Corporation facilities on 8 December 1989, in the amount of $5.7M.⁽⁾ The Minutes of the Lending Credit Committee at which the provision was made observed that "the Net Present Value of [Halwood Corporation] is 89 cents in the dollar". That provision was based on the most optimistic scenario, by the provisional liquidator, of an estimated return of 89 cents in the dollar under a Scheme of Arrangement. Corporate Banking had projected that the Bank's return of 89 cents in the dollar would be spread over six years to June 1995. On 14 December 1989, an "initial estimate" by the Senior Corporate Manager and the State Manager, New South Wales was made of losses under the Negative Pledge facilities, resulting in expected losses of 11 per cent with worst case being 42 per cent.⁽⁾ On 19 July 1990, a recommendation was made to the Lending Credit Committee for the provision against Halwood Corporation to be increased to an amount representing 50 per cent of the debt by providing an additional $12.8M. On 27 July 1990, Lending Credit Committee approved an increase in the provision of only $9.3M, without giving any reason for not accepting the recommended $12.8M. By 3 August 1990, this provision had been increased to $17.3M, and on that date $5.7M was written-off as at 30 June 1990, making the total loss charged to profit and loss account $23.0M for the year ended 30 June 1990.

In paragraph 31 of their letter of 16 August 1990 to Mr Clark, Group Managing Director, the external auditors reported that their "enquiries indicate provisioning on the above basis to be reasonable based on current estimates". More specifically in relation to Blanche Pty Ltd, the auditors reported, at paragraph 32, that "any potential for loss on this account is very much dependent on the outcome of negotiations regarding the lease or sale of the Australis Centre. We have been advised by Corporate Banking management that the Bank is currently negotiating an outright sale of the building. No loss is expected at this time and accordingly, no provision has been made."

The accounts for the Bank were approved by the Bank Board on 23 August 1990.⁽⁾ No provision had been made for Blanche Pty Ltd or Aspenair Pty Ltd. Provisions in respect of these facilities were not made until March 1991. At this time, provisions of $37.0M and $1.5M were made for Blanche Pty Ltd and Aspenair Pty Ltd, respectively.

No objective evidence was produced to the Investigation that a sale of the Australis Centre, (as alluded to in paragraph 32 of the letter of the external auditors of 16 August 1990, to which I have referred), was a likelihood at any time in the 1989-1990 financial year, at least at a price which would clear the debt due to the Bank. Again, it is not appropriate that I report in this Chapter on the matter of provisioning. The Australis Centre was still, at all material times, in the course of construction, and thus affected by the Bank's policy of deferred provision applicable relation to construction projects.

12.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

As directed by Terms of Appointment A(a) to (f) (inclusive), A(h) and E, I have investigated circumstances that occurred over the period from May 1986 to February 1991 surrounding certain facilities granted to Halwood Corporation. The Bank's provision of facilities in favour of Halwood Corporation has resulted in material losses to the Bank, and has resulted in the Bank, holding substantial assets which are non-performing.

For the reasons given elsewhere in this Chapter of the Report, on the basis of the facts which I have set out and on the basis of the documents to which I have refered, I am of the opinion that:

12.6.1 TERMS OF APPOINTMENT A

(a) The processes which led to the Bank engaging in transactions with Halwood Corporation were not appropriate.

(b) The May 1986 Proposal lacked merit, was not justified by the terms of the proposal, and should not have been recommended by the Lending Credit Committee, approved by the Board Sub-Committee, and confirmed by the Board.

(c) The May 1987 Proposal lacked merit, was not justified by the terms of the proposal, and should not have been recommended by the Lending Credit Committee, approved by the Board Sub-Committee, and confirmed by the Board.

(d) The September 1987 Proposal lacked merit, was not sufficiently justified by the terms of the proposal and should not have been recommended by the Lending Credit Committee, approved by the Board Sub-Committee and confirmed by the Board.

(e) The June 1988 Proposal lacked merit, was not justified by the terms of the lending submission, and should not have been approved by the Lending Credit Committee.

(f) So far as concerns the October 1988 Proposal - the "Australis Centre" Project:

(i) Mr D C Masters, Mr T L Mallett, Mr V R Pfeiffer and Mr P F Mullins, as members of the Lending Credit Committee, failed to exercise proper care and diligence in recommending to the Board that the facility be approved; and

(ii) Mr L Barrett, Mrs M V Byrne, Mr R P Searcy, Mr W F Nankivell and Mr T M Clark failed to properly and adequately supervise, direct and control the affairs, transactions and operations of the Bank.

(g) So far as concerns the November 1988 Proposal - the "Henry Waymouth Centre" Project:

(i) Mr G S Ottaway, Mr D C Masters, Mr R L Wright and Mr P F Mullins, as members of the Lending Credit Committee, failed to exercise proper care and diligence in recommending to the Board that the facility be approved; and

(ii) The Board Sub-Committee, namely Mr L Barrett and Mr T M Clark and the members of the Bank Board, namely Mr L Barrett, Mrs M Byrne, Mr R E Hartley, Mr R P Searcy, Mr A G Summers, and Mr T M Clark failed properly and adequately to supervise, direct and control the affairs, operations and transactions of the Bank.

(h) The February 1989 Proposal in favour of Aspenair Pty Ltd lacked merit, was not justified by the terms of the lending submission, and should not have been approved by the Lending Credit Committee.

12.6.2 TERM OF APPOINTMENT C

For the reasons which I have given, and in the respects which I have set out in Section 12.6.1, the operations, affairs, and transactions, of the Bank in relation to the Halwood Corporation facilities were not adequately or properly supervised, directed or controlled, by the Board of Directors of the Bank, or by the Chief Executive Officer of the Bank.

In expressing this criticism, I note the limited tenure on the Board of the Hon Donald W Simmons, Mr K J Hancock, Mr A G Prowse and Mr K Smith. The Hon Donald W Simmons passed away on 28 August 1986. Mr K J Hancock resigned from the Board on 31 December 1986. Mr K Smith resigned from the Board on 28 February 1987. Accordingly, any general reference in the text of this Chapter to the Board of Directors in relation to a period subsequent to those dates is not intended to be a reference to either of those former directors. Mr A G Prowse was appointed to the Board on 1 July 1990.

12.6.3 TERM OF APPOINTMENT D

For the reasons which I have given, and in the respects which I have set out in Section 12.6.1, the information and reports given by officers of the Bank to the Bank Board (to which I have made reference in this Report) were not, under all the circumstances, timely, reliable, and adequate and were not sufficient to enable the Bank Board to discharge adequately its functions under the Act.

12.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

I recommend that each of the matters dealt with above should be the subject of administrative action within the Bank to ensure proper supervision and competence in understanding and executing prudent lending policies and procedures including the lending policies and procedures of the Bank.

12.8 APPENDICES

SUMMARY OF ABBREVIATIONS

COMPANIES

A Halwood Corporation Ltd

A1 Halwood - "Henry Waymouth Centre"

B Hooker Fidelity Trust

C Blanche Pty Ltd

D Aspenair Pty Ltd

LENDING FACILITIES

CBA/E Commercial Bill Acceptance/Endorsement

L/C Letter of Credit

CBA/D Commercial Bill Acceptance/Discount

O/D Over Draft

FCA Foreign Currency Advance

PROPOSAL TYPE

CP Credit Proposal

AR Annual Review

V Variation to proposal, or lending covenants and conditions

Appendix A

Halwood Corporation Ltd - Group Structure

APPENDIX A

Appendix B

Henry Waymouth Centre - FUNDING STRUCTURE

Appendix C

Summary of Movements of Facilities

Date	Recommendation	Facilities Details		Entity^*	Prepared By	Supported and Recommended By	LCC		Sub Board Approval		Board Confirmation
		Type	Amount ($M)				Approved By	Date	Approved by	Date
12.05.86	Participate in syndicated facility (lead by State Bank NSW) (Term 3 years to 29.09.89)	CBA/E or L/C	20.0	A	A C Kloot Corporate Finance	A S Roff Senior Manager Corporate Finance D C Masters Chief Manager Corporate Banking	T M Clark D C Masters J T Hazel G S Ottaway J B Macky	15.05.86	L Barrett D W Simmons T M Clark	16.05.86	22.05.86 L Barrett K J Hancock R P Searcy D W Simmons Hon D W Simmons K Smith T M Clark
04.05.87	Participate in syndicated facility (lead by Societe Generale Aust Ltd) (Term 10 years to 25.06.97)	CBA/E or L/C Standby L/C	20.0 14.5 34.5	A A	T P Oxley Corporate Analyst	A C Kloot Senior Manager Corporate Banking	K S Matthews G S Ottaway S G Paddison D C Masters T L Mallett V R Pfeiffer	05.05.87	A G Summers T M Clark G S Ottaway	06.05.87	28.05.87 L Barrett D W Simmons M V Byrne W F Nankivell R P Searcy A G Summers T M Clark
21.09.87	Increase facility (Term 2 year evergreen)	CBA/E or L/C Standby L/C CBA/E	20.0 14.5 20.0 54.5	A A A	C H Andrew State Manager (NSW & Qld)	A C Kloot Senior Manager Corporate Banking	K S Matthews G S Ottaway D C Masters T L Mallett V R Pfeiffer	22.09.87			22.10.87 (Confirmed Round Robin approved 28.09.87) L Barrett R D E Bakewell M V Byrne R E Hartley W F Nankivell R P Searcy A G Summers T M Clark
23.06.88	Increase facility with participation in syndicated facility	CBA/E or L/C Standby L/C CBA/E Cash Advance	20.0 14.5 20.0 9.0 63.5	A A A B	A B Turnbull Manager Corporate Banking	C H Andrew State Manager NSW	K S Matthews G S Ottaway D C Masters J B Macky V R Pfeiffer R L Wright	29.06.88
05.10.88	Increase facilities to construct Australis Centre (Term: 3 years 3 months to 31.12.91)	CBA/E or L/C Standby L/C CBA/E Contingent Limit Cash Advance CBA/D or O/D	20.0 12.5 20.0 12.0 9.0 73.0 146.5	A A A A B C	M C Shipp Manager Corporate Banking	P J White Senior Manager Corporate Banking	D C Masters T L Mallett V R Pfeiffer P F Mullins	06.10.88			12.10.88 L Barrett D W Simmons M V Byrne W F Nankivell R P Searcy T M Clark
31.10.88	Increase facilities to construct Henry Waymouth Centre (Term: 18 months to 31.04.90)	CBA/E or L/C Standby L/C CBA/E Contingent Limit Cash Advance Cash Advance CBA/D or O/D	20.0 12.5 20.0 12.0 33.0 9.0 73.0 179.5	A A A A A1 B C	M C Shipp Manager Corporate Banking	P J White Senior Manager Corporate Finance	G S Ottaway D C Masters R L Wright P F Mullins	01.11.88	L Barrett T M Clark G S Ottaway	02.11.88	24.11.88 L Barrett D W Simmons R D E Bakewell M V Byrne R E Hartley R P Searcy A G Summers T M Clark
13.02.89	Increase facilities to refurbish Boulevarde, Burnside	CBA/E or L/C Standby L/C CBA/E Contingent Limit Cash Advance Cash Advance CBA/D or O/D CBA/D	20.0 12.5 20.0 12.0 33.0 9.0 73.0 6.0 185.5	A A A A A1 B C D	M C Shipp Manager Corporate Banking	P J White Senior Manager Corporate Finance	T L Mallett J B Macky P F Mullins R L Wright	14.02.89
09.07.89	Increase facilities for L/C Indemnity	CBA/E or L/C Standby L/C CBA/E Contingent Limit Cash Advance L/C Indemnity Cash Advance CBA/D or O/D CBA/D	20.0 11.6 20.0 12.0 19.25 1.14 9.0 73.0 6.0 171.99	A A A A A1 A B C D	B J Parker Senior Corporate Manager	C H Andrew State Manager NSW	G S Ottaway S G Paddison T L Mallett J B Macky D C Masters R L Wright	11.07.89			12.07.89 D W Simmons R D E Bakewell M V Byrne W F Nankivell R P Searcy T M Clark
07.08.89	Increase facilities for Australis Centre construction ($18.5M less $12.0M contingency limit) and for Boulevarde Burnside	CBA/E L/C Converted to FCA CBA/E Cash Advance L/C Indemnity Cash Advance CBA/D or O/D CBA/D	20.0 11.6 20.0 19.25 1.14 9.0 91.5 6.5 178.99	A A A A1 A B C D	M C Shipp, Manager Corporate Finance and Projects	P J White, Senior Manager Corporate Finance and Projects	K S Matthews S G Paddison D C Masters P F Mullins	21.08.89			21.08.89 D W Simmons R D E Bakewell W F Nankivell R P Searcy T M Clark

28.03.91

Increase facilities for Blanche Pty Ltd

CBA/E

FCA

CBA/E

CBA/D

20.0

11.6

20.0

98.36

6.5

156.46

C C Ritchie,

Manager Property Projects and Finance

J V Henderson,

Senior Manager

Property Projects and Finance

S G Paddison

T L Mallett

J Malouf

P F Mullins

D R Brewer

11.04.91

26.04.91

N R Clark

R D Bakewell

A R Prouse

R E Hartley

I E Webber

J Glidden

^* Refer to 12.8 Appendices for Summary of Abbreviations.

Appendix D.1

Chronology of Events
During the Life of the Loan

DATE	HALWOOD CORPORATION LTD
12.05.86	Submission to Lending Credit Committee for approval to participate in a syndicated facility to be managed by State Bank of New South Wales. Total facilities to be between $75.0M and $125.0M with the Bank to have maximum exposure of $20.0M. Facility to be either Bank Bill Acceptance/ Endorsement or Letters of Credit.
15.05.86	Advice from Lending Credit Committee that submission would be recommended to Board for approval.
16.05.86	Note that Sub Board Committee had approved facility.
22.05.86	Submission to Board for Participation in syndicated facility - approved.
02.03.87	Memo to GM Corporate & International Banking requesting the Bank's approval for Halwood Corporation Ltd to pay out minor Debenture Stockholders to make termination of Trust Deed easier. Plan was to offer Negative Pledge security to Banks - approved.
04.05.87	Submission to Lending Credit Committee for the Bank to participate in a syndicated standby Letter of Credit facility. The syndicate was to be lead managed by Societe Generale Australia Ltd with the Bank's exposure to be $US 10.0M (approximately $14.5M). The facility was to be used to guarantee the present value of the company's future interest obligations for 10 years on a $US 180.0M loan (used as part of a debt defeasance scheme). The term was for 10 years with six monthly amortisation of facility. The facility would be covered by a proposed Negative Pledge Agreement.
05.05.87	Advice of Lending Credit Committee decision - recommended to Sub-Board Committee subject to: 1. The Negative Pledge covenants being acceptable to Chief Manager Corporate Banking. 2. Disclosure of participation by the Bank to Halwood Corporation Ltd.
13.05.87	Submission to Board for participation in a syndicated facility of $14.5M in Standby Letters of Credit - approved.
21.09.87	Submission to Lending Credit Committee for increase in facilities of $20.0M of Bill Acceptance / Endorsement for general working capital purposes. Facility to be unsecured but covered by Negative Pledge Agreement.
25.09.87	Submission to Board for increase in facilities. Due to time constraints agreement from Directors requested prior to meeting.
06.10.87	Submission to Board for confirmation of round robin agreement to increase in facilities - confirmed.
16.10.87	Offer to Halwood Corporation Ltd for increase noting use of existing Facility Agreement and Negative Pledge and Guarantee Agreement. Term was two year "evergreen" basis, with annual reviews.
28.02.88	Extract of Australian Ratings report for Hooker Corporation noting a rating of BBB+ and showed an optimistic outlook for 1987/88 with further profit improvement.
08.04.88	Statement issued to all lenders by the company regarding its financial position. This was due to poor press reports.
28.06.88	Application to participate in Hambros Australia Ltd syndicate relating to unit trust being established by Hooker Property Funds Management Limited.
20.12.88	Submission to Lending Credit Committee for review of facilities and increase to offer an additional $10.0M Short Term Money Market line and Forex facility of $40.0M. GM Corporate declined to support increase in facilities and submission altered to seek review only. Reasons given were deterioration in profit performance due to expansion into the United States of America.
03.01.89	Advice of Lending Credit Committee decision at meeting 1/89 - approved continuation of facilities.
06.01.89	Submission to Board for noting the continuation of facilities.
26.01.89	Advice of Board meeting (vide 89/17) noting Lending Credit Committee decision.
25.01.89	Submission to Lending Credit Committee for change in facility term on syndicate participation with State Bank of New South Wales from expiration at September 1989 to two year evergreen.
31.01.89	Advice of Lending Credit Committee decision at meeting 8/89 - approved.
01.02.89	Notification that Lending Credit Committee decision had been rescinded pending GM Corporate Banking assessing cashflows and negative pledge covenants.
31.03.89	Extract of Australian Ratings report on Halwood Corporation Ltd lowering rating to BB-. Noted that while with current strategies the "bottom line" should improve the short term earnings and coverage had been impacted by asset growth.
22.06.89	Letter from KPMG to Bank requesting them to join a Moratorium on Halwood Corporation Ltd facilities to allow a more orderly review of the current situation.
30.06.89	Memo to Chairman Lending Credit Committee from State Manager New South Wales noting the Bank's acceptance to enter Moratorium and requests approval to exclude Manufacturers Hanover Trust Company from Moratorium due to refusal by that party. Approved subject to Task Force maintaining constant vigilance and if Manufacturers Hanover Trust called its debt the Moratorium to be collapsed.
09.07.89	Submission to Lending Credit Committee for ratification of GM Corporate Banking's verbal approval to the indemnification of a Halwood Corporation Ltd payment to Mitsubishi Bank Australia Ltd in a Syndicated Letter of Credit facility thus increasing contingent liabilities to Halwood Corporation Ltd by a net $US 0.85M (approximately $1.1M).
11.07.89	Advice of Lending Credit Committee decision at meeting 49/89 - approved.
11.07.89	Submission to Lending Credit Committee for increase in facilities of $10.0M in secured Revolving Floating Rate Cash Advance with Bill Reliquification Option for urgent working capital purposes. To be secured via registered mortgages over Monash Business Park lots. Recommendations were for drawdowns to be approved by GM Corporate Banking, security and principal o/s to be at ratio of 2:1, first repayment from asset realisation and control of funds to be maintained by KPMG.
11.07.89	Advice of Lending Credit Committee decision at meeting 49/89 - recommended to Board.
13.07.89	Advice of Board decision (vide 89/228) approved submission for increase in facilities. Subsequently cancelled.
28.07.89	Letter from Mr Harkness of KPMG Peat Marwick Hungerfords advising that he had been appointed Provisional Liquidator pursuant to order of the Supreme Court of New South Wales on 26.07.89. The appointment was made upon the application of the company.
28.07.89	Submission to Lending Credit Committee for noting that Moratorium Agreement had been terminated, Peat Marwick had been appointed Provisional Liquidator and to approve the classification of Halwood Corporation Ltd facilities to non accrual.
01.08.89	Advice of Lending Credit Committee meeting 55/89 when they noted and approved the classification of commercial bill acceptance facilities $40.0M as non accrual.
02.08.89	Submission to Lending Credit Committee requesting permission to reclassify Syndicated Letter of Credit facility (converted to Foreign Currency Advance) as non-accrual.
09.08.89	Memo to GM Corporate Banking requesting withdraw of Notices of Demand served on Halwood Corporation Ltd for payment of $20.0M direct facility and $20.0M syndicated facility - approved. This had been requested by Mr Harkness and confirmed by Bank's solicitors Mallesons as in the best long term interests of the Bank.
12.02.90	Company changes its name to Halwood Corporation Limited.
22.08.89	Advice of Lending Credit Committee decision - approval given to reclassify foreign currency advance as non-accrual.
26.09.89	Copy of Letter of Demand lodged by Societe Generale Aust Ltd as agent for the Bank for default on payment of $US 8.7M and $US 0.85M under Syndicated Standby Letter of Credit facility.
19.10.89	Submission to Lending Credit Committee for noting the current situation with outlook, particularly in the United States of America, pessimistic and "clouded" in Australia.
23.10.89	Advice of Lending Credit Committee review of submission - meeting 79A/89.
23.10.89	Submission to Board for noting of current situation.
26.10.89	Advice of Board meeting (vide 89/337) - noted.
08.12.89	Advice of Lending Credit Committee decision to provide $5.7M for doubtful debts in relation to account - meeting 93/89.
14.12.89	Initial estimate by Senior Corporate Manager and State Manager of losses under Negative Pledge Agreement. Based on projections of sales of Australian assets losses expected to be 11 cents in the dollar with worst case 58 cents in dollar loss.
14.12.89	Request from Senior Corporate Manager for formal termination of Role of Agent for Societe Generale Aust following the appointment of a Provisional Liquidator - approved by State Manager.
09.05.90	Advice of Lending Credit Committee decision to provide an additional $8.0M - meeting 34/90.
14.06.90	Memo to State Manager New South Wales noting that the date for lodging Proofs of Claim by Australian Unsecured lenders has been extended until 28.09.90. Mallesons to assist in its preparation.
15.06.90	Memo from Corporate Officer noting that, as the facility was unsecured, Legal Dept had advised that no upstamping of documents was applicable.
19.07.90	Submission to Lending Credit Committee for increase in provisioning to a total of $26.5M taking into account the present estimates of realisable values and claims. Represents a collection of 50 cents in dollar.
27.07.90	Advice of Lending Credit Committee decision at meeting 59/90 where increase in provision made to $23.0M (increase $9.3M). Pay back of 56.6 cents in dollar.
03.08.90	Advice of Board decision 2 August 1990 to write off $5.7M in relation to Halwood Corporation Ltd.
21.08.90	Request to GM SA Corporate & Commercial Banking for Bank to approve in principle to becoming a party to the Scheme of Arrangement proposed by KPMG. Approved and Hindsight Overviewed by Chief General Manager Australian Banking. Likely returns under Scheme were 45 cents in dollar - under liquidation 18 cents in dollar.
20.11.90	Letter from Coudert Brothers (Bank solicitors in the United States of America) advising that they had completed and lodged the proof of debt claim of $US 51.2M against Halwood Corporation Ltd's US subsidiaries currently under Chapter 11 bankruptcy.
06.12.90	Submission to Lending Credit Committee for increase in provisioning by $9.0M to $26.3M - approx return 40 cents in the dollar.
07.12.90	Advice of Lending Credit Committee decision meeting 105/90 - approved increase.
21.01.91	Submission to Lending Credit Committee for approval to formally enter Scheme of Arrangement and the settlement proposal for distribution of funds from the United States of America.
24.01.91	Advice of Lending Credit Committee decision meeting 6/91 - approved subject to: 1. The provision of a schedule of projected and past asset sales. 2. Confirmation as to whether the assessments and forecasts provided fully consider all possible contingent liabilities. 3. Sydney Office to promote a revised provisioning and specific bad debt write off.
27.02.91	Submission to Group Credit Committee noting that the New South Wales office saw no real benefit seeking to be represented on the Committee assisting the Administrator.
28.02.91	Advice of Group Credit Committee decision meeting 15/91 - noted.
01.03.91	Note by Manager Corporate Banking that the Bank would not receive any tax deduction for a bad debt write off on Halwood Corporation Ltd after the Courts approved the Scheme (this occurred 28 February 1991) until its completion.
21.03.91	Advice of Group Credit Committee decision meeting 19/91 for increase in provisioning of $13.7M to $40.0M.
17.05.91	Submission to GM National Corporate Accounts for cancellation of indemnity issued to Mitsubishi Bank for $1.135M. With Scheme underway the Administrator had confirmed that he would not be pursuing the payment to Mitsubishi Bank as a preference payment - approved.

Appendix D.2

Chronology of Events
During the Life of the Loan

DATE	BLANCHE PTY LTD
22.09.88	Valuation by Baillieu Knight Frank of proposed complex at 75 Grenfell Street. Projected market value on completion in October 1990 was $89.0M. Notes the granting of planning approval from Adelaide City Council on 26 November 1987. Basis of valuation in regard to rental income and capitalisation rates disputed by Bank Valuers. Net Lettable Area 17,861 sq m Net Income $5.874M Capitalisation rate 6.50% Capitalised Value (rounded) $90.2M Less letting up allowance $1.2M Market Value $89.0M
28.09.88	Submission to Lending Credit Committee for approval of $73.0M multi-optional facility for construction of 18 storey office/retail complex at 75 - 85 Grenfell Street. Funding as required by Halwood Corporation Ltd to be at 100% of project cost which was estimated at: ($M) Land acquisition 16.59 Vacant Possession 4.35 Construction Costs 35.82 Fees and Commissions 4.07 Sundry Development 0.30 Net Holding Costs 0.20 Contingencies 0.44 Interest 11.09 Total Project Cost 72.86
28.09.88	Facility of commercial bills or overdraft was for 3 years 3 months to 31.12.91 with the following security: 1. First Registered Mortgage over development site at 75-85 Grenfell Street. Certificates of Title: . CTV 4152 F 507; . CTV 4180 F 730; . CTV 4193 F 359; and . CTV 4211 F 248.
28.09.88	2. First Registered Mortgage Debenture over all the assets and undertakings of Blanche Pty Ltd. 3. Construction Completion Guarantee from Hooker Corporation Ltd incorporating limited guarantee to meet all cost overruns above estimated $73.0M project construction costs, interest and fees. 4. Letter of Comfort from Hooker Corporation Ltd. 5. Loan Facility Agreement. 6. Appropriate insurance cover noting the Bank's interest as mortgagee. The valuation used for the building was prepared by a Bank Valuer, Mr Goodyear, at $78.1M (limiting the designated lending margin of 70% to $54.67M). The valuation was based on net income of $5.1M capitalised at 6.65% plus electricity profit and naming rights.
04.10.88	Advice from Lending Credit Committee noting the deferral of decision - no reasons given.
05.10.88	Revised submission to Lending Credit Committee with new security proposed. As above plus: 1. First Registered Share Mortgage over all the issued shares in Blanche Pty Ltd together with lodgement of signed blank share transfer forms.
06.10.88	Advice of Lending Credit Committee decision at meeting 407 - recommended the provision of construction finance to the Board.
06.10.88	Submission to Board for approval of the allocation of a $12.0M contingency limit for Halwood Corporation Ltd, to cover cost overruns and leasing up costs, on the following basis: Pre-completion of building $8.0M limit Post-completion of building $12.0M limit The facility to be set up without Halwood Corporation Ltd's knowledge would last 3 years to 31.12.91 and be unsecured.
06.10.88	Advice of Lending Credit Committee decision at meeting 407 - recommended the allocation of contingency limit to the Board.
07.10.88	Submission to Board with terms of Lending Credit Committee approval for construction facility.
13.10.88	Advice of Board decision at 12.10.88 meeting (vide 88/402) - approved construction facility.
13.10.88	Advice of Board decision at 12.10.88 meeting (vide 88/401) - approved contingency limit.
14.10.88	Letter of offer to Hooker Projects of $73.0M funding with conditions precedent of: 1. All necessary planning approvals and consents to be in place prior to the first advance. 2. Confirmation by the Quantity Surveyor, Rider Hunt of the expected construction costs based on final approved plans. 3. Prior to drawdown of construction funds the Bank to be provided with a projected schedule of building works and construction costs, together with certified copies of the contracts and project plans. 4. Blanche Pty Ltd to provide the Bank with all the security items together with such documents, notices, consents or authorisations that the Bank shall reasonably require. Additional security requested being a First Registered Charge over the construction contract with Hooker Multiplex Constructions Pty Ltd.
24.10.88	Copy of letter from Corporation of City of Adelaide approving the development application for a 21 storey complex at 75 Grenfell Street.
31.10.88	Confirmation of insurance from Sedgwick Hooker Pty Ltd for year ended 30.06.89: Construction Material Damage $35.0M Third Party Liability $5.0M Interest of the Bank noted on both policies and Sedgwick Hooker Pty Ltd indicated that $35.0M cover can escalate for contract price increases.
31.10.88	Advice that initial drawdown of $9,071,218 had occurred.
01.11.88	Memo to Chief Manager, Corporate Banking requesting approval to advance up to $20.0M prior to Halwood Corporation Ltd obtaining vacant possession (with short term security proposed over Unley Shopping Site) - approved.
07.11.88	Copy of Construction Management Contract between Blanche Pty Ltd and Hooker Multiplex Constructions Pty Ltd.
08.03.89	Letter from Hooker Projects that last of security documents requested had now been forwarded.
15.03.89	Hooker advised that Rider Hunt was no longer the Quantity Surveyor for Australis Centre.
05.05.89	Note that Halwood Corporation Ltd had indicated that Rider Hunt may have underestimated costs by $6.0M - they had been replaced by WT Partnership. No increases to funding necessary at this stage.
31.05.89	Note that Blanche Pty Ltd had arranged vacant possession with discharge of leases from titles.
15.06.89	Advice that the Bank had refused to meet Progress Claim No.7 for $1.2M as projected construction cost to complete exceeded funding approvals by $2.5M. Halwood Corporation Ltd instructed to pay claim.
27.06.89	Memo from Legal department advising of their suggestions to recovering of debts following the Bank entering into the Halwood Corporation Ltd debt moratorium on 21 June 1989.
06.07.89	Submission to Lending Credit Committee for review of Halwood Corporation Ltd project finance facilities following reported "financial pressures presently facing Hooker".
18.07.89	Confirmation from Sedgwick Hooker Pty Ltd that insurance covers have continued at existing levels until 30 June 1989.
18.07.89	Minutes of meeting between representatives of Hooker Projects and Bank. Hooker representatives questioned whether the project was still viable with estimated cost overruns of interest $13.0M, construction $4.0M and rental incentives $6.0M.
26.07.89	Letter to Halwood Corporation Ltd from Manager Corporate Finance demanding the payment of $0.89M for Administration costs incurred by Blanche over the approved limits. Another letter demands payment for overrun of $0.24M for Finance Costs.
27.07.89	Note from Senior Manager Corporate Finance & Projects (PJ White) to GM Corporate Banking recommending the appointment of a Receiver & Manager to Blanche Pty Ltd immediately.
28.07.89	Copy of Appointment of Receivers and Managers by virtue of equitable charge Registered No. 16580/1 - Stephen Elliott Young and John Harold Heard of Arthur Anderson appointed.
07.08.89	Submission to Lending Credit Committee for the continuance of the construction program to completion and the approval of an increase in facilities to $91.5M, following the appointment of a Receiver and Manager for Blanche Pty Ltd. Noted that the increase of $18.5M includes the $12.0M already provided as contingency limit for Halwood Corporation Ltd. The increase was to meet cost overruns due to inaccurate project estimates. Major overruns have occurred in: $M Construction costs 8.4 Consultants Fees 1.7M Finance Costs 7.9M Referred to Myer/REMM Project Review Committee.
08.08.89	Submission to Myer/REMM Project Review Committee for their recommendation to the Board - recommended approval.
21.08.89	Submission to Board noting the current situation and requesting ratification of steps taken to minimise loss. Request for continuance of construction, increase in facilities to $91.5M and noting of appointment of Receiver & Manager and that legal opinion is being sought for rights to claim against Halwood Corporation Ltd.
21.08.89	Advice of Lending Credit Committee decision at meeting 61A/89 - recommended adoption of Option C (continuation of construction).
24.08.89	Advice of Board decision at meeting (vide 89/263) - approved.
26.09.89	Paper to Lending Credit Committee for noting of current position. Existing limits $91.5M with outstanding liability of $37.59M.
23.10.89	Advice from Lending Credit Committee that they had noted 26.09.89 paper and had submitted it to Board for noting.
26.10.89	Advice from Board (vide 89/337) that they had noted paper dated 23 October 1989.
31.10.89	Submission to Myer/REMM Project Review Committee for approval to appoint Concrete Constructions (SA) Pty Ltd to complete Australis Centre on a gross maximum price and fixed time contract.
01.11.89	Advice of Lending Credit Committee decision meeting 82A/89 - approved.
02.11.89	Paper to Board for noting of appointment of Concrete Constructions.
09.11.89	Confirmation from Sedgwick Hooker Pty Ltd of insurance cover for years ending 30 June 1991 at: $M Contract Works Floater 75.0M Third Party Legal liability 10.0M
23.11.89	Advice from Board (vide 89/364) that they had noted paper dated 2 November 1989.
29.01.91	Placing Slips from Marsh & McLennan Pty Ltd for insurance after Practical Completion Date to 25 January 1992. $M Industrial Special Risks 63.0 Public Liability (Broadform) 5.0M Umbrella Liability 15.0M
31.01.91	Memo from Manager and Senior Manager Property Projects and Finance to the GM National Corporate Accounts requesting a temporary increase in facilities of $1.2M until a Lending Credit Committee submission was prepared -approved.
19.02.91	Memo from Manager and Senior Manager Property Projects and Finance to the GM National Corporate Accounts requesting a temporary extension in facilities to 28 February 1991 when Lending Credit Committee submission will be completed.
20.02.91	Valuation from Bank Valuer, Mr Goodyear for current market price of Centre. He assumed the Bank would be offering a 2 year rent guarantee and the gross rents used are approximately 70 per cent of those used for initial submission. A capitalisation rate of 7.25 per cent was considered appropriate and the fair market value was calculated to be $54.0M.
25.02.91	Note that account had been classified as non accrual from 1 January 1991.
25.03.91	Advice from Group Credit Committee meeting 19/91 on 21 March 1991 when provision of $37.0M was created and account downgraded to Grade G.
28.03.91	Submission to Group Credit Committee for confirmation of temporary facilities, an increase of $5.0M to $98.36M, the continuation of facilities to 31 March 1992 and the continuing plan of holding onto the building and getting tenants and selling the building once property prices improve.The submission noted a current valuation of the Australis Centre by Bank Valuers at $54.0M with its practical completion on 25.01.91. The construction costs to 31 January 1991 were: $M Site Acquisition 21,738 Preliminaries 3,695 Sub contractors 11,744 Building Costs - CCL 29,661 Construction Management 452 Other Management Costs 2,120 Bank Line Fees 408 Consultants 3,676 Interest Costs 20,118 Hooker Corp Funding (1,200) Other Debtors ( 229) Net Development Costs $92,183 Further costs excluding holding costs are $3.55M.

Appendix D.3

Chronology of Events
During the Life of the Loan

DATE	ASPENAIR PTY LTD
07.02.89	Valuation by Bank Valuer, Mr R Wood, on proposed development as at completion 1 September 1989. Notes proposal plan to create strata titled retail tenancies but discounts target rental rates. $M Option A: 8 strata titles 7.25 uses capitalisation rates from 7.5 to 8 per cent Option B: 7 strata titles 6.8 uses capitalisation rates from 7.5 to 7.75 per cent
12.02.89	Submission to Lending Credit Committee for establishment of $6.0M Project Finance Facility for Aspenair Pty Ltd to finance the acquisition and refurbishment of the former Demasius building and adjacent car park within Burnside Village complex. $'000 Building Acquisition 4,584 Construction costs 840 Construction contingency 20 Design Fees 118 Sundry Development 34 Leasing Commissions 60 Marketing 15 Net Holding costs 30 Interest cost (at 17 per cent) 337 General Contingency 20 Contributed by developer (58) Total project cost 6,000 Term to be 7 months with extra 5 months not to be advised to Halwood Corporation Ltd. Facility to be via commercial bills.
	Security required: 1. First Registered Mortgage over development site. 2. First Registered Mortgage Debenture over Aspenair Pty Ltd. 3. Charge over Hooker Corporation Ltd shares in Aspenair Pty Ltd. 4. Guarantee from Hooker Corporation Ltd to meet any interest, fees and holding costs beyond the facility limit. 5. Loan Facility Agreement incorporating covenant not to sell the project for less than the outstanding liability to the Bank without the Bank's consent. Valuation by Bank Valuer on 8 February 1988 noted at $7.25M giving an Extended Loanable Amount at 70 per cent of $5.075M.
14.02.89	Advice of Lending Credit Committee decision at meeting 11/89 - approved.
14.03.89	Letter of offer to Hooker Projects revised from original offer made 15 February 1989. Purpose of facility altered to "be on lent by the Borrower to Hooker Corporation Ltd to be utilised for the purchase of all the issued shares in the Borrower, and additional funding for the refurbishment of the former Demasius store". Conditions Precedent: 1. Final projected schedule of building works and refurbishment costs together with certified copies of the refurbishment plans and, if appropriate construction contracts. 2. All necessary planning approvals and consents to be in place. 3. Compliance with the requirements of Section 129 of the Companies Code and the issue of a S130(6) certificate by the Borrower. 4. Provision of all security documents.
01.05.89	Confirmation of Insurance for year ended 30 June 1989 with Bank's interest noted: $M Construction Material Damage 35.0M Third Party Liability 5.0M
02.05.89	Letter to Halwood Corporation Ltd confirming drawdown of facility on 1 May 1989 for $5.24M. The Bank noted the absence of the following prior to settlement: 1. Share Certificate for Aspenair Pty Ltd shares; 2. Certified copy of Memo and Articles; 3. Original power of attorney; 4. Section 230(8) and Section 130(6) certificates; and 5. Evidence of insurance.
13.06.89	Letter from Halwood Corporation Ltd forwarding the last of the Conditions Precedent documents.
15.06.89	Note that the Bank had determined that the project would exceed cost budgets and would seek payment of Progress Claim # 2 from Halwood Corporation Ltd.
19.06.89	Submission to Lending Credit Committee for increase in facilities to $6.5M to allow for increased purchase cost $0.192M, construction costs $0.158M and finance costs $0.188m for a total of $0.538M ($38,000 to be met by Hooker). It was intended to advise Halwood Corporation Ltd that $0.4M had been approved. Improvement in valuation noted to $8.225M (Extended Loanable Amount $5.758M).
19.06.89	Brief valuation by Bank Valuer, Mr R Wood, giving value on the basis of individual strata title units at $8.225M and on the basis that the development is sold as a single entity at $7.95M.
27.07.89	Memo discussing current situation and deciding that with minimal time left to complete refurbishment it would be best to continue. Recommended the appointment of Receiver and Manager.
28.07.89	Letter from Manager Corporate Finance to Built Environs Pty Ltd, the refurbishers, confirming the Bank's undertaking "to meet all project costs associated with the Boulevard".
10.08.89	Confirmation of Insurance for year ended 30 June 1990 with Bank's interest noted: $M Construction Material Damage 35.0 Third Party Liability 5.0
01.08.89	Notice that Messrs Stephen Elliott Young and John Harold Heard had been appointed as Receivers and Managers on 28 July 1989.
01.08.89	Letter to Provisional Liquidator of Halwood Corporation Ltd that it was Bank's intention not to implement remedies available under loan documentation at this stage.
01.08.89	Letter from Jones Lang Wootton confirming their appointment as agent for sale and leasing of the Boulevard, Burnside for 3 months following practical completion.
22.12.89	Valuation by Bank Valuer, Mr Goodyear, with 3 different scenarios: $M Sale as is - Cap rate 9.375 per cent 6.5 Sale when fully leased - 8.75 per cent 6.75 Sale as individual strata titled retail units - 8.75 per cent 7.15
19.01.90	Letter to Baker O'Loughlin stating that due to the charge the Bank had over the shares they disputed the interest Halwood Corporation Ltd had in the property and its proposed selling price.
13.02.90	Submission to Lending Credit Committee for noting that the Receiver and Manager had recommended that the property be withdrawn from market on a "sale by tender" basis, and for approval that the account be classified as non-accrual and the property be placed on the market at auction. Existing facility of $6.5M.
15.02.90	Advice of Lending Credit Committee decision at meeting 12/90 - noted and approved subject to "further discussions to take place between Corporate Banking and Finance Dept and possibly a subsidiary of the Bank, in relation to the appropriate means by which the property may be brought into our portfolio in the event that the auction fails to secure an offer sufficient to extinguish the debt in full."
21.03.90	Notice of Demand to Aspenair Pty Ltd under Memo of Mortgage 6729733 and Equitable Charge No 16989/1 that the Facility Agreement dated 01.05.89 had been terminated and payment of $7.159M was demanded.
28.03.90	Notice of Default and Intention to Sell to Aspenair Pty Ltd due to non payment under Notice of Demand dated 21.03.90.
28.03.90	Notice of Entry into Possession and Crystallisation of Charge in relation to Equitable Charge 16989/1.
10.05.90	Memo noting that the property was passed in at auction with no genuine bids.
25.05.90	Insurance Note/Certificate for period ending 31.05.91 with Bank's interest noted: Industrial Special Risk $8.0M
20.07.90	Memo to GM Corporate Banking that due to stamp duty considerations it was recommended that the Bank determine whether the Receiver and Manager had completed the administration of the company and, if so, he would be asked to resign, when the Bank would enter as Mortgagee In Possession.
05.02.91	Valuation by Bank Valuer, Mr Goodyear, with capitalisation rate of 10.25 per cent at $6.0M.
21.03.91	Advice of Group Credit Committee decision at meeting 19/91 where specific provision of $1.5M set.

CHAPTER 12 CASE STUDY IN CREDIT MANAGEMENT: HALWOOD

12.2 BACKGROUND TO THE ACCOUNT

12.3 CHRONOLOGY

12.4 COMPLIANCE WITH POLICIES AND PROCEDURES

12.5 MANAGEMENT OF NON-PERFORMING FACILITY

12.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT

12.7 RECOMMENDATION ON FURTHER INVESTIGATION OR ACTION

12.8 APPENDICES

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CHAPTER 12
CASE STUDY IN CREDIT MANAGEMENT: HALWOOD