CHAPTER 43
OTHER MATTERS INVESTIGATED WITHIN THE BANK AND BENEFICIAL FINANCE
TABLE OF CONTENTS
43.1 INTRODUCTION
43.2 REMUNERATION PRACTICES IN NEW YORK AND LONDON OFFICES OF THE BANK
43.2.1 INTRODUCTION
43.2.2 REMUNERATION IN THE NEW YORK OFFICE
43.2.3 REMUNERATION IN LONDON OFFICE
43.2.4 CONCLUSIONS
43.3 LOANS TO BENEFICIAL FINANCE EXECUTIVES
43.3.1 INTRODUCTION
43.3.2 INITIATION OF THE LOANS POLICY
43.3.3 POLICY IN RELATION TO INVESTMENT LOANS
43.3.4 CONCLUSIONS
43.4 THE PAYMENT OF "SHADOW" SALARIES TO BENEFICIAL FINANCE EXECUTIVES
43.4.1 OVERVIEW
43.4.2 AUTHORISATION PROCEDURE FOR THE PAYMENT OF "SHADOW" SALARIES
43.4.3 PREPARATION AND MAINTENANCE OF RECORDS OF "SHADOW" SALARIES
43.4.4 EXTERNAL AUDIT OF "SHADOW" SALARIES
42.4.5 RELEVANT LEGISLATION
43.4.6 CONCLUSIONS
43.5 PARTICIPATION BY EXECUTIVES IN THE JOLEN COURT PROJECT
43.5.1 OVERVIEW
43.5.2 THE JOLEN COURT PROJECT
43.5.3 LOANS TO BENEFICIAL FINANCE TO EXECUTIVES WHO WERE UNIT HOLDERS IN THE JOLEN COURT UNIT TRUST
43.5.4 BENEFICIAL FINANCE'S DEALINGS WITH THE TRIBE AND CRISAPULLI GROUP
43.5.5 CONFLICTS OF INTEREST
43.5.6 RELEVANT LAWS, AND ARTICLES OF ASSOCIATION
43.5.7 CONCLUSIONS
43.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
43.6.1 REGARDING "SHADOW" SALARIES
43.6.2 REGARDING JOLEN COURT PROJECT
43.7 APPENDIX
A Remuneration Summary - Years Ended 30 June 1988, 1989 and 1990
43.1 INTRODUCTION
This Chapter of my Report provides the results of my examination of a number of matters relating to the remuneration of officers of the Bank, and of Beneficial Finance. In particular:
Section 43.2 briefly describes the remuneration arrangements that applied to the most senior executives of the Bank's United States of America and United Kingdom branches. This has been a matter of public comment, and it is appropriate that I report publicly the key elements of those arrangements;
Section 43.3 describes the principal features of Beneficial Finance's policies and procedures relating to the provision of loans to its executives;
Section 42.4 reports a particular remuneration arrangement, called "shadow" salaries, used by Beneficial Finance until June 1986; and
Section 42.5 reports the evidence found by my Investigation regarding the participation by certain executives of Beneficial Finance in a joint venture project with a client of Beneficial Finance, in circumstances which involved a conflict of interest on the part of some of those executives.
The matters described in Sections 42.4 and 42.5 were examined by me because, in my opinion, they fell within the terms of Section 25(2) of the State Bank of South Australia Act 1983 (as amended), and Paragraphs A(h) and E of my Terms of Appointment. Those provisions require me to investigate and report on any possible conflict of interest or breach of fiduciary duty, or other unlawful, corrupt or improper activity on the part of a director or officer of the Bank or a subsidiary of the Bank which, in my opinion, I should investigate and report upon, and to advise whether any such matter should be the subject of further investigation.
43.2 REMUNERATION PRACTICES IN NEW YORK AND LONDON OFFICES OF THE BANK
43.2.1 INTRODUCTION
In the course of examining the remuneration practices of the State Bank, I have examined documentation relating to the remuneration of certain executives of the Bank in its New York and London offices. There has been public comment in relation to these matters, and it is therefore appropriate that I report the findings of my examination of them. This report is supplemental to observations made in my First Report regarding the Bank's remuneration practices.
43.2.2 REMUNERATION IN THE NEW YORK OFFICE
Mr R Sewell was recruited by the Bank from the ANZ Bank in 1988, to the position of Executive Vice President in charge of the Bank's North American Operations, based in New York. His commencement remuneration was as follows:
(a) Base salary $US 150,000, reviewed annually, with the first review to be on or before 1 July 1989.
(b) A performance bonus paid at the end of each financial year, up to a maximum of one third of base salary.()
(c) A signing-on fee of $US 75,000, payable in three annual instalments of $US 25,000 on 1 July 1988, 1 July 1989 and 1 July 1990.
(d) Provision of housing comparable to his then existing housing, and payment of reasonable utilities charges, on a tax-free basis.
(e) A loan of up to two and one half times base salary, at an interest rate equal to 65 per cent of the Bank's prime US currency rate.
(f) Additional loans comparable to those that had been provided by the ANZ.
(g) Two motor vehicles, and all running expenses.
(h) Membership of one business club.
(i) A superannuation plan.
(j) Group life insurance and health, dental and other insurance.
(k) Spouse travel and accommodation to visit Mr Sewell during his initial familiarisation period in Adelaide.
(l) A guaranteed termination payment of $US 200,000 in the event that the Bank ceased operations in the United States within three years of the commencement of his employment, and was unable to offer a comparable, mutually satisfactory position.
In about June 1989, Mr Sewell made recommendations for base salary increases, and bonus payments, for management and staff in respect of the financial year ending 30 June 1989. Those recommendations were approved without exception.() Mr Sewell's salary was increased to $US 200,000, and he received a bonus payment of $US 50,000. All other benefits were retained. The memorandum advising Mr Sewell of the increase stated:
"Robyn, your salary review recognises what, in my opinion, has been an outstanding job in establishing the Bank in New York, and positioning us for even better things in the future".()
For the financial year ending 30 June 1990, Mr Sewell recommended that management equitably share a percentage of the net profit of the United States operations in excess of budget levels.() On the formula suggested, and on the basis that the United States operations would exceed that budgeted by an amount of almost $US 1,500,000, a management bonus pool in excess of $US 400,000 was suggested. On that basis, Mr Sewell recommended that three members of the management team each receive a bonus of $US 100,000.() Mr Sewell also supported bonuses to staff of up to 30 per cent of salary.
In fact, for the financial year ending 30 June 1990, Mr Sewell received a bonus of $US 130,000. The other members of the management team who had been hired in 1988 received bonuses of $US 90,000, $US 70,000 and $US 70,000 respectively. The fifth member of the management team, who had been hired in May 1990, received no bonus.() The other bonuses paid to staff in the New York office for the year ending 30 June 1990 were:
|
"Performer" |
Bonus |
|||
|
1 |
30,000 |
|||
|
2 |
10,500 |
|||
|
3 |
1,700 |
|||
|
4 |
NIL |
|||
|
5 |
500 |
|||
|
6 |
500 |
|||
|
7 |
18,000 |
|||
|
8 |
2,100 |
|||
|
9 |
34,000 |
|||
|
10 |
9,000 |
|||
|
11 |
19,000 |
|||
|
12 |
11,000 |
|||
|
13 |
27,000 |
|||
|
14 |
3,500 |
|||
|
15 |
1,000 |
|||
|
16 |
3,100 |
|||
|
17 |
1,500 |
|||
|
148,100 |
||||
In May 1990, Mr Sewell made recommendations in relation to the incentive scheme for the financial year ending 30 June 1991. He recommended that management, consisting of five members, including himself, should participate in a bonus scheme as follows. In so far as the scheme related to management, the benefits proposed were to be as follows:
"(a) Upon achievement of an 8% return on notional capital, after tax, but before general provisions, a flat bonus of 10% of base salary.
(b) Upon achievement of any excess of the above target, the creation of a pool into which 25% of the excess is paid, to be divided by participants. Specific payments to be proposed by the Executive Vice President USA, recommended by the Chief General Manager International Banking and approved by the Group Managing Director.
(c) In the event (b) is achieved, management would like to be able to recommend payments to selected staff who are recognised as having specifically performed in a superlative manner, so that individuals can be recognised over and above staff payments. Any payment made in this manner would, in fact, decrease the "management pool".
STAFF
(d) Payments of between 0 and 30% of base salary regardless of target achievements."()
Mr T L Mallett responded by a Memorandum dated 9 July 1990 agreeing to (a), (c) and (d), and in relation to (b) commenting:
"I assume that the above target relates to the budget for New York for the year not the 8% return on notional capital ... on this basis, having achieved the budget, creation of a pool into which 25% of the excess is paid would be appropriate after meeting the cost of the 25%."
The recommendations were in turn recommended to the Group Managing Director, Mr T M Clark.() Although these recommendations were accepted, they were overtaken by events in 1991, when the Bank took action to close its international operations, and refocus on its core banking business in South Australia.
43.2.3 REMUNERATION IN LONDON OFFICE
Mr Todd was engaged as the Chief Manager of the Bank's London branch in November 1989. A letter dated 21 September 1989 offered him employment, to commence on 13 November 1989, on the following terms:
(a) Base salary of £100,000 per annum, increasing to £120,000 per annum on 1 July 1990, and subject to annual review thereafter.
(b) For the seven month period to 30 June 1990, eligibility for a bonus payment calculated on the basis of the London office's performance over and above budget, as follows:
|
Performance |
|
|
20 |
30,000 |
|
35 |
60,000 |
|
50 |
100,000 |
(c) Participation in the State Bank Group's profit share scheme for financial year ending 30 June 1990.
(d) For the financial year ending 30 June 1991, Mr Todd was to propose a performance related bonus scheme for himself, to be agreed by the Chief General Manager, International Banking.
(e) A fully maintained motor vehicle up to a value of £30,000, and reimbursement for all work- related running expenses.
(f) Five weeks annual holiday.
(g) Non-contributory superannuation.
(h) Health and disability insurance.
(i) In the event of closure of the London office prior to 31 December 1992, and in the event that the Bank was unable to appoint Mr Todd to mutually acceptable alternative position, a termination payment of £200,000.
(j) A subsidised housing loan of up to £100,000.
Mr Todd accepted the offer.
In accordance with the agreement, Mr Todd's base salary was increased to £120,000 on 1 July 1990. In addition, for the financial year ending 30 June 1990, he was paid a performance bonus of £62,740.() Having regard to the period worked by Mr Todd in the financial year ending 30 June 1990, the bonus payment equates to 100 per cent of Mr Todd's base salary. Assuming an exchange rate of $2.45 equals £1, Mr Todd was paid a sum in excess of $300,000 in base salary and bonuses for the seven and one half month period.
Pursuant to the terms of his employment contract, Mr Todd suggested that for the financial year ending 30 June 1991, a bonus scheme be put into operation which would provide for a bonus to be paid on the achievement of budget. That suggestion was rejected by the Bank.
Mr Todd was dismissed in November 1990 by Mr G D Abbott, the Bank's General Manager, Banking Services.() The reasons given by the Bank for the termination included the following actions alleged to have been taken by Mr Todd:()
(a) recording as profit of the London branch in October 1990, the sum of £100,000 which was in fact a repayment of a loan, and not income;
(b) entering into contractual arrangements with four members of staff, in breach of the Bank's Employment Policy;
(c) communicating confidential matters concerning the Bank, without first having obtained written approval of the Chief General Manager;
(d) purchasing, at the cost of the Bank, a motor vehicle in excess of the approved limit of £30,000; and
(e) payment of a pension in advance, and at a higher rate than approved.
Mr Todd instituted legal proceedings in England, seeking damages for his dismissal. The action was ultimately settled.
43.2.4 CONCLUSIONS
There is no doubt that, judged by local standards and in the context of current economic conditions, the remuneration arrangements for the top executives of the Bank's New York and London branches appear to be excessive, even exorbitant. These arrangements must, however, be judged according to the context in which they were established. Nevertheless in my opinion, approval for the payment of bonuses at the rates as stated in the Chapter in both New York and London was excessive and hence inappropriate.
43.3 LOANS TO BENEFICIAL FINANCE EXECUTIVES
43.3.1 INTRODUCTION
There has been a significant degree of public comment regarding the matter of investment loans to executives of Beneficial Finance. I have examined this matter, and in my opinion, there were certain features associated with the practice that require comment.
It should be stated, at the outset, that some of the publicity in respect of this matter has been based on internal Beneficial Finance reports that my Investigation has found to be misleading and inaccurate. This issue has been exhaustively examined by my Investigation, and I have concluded that, while there were some irregularities in respect of the provision of loans to executives, the matter does not attract adverse findings.
43.3.2 INITIATION OF THE LOANS POLICY
The policy of providing reduced interest loans to Beneficial Finance executives appears to have first been raised in 1985. At the Remuneration Sub-Committee Meeting of 19 March 1985 attended by Mr L Barrett, Mr Clark, Mr R P Searcy, Mr J A Baker and Mr G B Strutton, the Sub-Committee resolved that:
"...(3) The policy of a special 3% loan as to key staff was accepted as submitted, with two aspects emphasised.
(a) Recipients to be at the discretion of the Managing Director after recommendations from the Senior Line Manager to Managing Director/Human Resources Manager.
(b) The ceiling of $100,000 cost to the company in 1985/86 be closely monitored and reported to the Board."
The concept of investment loans as part of the salary package was first raised in 1987, as a result of the introduction of fringe benefits tax ("FBT")in 1986. The minutes of Executive Committee Meeting 22 January 1987 record, in respect of executives' remuneration packages, that:
"The company's first priority is to obtain approval from the Board Remuneration Sub-Committee for our investment loan policy. Greg Hayes, Beneficial's new Taxation Manager, should be involved in all "technical" tax matters that arise."
43.3.3 POLICY IN RELATION TO INVESTMENT LOANS
A policy document regarding the provision of investment loans was prepared in 1989 by Mr G Connor at the direction of Mr M Chakravarti.() The policy formed part of an overall remuneration arrangement called the "Total Remuneration Concept", or "TRC". The policy document stated:
The proposed process for approval of investment loans was as follows:
"STATEMENT
One major benefit which is available to TRC recipients is the INVESTMENT LOAN. This facility allows performers to utilise package funds to borrow for investment purposes.
POLICY
The following parameters are to be followed in the approval process:
A) TRC > $100,000: able to borrow 2.5 x package
B) TRC > $ 75,000: able to borrow 1.5 x package total
1. The loans must be fully secured.
2. They may be either Principal & Interest or Interest Only.
3. Package deduction will be from the arms length FBT rate (say 14.25%) to the charged rate (say 3%) i.e. 11.25% in this example.
4. Minimum post-tax rate to be used is 3%.
5. As these loans are income/gains producing, no FBT is applicable.
6. Performers will be required to complete an annual declaration for FBT purposes.
7. Full and complete documentation will be required for all loan transactions.
8. "Approval Process"
Manager Personnel may approve loans recommended by Divisional Heads falling within the above parameters.
Any exceptions may only be approved by the Managing Director.
This Policy will remain with Divisional Heads only." ()
The general concept of the provision of investment loans to executives was accepted within the company. It appears, however, that the specifics of the policy set out above were not formally approved by the Remuneration Sub-Committee of the Board of Directors, or by the full Board.()For example, Mr Baker said in his evidence to my Investigation, that the two and one half times package "cap" on loans provided in the policy document:
"... was never recommended up to the Beneficial Board or the Beneficial Remuneration Sub-Committee of the board ... but it was a self imposed management control that was felt appropriate to have." ()
Mr Connor stated in evidence() that there was a "general rule of thumb" that loans be limited to two and one half times salary prior to the Total Remuneration Concept package coming into operation. This so called rule of thumb was explained to him, during his employment interview, as being a limit on the benefit available in the form of housing loans. Mr Connor described the preparation of the policy document regarding investment loans as a move towards formalising the policy on this matter.()
Notwithstanding the stated policy, at least two senior executives, Mr Chakravarti() and Mr E P Reichert,() obtained investment loans from Beneficial Finance that were in excess of two and one half times salary package limit. The extent of the investment loans that could be available to certain senior executives within the limit can be seen from the information regarding salary packages set out in Appendix A.
In summary, Beneficial Finance's policy regarding the provision of loans to executives within the "Total Remuneration Concept" arrangement operated as follows:
(a) Beneficial Finance's executives were entitled to receive a maximum salary that was approved by the Remuneration Sub-Committee of the Board of Directors. The maximum salary was defined as a "total remuneration package".
(b) Within the total amount of the "total remuneration package", executives could elect to take their salary in various forms - either as straight salary, or including other benefits, including loans. Authority to approve loans to senior executives was delegated by the Board to Mr Baker. It is important to appreciate that the "total remuneration package" set an absolute limit on the amount of salary and benefits that could be taken. The total cost to Beneficial Finance of providing an executives' remuneration, including the cost to Beneficial Finance of any fringe benefits tax on non-cash benefits, could not exceed the amount approved by the Remuneration Sub-Committee of the Board of Directors.
(c) If an executive took a loan, the amount of interest on that loan, at the commercial interest rate, was deducted from his salary. If the loan was not used for investment purposes, so that fringe benefits tax was payable on the loan, the fringe benefits tax liability was deducted from their salary as well. There was, therefore, an in-built cap on the amount of any loan that could be taken. If a loan exceeded the two-and-a-half times total package limit, the executive's salary was further reduced to pay the interest on the additional loan amount.
There was, however, some apparent looseness in the application of the policy in practice. Beneficial Finance's records indicate that some of Mr Baker's loans were approved by himself. The circumstances of the loans to executives in relation to the Jolen Court Project, described in Section 43.5 of this Chapter, were also less than satisfactory.
Nevertheless, it should be noted that all loans provided by Beneficial Finance to its senior executives who subsequently resigned or were made redundant have been repaid, or are being repaid.
43.3.4 CONCLUSIONS
My conclusions in respect of the provisions of loans by Beneficial Finance to its executives are:
(a) The provision of loans to executives and staff is a practice common to almost all financial institutions.
(b) The policy regarding the provision of loans to Beneficial Finance's executives was, on balance, adequate.
(c) Beneficial Finance has suffered no losses in respect of its loans to executives.
(d) There was some looseness in the administration of the policy. That is demonstrated by the loans described in Section 43.5 of this Chapter.
43.4 THE PAYMENT OF "SHADOW" SALARIES TO BENEFICIAL FINANCE EXECUTIVES
43.4.1 OVERVIEW
Before the introduction of fringe benefits tax with effect from 1 July 1986, Section 26(e) of the Income Tax Assessment Act required employees to declare in their personal income tax return, as part of their taxable income, the value to them of any benefit provided to them by their employers, other than reimbursements of purely business expenses.
From about 1983 until to the introduction of fringe benefits tax in 1986, Beneficial Finance remunerated its senior executives, including the managing director, with a combination of salary and "shadow" salary.
Under the "shadow" salary arrangements, an executive would present accounts relating to expenditure incurred by the executive, which would then be paid by Beneficial Finance and deducted from the executive's "shadow" salary entitlement. The amounts deducted were debited to an expense ledger account within Beneficial Finance, and not against its wages and salaries ledger account. Records of the "shadow" salary proportion of the executives' remuneration and of the application of the "shadow" salary were kept by Mr Strutton, the Personnel Manager and later the Manager of the Human Resources department of Beneficial Finance.
Pursuant to the arrangement, executives could elect to take a proportion of their annual increase in remuneration as "shadow" salary.() The proportion of the total remuneration that could be taken as "shadow" salary increased over time.
The salaries of executives were established in about March of each year for the ensuing period 1 April - 31 March. In 1984, the proportion of total remuneration that could be taken as "shadow" salary was 10 per cent.() By the time of the salary review of March 1986, for the year from 1 April 1986 to 31 March 1987, the proportion of total salary that could be taken as "shadow" salary had increased to about 20 per cent of an executive's total remuneration, and "shadow" salaries totalling $365,322 were provided to forty-four executives. The list of "Approved Shadow Salaries" for the period commencing 1 April 1986 was:
|
"Approved Annual Shadow Salaries" |
|||
|
Staff Member |
$ |
||
| 1. |
4,750 |
||
|
2. (awaiting approval) |
38,406 |
||
| 3. |
8,576 |
||
| 4. |
7,500 |
||
| 5. |
4,750 |
||
| 6. |
2,000 |
||
| 7. |
3,000 |
||
| 8. |
16,800 |
||
| 9. |
4,750 |
||
| 10. |
8,000 |
||
| 11. |
11,250 |
||
| 12. |
6,050 |
||
| 13. |
10,050 |
||
| 14. |
6,200 |
||
| 15. |
7,700 |
||
| 16. |
8,000 |
||
| 17. |
10,350 |
||
| 18. |
15,800 |
||
| 19. |
6,950 |
||
| 20. |
16,800 |
||
| 21. |
2,000 |
||
| 22. |
2,000 |
||
| 23. |
14,500 |
||
| 24. |
10,800 |
||
| 25. |
10,800 |
||
| 26. |
7,000 |
||
| 27. |
16,800 |
||
| 28. |
6,750 |
||
| 29. |
2,000 |
||
| 30. |
11,175 |
||
| 31. |
9,250 |
||
| 32. |
2,000 |
||
| 33. |
14,500 |
||
| 34. |
2,000 |
||
| 35. |
15,800 |
||
| 36. |
11,100 |
||
| 37. |
2,000 |
||
| 38. |
6,250 |
||
| 39. |
10,800 |
||
| 40. |
3,000 |
||
| 41. |
2,000 |
||
| 42. |
2,000 |
||
| 43. |
1,615 |
||
| 44. |
1,500 |
||
|
$365,322 |
|||
The "shadow" salary arrangement was discontinued in July 1986 when fringe benefits tax came into operation. Fringe benefits tax places on employers the liability to pay tax in respect of benefits granted to employees as part of their remuneration.
43.4.2 AUTHORISATION PROCEDURE FOR THE PAYMENT OF "SHADOW" SALARIES
Approval for the use of "shadow" salaries was granted by the Remuneration Sub-Committee of the Board of Directors in early 1984. The Minutes of the Remuneration Sub-Committee meeting held on 14 March 1984 at the Hilton Hotel, Melbourne, and attended by Mr Rennie, Mr Baker, Mr N Barrell (all Directors of Beneficial Finance), Mr Kuraishi and Mr Rowan (apology Mr Strutton)() record that:
"It was agreed that Level 1 Executives could take some of the increase in an approved tax effective manner, within tight controls agreed between the Managing Director and the Remuneration Sub-Committee Chairman. Broadly the increases could be based on 25% going into salary and 75% into the "shadow" salary area along lines suggested by Cullen Egan Dell."
A report by Cullen Egan Dell, remuneration consultants, set out the various remuneration components being used by employers at the time, and described the most common remuneration component items as follows:
(a) base salary;
(b) representation/hospitality allowance;
(c) vehicle;
(d) vehicle allowance;
(e) clubs and professional association subscriptions;
(f) low cost home finance;
(g) telephone payments;
(h) employer superannuation contributions;
(i) bonus/incentive payments;
(j) overseas travel;
(k) expense reimbursement;
(l) additional superannuation contribution;
(m) local travel;
(n) spouse allowance; and
(o) health insurance/expenses.
Each year, Mr Strutton and Mr Baker prepared a proposed salary schedule for approval by the Remuneration Sub-Committee of the Board of Directors, which approved salary levels for senior executives. Salaries below that level were approved either by Mr Baker, or by personnel or division heads.() After the Remuneration Sub-Committee had ratified the salary schedule, the approved salary would be apportioned between salary and "shadow" salary. According to Mr Strutton:
"The Remuneration Sub-Committee would be aware that these could have been taken in a tax effective manner but I strongly believe that the definition of tax effective manner was left to John Baker to implement." ()
In his submission to my Investigation, Mr Baker said that Mr Strutton's immediate superior may have provided guidance and advice in relation to the administration of shadow salaries.()
On 23 March 1987, Mr Baker wrote to the Remuneration Sub-Committee consisting of Mr Barrett, Mr Clark and Mr Searcy, stating:
"Following the introduction of Fringe Benefits Tax (FBT) the provision of fringe benefits has been made completely legitimate." ()
When asked for an explanation of the words "completely legitimate", Mr Baker said:
"Well, obviously prior to FBT, advantage was taken of the system ... It was possible perhaps to claim a tax deduction for something that was not entirely business related ..." ()
In relation to the question of the use of "shadow" salary entitlements to pay non-business expenses, Mr Baker said:
"It just seemed to be part of the way things worked in those days, and I would have thought not entirely different from most corporations prior to the introduction of Fringe Benefits Tax ..." ()
43.4.3 PREPARATION AND MAINTENANCE OF RECORDS OF "SHADOW" SALARIES
It was Mr Strutton's task to keep a record of shadow salaries, raise sundry cheque requisitions, and retain a copy of sundry cheque requisitions to enable preparation of periodic reconciliations of the "shadow" salaries. Mr Strutton said:
"Although it was only a mundane clerical task, because of the sensitivity of the fact of relating to senior executives, I was given the job of being the clerk that ran a ledger on how that person was mopping up the shadow salaries. So I used to do that. It was as simple as that, a ledger book that you would buy from any stationer, just in handwritten form and usually once a month I would just manually calculate what debits there were to their shadow salaries, as they have now become known, and therefore how they were using their total remuneration." ()
In relation to the question of why it was that he kept the records, Mr Strutton said:
"If anybody directed me it would have been John Baker, but it might have just been the way the cookie crumbled, so to speak, at a meeting, that it was suggested that this should not be kept by a lower level Pay Clerk."()
Mr Strutton was of the view that, in addition to the fact that it was thought that the Pay Office staff should not be privy to the remuneration details of senior executives, the records were to be kept privately:
"Because I think there is a somewhat sinister motive to the introduction of "shadow" salaries ... that it would eventually become an area of remuneration that was exploited and if it was not for the advent of FBT it would have been dubious. Let us even be provocative and let us say illegal in nature." ()
The records were kept at Mr Strutton's home.() His explanation for this arrangement is that the task was a mundane clerical one, and that rather than interrupt his work he would take a photocopy of the account, and every month or so perform a reconciliation at home. He said:
"I think what is meant there by retention of those records, it is not the prime document that would, as I described previously, end up in the finance division, it is a record of a reconciliation of the "shadow" salary that the individual had, and I concede, yes, that was done at home for the reason I outline previously, that it was a mundane manual task that was best done in the quiet of the kitchen on a Wednesday evening, or whatever. So the retention of those records was the retention of the reconciliation of "shadow" salaries, not the actual documents that might have been the credit card reimbursement, because that SCR [Sundry Cheque Requisition] ended up in the finance division."
The reconciliation calculations prepared by Mr Strutton were retained for only a matter of months, and then destroyed. Mr Strutton said:
"Once the reconciliation had been agreed by the recipient they were history, and as such I destroyed them because they were only working copies, just something for me to do a reconciliation with." ()
The executives acknowledged utilisation of their "shadow" salary entitlement, or the conversion of any unused balance to regular salary, by signing off on the book copy which was subsequently shredded.()
43.4.4 EXTERNAL AUDIT OF "SHADOW" SALARIES
Mr Strutton said that because of his concern as to the nature of "shadow" salaries, and to ensure that there were no adverse repercussions regarding the amounts he had authorised for payment, in 1986 he requested that the managing director, Mr Baker, institute an external audit of "shadow" salaries. Mr Strutton said that, with the introduction of fringe benefits tax, he was:
"... coming under increasing pressure from John Baker and other senior executives to pull some rabbits out of the hat in terms of replacement creative remuneration practices, now that a higher percentage of the total remuneration was able to be applied in a tax effective manner and we now had FBT imposing fringe benefits tax on those benefits ... I could just surmise that there may (be) some criticism of me not being able to pull rabbits out of a hat, and there could be some dirty washing brought up from the past, and I just wanted to make a clean break of it, and it was normal for Price Waterhouse to review salaries every year anyway on a standard audit, so I just said I wanted it extended it into shadow salaries." ()
The notes of a meeting of Beneficial Finance Management on 23 April 1986, attended by Mr D R Clark, Mr Baker, Mr J G Graham and Mr B D Barton, record that the "tax impact of "shadow" salaries was discussed including the significance of recent legislation." ()
Mr Baker met with a representative from Price Waterhouse that day. After conducting an audit, Price Waterhouse provided a report to Mr Baker dated 10 June 1986 that was marked "Private and Confidential". The report confirmed that an audit had been conducted of the systems, documentation and controls in connection with "shadow" salaries, bonus payments and home loans, including test checking of "shadow" salary payments and bonus payments.
The audit report regarding the "shadow" salary system dealt in part with the question of whether it was possible to check the accuracy of Mr Strutton's recording of expenditure against "shadow" salaries. The report stated:
"... under the current system, and particularly under the current filing of documentation, the company is unlikely to detect cases where bonus or "shadow" payments were omitted from Mr Strutton's listings. Accordingly it has not proved possible for us to confirm that every SCR raised by Mr Strutton has been correctly recorded on the listing and reconciliations. One method of improving control would be to open a separate banking account to be used only for "shadow" and bonus payments. It would be straight forward to ensure that all payments had been correctly recorded. A disadvantage would be that these payments would become more readily identifiable within the Company's systems." ()[Emphasis Added]
In their submission to my Investigation, the external auditors said that the final sentence was referring to the fact that the existence of these payments could be more readily identified by other staff of Beneficial Finance if a separate account was used.()
In relation to the nature of "shadow" salary payments, the report stated:
"Our work indicated that many of the items purchased under the bonus and "shadow" salary system were not of a business nature. In the cases of "shadow" payments these items are charged to various expense categories in the profit and loss account. In the event of a tax audit it may be difficult to satisfactorily explain the nature of these payments. ... As indicated above, "shadow" payments are charged to various expense accounts in the Profit and Loss Account depending on the nature of the goods or services purchased. These items are effectively for remuneration of staff, accordingly the wages and salaries expense in the Profit and Loss Account is understated and other expense accounts are overstated." () [Emphasis Added]
The report concluded:
"In relation to "shadow" payments, you are aware that the recipients are assessable to tax on the value to them under s.26(e) of the Income Tax Assessment Act and it is a responsibility of the recipients to disclose such benefit in their personal return. If they do not, there does not appear to be any liability attached to Beneficial at the present time. However, you will be aware that Fringe Benefits Tax comes into effect on 1 July 1986, and from that time onwards the payment of shadow amounts on behalf of employees will attract Fringe Benefits Tax, and it will be Beneficial's responsibility to report the benefits and bear the tax. Heavy penalties are provided for evasion.
You should also consider the possibility that the disclosure of the existence of such fringe benefits to the Taxation Office in a return could lead them to inquire into past practices and to check that appropriate disclosures had been made by the recipient." [Emphasis Added]
An examination by Price Waterhouse of "shadow" payments made on behalf of ten employees revealed payments deducted against the Beneficial Finance Profit and Loss Account in respect of a variety of non-business expenses, including:
(a) Holiday Travel;
(b) Golf Club Fees and Subscriptions;
(c) Credit Card reimbursements;
(d) Carpentry;
(e) Furniture and electrical goods;
(f) House painting; and
(g) Carpets.
The "shadow" salary proportion of an executive's total remuneration could also be used to reduce the interest rate on housing loans.
The use of shadow salaries ended with the introduction of fringe benefits tax from 1 July 1986. For example, Mr Strutton advised the executives in respect of low interest housing loans that:
"Following the introduction of FBT, "shadow" salaries can no longer be used as a mechanism to reduce P & I monthly loan repayments by charging an artificially lower 3% rate." ()
42.4.5 RELEVANT LEGISLATION
In considering the implications of the "shadow" salary arrangements, I have had regard to the following legislative provisions:
Section 267(1) of the Companies Code requires a company to:
"(a) Keep such accounting records as correctly record and explain the transactions of the company (including any transactions as trustee) and the financial position of the company; and
(b) Keep its accounting records in such a manner as will enable -
(i) the preparation from time to time of true and fair accounts of the company, and
(ii) the accounts of the company to be conveniently and properly audited in accordance with this Code."
Section 267(11) of the Code provides that:
"If default is made in complying with a provision of this section other than sub-section (10), the company, a director of the company who failed to take all reasonable steps to secure compliance by the company with the provision and any officer of the company who is in default are each guilty of an offence.
Penalty: $2,500 or imprisonment for 6 months, or both".
Section 8L Taxation Administration Act 1953 provides:
"Where -
(a) A person who is required under or pursuant to a taxation law to keep any accounts, accounting records or other records keeps them in such a way that they do not correctly record and explain the matters, transactions, acts or operations to which they relate;
or
(b) A person who is required under or pursuant to a taxation law to make a record of any matter, transaction, act or operation makes it in such a way that it does not correctly record the matter, transaction, act or operation,
the person is guilty of an offence."
The penalty for breach (provided in Section 8M) is a fine not exceeding $2,000.
Section 8Q of the Act provides:
"Where -
(a) a person who is required under or pursuant to a taxation law to keep any accounts, accounting records or other records recklessly or knowingly keeps them in such a way that they do not correctly record and explain the matters, transactions, acts or operations to which they relate; or
(b) a person who is required under or pursuant to a taxation law to make a record of any matter, transaction, act or operation recklessly or knowingly makes it in such a way that it does not correctly record the matter, transaction, act or operation,
the person is guilty of an offence."
The penalty for breach (provided in Section 8R) is a fine not exceeding $3,000.
Section 8T of the Act provides:
"A person who -
(a) keeps any accounts, accounting records or other records in such a way that they -
(i) do not correctly record and explain the matters, transactions, acts or operations to which they relate; or
(ii) are (whether in whole or in part) illegible, indecipherable, incapable or identification or, if they are kept in the form of a data processing device, incapable of being used to reproduce information;
(b) makes a record of any matter, transaction, act or operation in such a way that it does not correctly record the matter, transaction, act or operation;
(c) alters, defaces, mutilates, falsifies, damages, removes, conceals or destroys any accounts, accounting records or other records (whether in whole or in part);
or
(d) does or omits to do any other act or thing to any accounts, accounting records or other records,
with any of the following intentions, namely:
(e) deceiving or misleading the Commissioner or a particular taxation officer;
(f) hindering or obstructing the Commissioner or a particular taxation officer (otherwise than in the investigation of a taxation offence);
(g) hindering or obstructing the investigation of a taxation offence;
(h) hindering, obstructing or defeating the administration, execution or enforcement of a taxation law; or
(j) defeating the purposes of a taxation law,
(whether or not the person had any other intention) is guilty of an offence."
The Penalty for breach (provided in Section 8V(1)) is a fine not exceeding $5,000 or imprisonment for a period not exceeding twelve months or both.
43.4.6 CONCLUSIONS
Both business and non-business expenses were paid by Beneficial Finance, on behalf of executives, and notionally deducted against the executives' entitlements to "shadow" salary.
In the accounting records of Beneficial Finance, the "shadow" payments were charged to various expense accounts in the Profit and Loss Account, depending on the nature of the goods or services obtained by the employees and paid for by Beneficial Finance.
The payments of those expenses relating to non-business or part business expenditure should have been charged to the Wages and Salaries Ledger Account in the Profit and Loss Account, and not to other expense accounts.
The accounting by Beneficial Finance of the "shadow" salary payments was, to say the least, irregular. Whether for reasons of convenience or otherwise, the reconciliation statements recording the utilisation of "shadow" salary entitlements was performed by Mr Strutton at his private residence, and the reconciliation records kept there. The records were then destroyed within a matter of months following the annual reconciliation, and the only record which then remained was the expense voucher and accompanying sundry cheque requisition, recorded simply as part of Beneficial Finance's operating costs.
Bearing in mind that the Price Waterhouse report stated that the procedures instituted in relation to "shadow" salaries did not provide an adequate system for ensuring that "shadow" payments were always included in Mr Strutton's listings and therefore taken into account in the reconciliations, a situation was created in which Beneficial Finance was not able to ensure that amounts were not paid on behalf of executives in excess of their entitlements.
Pursuant to Section 26(e) of the Income Tax Assessment Act, it was the responsibility of the executives to disclose, in their personal income taxation returns, the value to them of any benefit provided by Beneficial Finance. That obligation extended to include all expenses of a private nature paid by Beneficial Finance as part of the executives' "shadow" salary entitlements, including the difference between the reduced interest rate and the commercial interest rate on housing loans, and to the private use proportion of the costs of operating a motor vehicle. Purely business related expenses, such as those in respect of necessary business travel, could of course have been simply paid from the appropriate expenses account of Beneficial Finance, and should not have involved any utilisation of "shadow" salary.
The application of "shadow" salary to non-business expenditure by various executives was known to Mr Strutton, Manager of the Human Resources department, and to Mr Baker, Managing Director, and was recognised by the external auditors, Price Waterhouse, in their report dated 10 June 1986.
In my opinion, the treatment of the "shadow" salary benefits in Beneficial Finance's accounting records was undertaken so that they could not be identified as having benefited the particular executives. It provided the opportunity for executives to minimise their taxable income by not including the "shadow" salary component in their income tax returns.
It must be stated that I have not examined the personal income tax returns of the executives of Beneficial Finance who received "shadow" salaries, and so no inference can necessarily be drawn that the executives involved did not fully disclose the benefit in their personal income tax returns. All that can be said is that the arrangement provided them with the opportunity to not disclose the benefit. I have been advised that the matter of the disclosure or non-disclosure of the "shadow" salary benefits by executives is currently being investigated by the Federal Police.
43.5 PARTICIPATION BY EXECUTIVES IN THE JOLEN COURT PROJECT
43.5.1 OVERVIEW
This Section reports the results of my examination of the participation by six executives of Beneficial Finance in a property development project with a client of Beneficial Finance, Viaduct Services Pty Ltd, a member of the Tribe and Crisapulli Group of Companies. I will call the project the "Jolen Court Project".
In April 1989, six Beneficial Finance executives and Viaduct Services entered into an arrangement to acquire and develop land located at 57-65 Springvale Road, Donvale, Victoria. The purchase price of the property was $2.5M, with $0.5M payable as a deposit on 28 July 1989, and the balance of $2.0M payable in April 1990.
In August 1989, the executives borrowed a total of $0.475M from Beneficial Finance to fund their investment in the Jolen Court Project. That money was used to pay the deposit to buy the land. The balance of the purchase price, payable in April 1990, was to be raised by Viaduct Services. Viaduct Services was also to provide the expertise to develop the project.
The ability of Viaduct Services to obtain the $2.0M to purchase the land depended upon the continuing financial strength of the Tribe and Crisapulli Group. Viaduct Services had given guarantees in respect of other companies in the Tribe and Crisapulli Group with respect to borrowings by those other companies from Beneficial Finance. Any failure of that Group would affect the ability of Viaduct Services to obtain the $2.0M needed to complete the purchase of the land. That could, in turn, result in the Beneficial Finance executives forfeiting the $0.5M they had contributed as the deposit for the property, unless they could obtain $2.0M from other sources.
By September 1989, the Tribe and Crisapulli Group was experiencing financial difficulties. Certainly, the Beneficial Finance Board of Directors was concerned about Beneficial Finance's exposure to that Group. The Board imposed a limit of $33.5M on the exposure to the Tribe and Crisapulli Group.
The potential for a conflict of interest on the part of the six Beneficial Finance executives is patent, when it is appreciated that certain of those executives involved in the Jolen Court Project were also involved in the credit approval process in respect of applications by the Tribe and Crisapulli Group for loans from Beneficial Finance. Without the continuing financial support of Beneficial Finance to the Tribe and Crisapulli Group, Viaduct Services may not have been able to perform its part in the Jolen Court Project, potentially resulting in the executives losing their investment, itself funded by Beneficial Finance.
43.5.2 THE JOLEN COURT PROJECT
On 11 April 1989, two executives of Beneficial Finance, Mr Reichert and Mr G L Martin, became directors and shareholders of a company named Wanslea Willows Pty Ltd ("Wanslea Willows").
On 28 April 1989, Wanslea Willows, or its nominee, entered into a contract to purchase a residence and land at 57-65 Springvale Road, Donvale, Victoria for an amount of $2.5M. Pursuant to the contract, a non-refundable deposit of $0.5M was payable by 28 July 1989, and the balance of $2.0M was to be paid on 28 April 1990.
The sum of $40,000 was paid to the vendor's Real Estate Agent, Ray White (Templestowe) Pty Ltd ("Ray White"), on 1 May 1989, and a receipt of that date from Ray White acknowledged the payment as having been made by Wanslea Willows as "part deposit 57-65 Springvale Road, Donvale". On 15 May 1989, a further payment of $60,000 "on account of deposit" was paid to Phillips and Wilkins, solicitors for the vendors P & G Papamichael. Receipt No 103776 of that date refers to that payment as being received by cheque from Parkville Properties, the business name of the Tribe and Crisapulli Group of Companies.
The Jolen Court Unit Trust was established by a Deed of Trust dated 28 July 1989, with Wanslea Willows as trustee. The unit holders are listed in the First Schedule of the Trust Deed as being:
(a) Viaduct Services Pty Ltd of 1st Floor, 207 Lygon Street, Carlton, 105 Units;
(b) John Ascott Baker of Greenhill Road, Burnside, SA, 20 Units;
(c) Eric Paul Reichert of 7 Allendale Avenue, Glen Osmond, SA 20, Units;
(d) Garry Leslie Martin of 30 Cedar Avenue, Glenunga, SA, 20 Units;
(e) Ronald Christopher Hansen of 9 Powrie Court, Ringwood, Vic, 20 Units;
(f) John Blunt of Trinidad Court, West Lakes, SA, 10 Units; and
(g) Lyle Kenny of 25th Floor, State Bank Centre, Adelaide, SA, 5 Units.
The directors of Viaduct Services were Mr K J Tribe and Mr V Crisapulli, the principals of the Tribe and Crisapulli Group. The six other unit holders in the Jolen Court Unit Trust were executives of Beneficial Finance. Wanslea Willows shared its registered office with Viaduct Services.
A trust account receipt dated 2 August 1989 records that $0.4M was received as "balance of deposit 57-65 Springvale Road, Donvale", from "Parkville Properties for Wanslea Willows Pty Ltd".
Of the $0.5M paid by or on behalf of Wanslea Willows as the deposit for the purchase of the land, $0.475M was paid to Wanslea Willows as trustee of the Jolen Court Unit Trust by the six Beneficial Finance executives who were listed as unit holders in the Trust. The remaining $25,000 was paid by another Beneficial Finance employee who did not receive any units in the Trust, and so was not included as a unit holder in the schedule.()
One of the Beneficial Finance executives who invested in the Jolen Court Project, Mr J Blunt, was employed in the Structured Finance and Projects division. He said that he was made aware of the project by either Mr Martin or Mr Reichert.() Mr Blunt was aware that Tribe and Crisapulli were to be involved, and that they were not contributing any initial funds, but were to guarantee to raise the balance of funding and to provide expertise to complete the Project.() He was not sure who the other investors were to be at the time he agreed to participate, but subsequently became aware of their identity.()
The deposit for the Jolen Court Project land having been paid on 1 August 1989, it was incumbent upon Viaduct Services to raise the remaining $2.0M to complete the contract. It is apparent that all attempts made by Viaduct Services to arrange the additional funding were unsuccessful. During the second six months of the twelve month settlement period, there was no progress in terms of raising the funds, and the question of the balance of funding became a concern.()
Mr Blunt said that as the proposed settlement date of 28 April 1990 approached, it had become reasonably clear that Tribe and Crisapulli were not going to be able to raise the finance. He expressed the view that he did not think they were actively trying to do so.() He stated:
"Well, I think by that stage, it was becoming evident that they had their own problem...I would have been aware that they probably were starting to be classified as a potential concern account within Beneficial. So if that was the case, they wouldn't have been able to - it certainly would have been difficult for them to raise funds from anywhere."
Mr Blunt also said that:
"Towards the end, attempts were made by some of the participants from Beneficial to raise the money because, obviously, we really didn't want to lose our loan, and wanted to see whether there was a way to make the thing go ahead and at least even if it was just to recover what we had put in and not make any profit, that was looked at as an option. But really, at the end of the day, I think personal guarantees would have had to be provided to raise this other $2.0M of funding and then development costs on top. I don't know about the others but I certainly wasn't prepared, for my limited interest in it, to guarantee $2.0M plus worth of debt." ()
The vendors were initially prepared to extend the settlement date, but ultimately on 23 July 1990 served a notice of default on Wanslea Willows. Mr Baker then approached Mr D W Simmons to approve a loan of $2.0M to several executives, including himself.() Mr Simmons described the proposed loan as:
"... a joint venture, and it appears that this joint venture with a Melbourne developer, Tribe and Crisapulli, is in default and the account is in default at a level of $37.0M rather than within the approved Board (limit of) $30.0M."
Mr Simmons was not prepared to approve the loan, and so he referred the proposal to the Board of Directors. Mr Simmons' diary note says that the "Board said it would approve of it provided that it had audit sign off".
It appears from the information available that the settlement did not proceed, and that Wanslea Willows never came into possession of the land at 57-65 Springvale Road, Donvale, Victoria.
43.5.3 LOANS TO BENEFICIAL FINANCE TO EXECUTIVES WHO WERE UNIT HOLDERS IN THE JOLEN COURT UNIT TRUST
The sum of $0.475M paid to Wanslea Willows was in the form of a cheque number 357526, dated 1 August 1989, drawn on a Beneficial Finance Corporation Ltd account at a National Australia Bank Ltd branch in Victoria. The sum represented loans to the unit holders in the following amounts:
|
$ |
|||
|
Mr J A Baker |
100,000 |
||
|
Mr E P Reichert |
100,000 |
||
|
Mr G L Martin |
100,000 |
||
|
Mr R C Hansen |
100,000 |
||
|
Mr J Blunt |
50,000 |
||
|
Mr L Kenny |
25,000 |
||
|
475,000 |
|||
On the same day, 1 August 1989, Mr Connor, who as Manager of the Human Resources department of Beneficial Finance was responsible for ensuring that the benefit to Beneficial Finance executives provided by reduced interest loans was debited against their salary package, was informed that the executives had made an investment in Wanslea Willows, that the money had been advanced, and that loan records needed to be established.() It should be noted that not all of the loans were reduced interest loans.
Mr Connor was not provided with any documentation relating to the loans, Wanslea Willows, or the Jolen Court Unit Trust. The absence of documentation caused him concern, and he requested written authorisation from Mr Baker. Later that day, 1 August 1989, he received a hand written note signed by Mr Baker dated "1/8", the full text of which reads:
"Greg Connor, you are authorised to advance $475,000 to Wanslea Willows Pty Ltd on behalf of various senior Beneficial performers with appropriate security consistent with company policies."
The procedure by which loans were arranged to enable the executives to invest in the Jolen Court Development Project did not comply with the investment loan policy, which required, among other things, that "full and complete documentation" be provided for all loans. The policy provided, however, for exceptions to be approved by the Managing Director.
In evidence to my Investigation, Mr Baker said that he has no recollection of the loans. He said in respect of his note to Mr Connor that:
"I did not think I had - I could not remember having approved loans for Beneficial employees for that purpose until last Friday when I got this copy of this here which says that I authorised Greg Connor to advance $475,000 to Wanslea Willows Pty Ltd on behalf of various senior Beneficial performers with appropriate security consistent with company policy." ()
Mr Baker said that he was invited to participate in the project by Mr Reichert,() and that he:
"Did not really understand that I had a $100,000 loan until a considerable time after that...well after this memo (of 1 August 1989). This would have been, from what I see on my loan records, when the money was advanced, the day I approved it. I still did not think - I never signed the loan document and the thing had just gone straight out of my mind. It probably was not until into 1990 when I realised that I had a loan there." ()
He acknowledged that it was not sound practice to have in place a system which enabled a loan for $0.1M to be extended to a borrower who had no knowledge of the loan.() He described his reaction to discovering the loan as follows:
"I was somewhat amazed that it had happened. I may have called Erich Reichert and asked him about it at the time, but I am sure I do not remember ever having signed any documentation for it, ever having advice of it being drawn, or anything like that, until I saw it on my loan record sometime in 1990, as best as I can recall." ()
Security for the loans consisted of a mortgage over units in the Jolen Court Unit Trust, which Mr Baker acknowledged was not sufficient security, although the loans may have been otherwise protected by "all monies clauses" in the executives' mortgages.
43.5.4 BENEFICIAL FINANCE'S DEALINGS WITH THE TRIBE AND CRISAPULLI GROUP
As noted, the holder of the majority of units in the Jolen Court Unit Trust, Viaduct Services, was a company in the Tribe and Crisapulli Group of Companies, an existing customer of Beneficial Finance.
The involvement of the Beneficial Finance executives in a venture with a client of Beneficial Finance upon whose financial viability the success of the venture directly depended, clearly had the potential to give rise to a conflict of interest. Over the course of the year until Viaduct Services was required to contribute $2.0M to the venture, there would, on any reasonable view, be pressure upon those executives involved in the credit approval process to ensure, so far as they were able, that the Tribe and Crisapulli Group received continued funding from Beneficial Finance, and that no action was taken that could result in a financial crisis for the Group.
My inquiries were directed to the support which the executives gave to credit submissions submitted to the Board of Directors for continued and new funding for the Tribe and Crispulli Group.
A credit submission dated 14 July 1989 sought approval from the Beneficial Finance Board of Directors for a loan facility for Banneray Pty Ltd, another Tribe and Crisapulli Company. Attachment A of the submission reported that Viaduct Services had borrowed $7.45M on 8 June
1988, and that as at the time of the report, 28 June 1989, owed a principal balance of $6.506M and had a lease exposure of $0.495M, including leases in respect of six motor vehicles. There were also exposures to other Tribe and Crisapulli companies, including contingent liabilities, of $27.6M.
Attachment B to the submission, headed "Parkville Properties Project Status/Projections", includes a reference to:
"12. Project - Springvale Road, Donvale; Status-20 lot subdivisional estate - $100,000 paid; estimated profit and return of capital (net to Parkville) $700,000; Comments-commence June 1990/complete October 1990."
That project was the Jolen Court Project involving the Beneficial Finance executives. The executives' participation was not disclosed in the submission.
The Beneficial Finance Board was concerned about the exposure to the Tribe and Crisapulli Group. The minutes of the Board of Directors' meeting on 29 September 1989 record that:
"5.1.8 Viaduct Services Pty Ltd: the Board believed that the exposure to Tribe and Crisapulli was getting high ($28.5M) and was probably reaching its limits.
The Managing Director advised the Board that the current approval limit given to the credit committee for "top-up" credit to existing customers was 10% of the previous exposure limit. The Board requested that the policy be limited to 10% of the previous approved exposure limit in any 12 month period."
One month later, on 25 October 1989, Mr Baker presented another credit submission to the Board seeking funding for another Tribe and Crisapulli project involving Lameroo Lake Pty Ltd, a member of the Tribe and Crisapulli Group. The exposure to the Tribe and Crisapulli Group at that time, including contingent liabilities, was $33.6M. An attachment to the submission, dated 12 October 1989, stated:
"It is further noted that, as a separate exercise, a comprehensive review and analysis of Tribe & Crisapulli's financial position is being undertaken by Beneficial. However, this was unable to be completed within the time frame necessary to accompany this submission to achieve settlement on the desired date. It is committed that this review will be completed for the November 1989 Board meeting."
The submission, which described Tribe and Crisapulli as clients "with whom Beneficial enjoys a strong and profitable relationship",() was recommended for approval by, among others, Mr Baker, Mr Reichert, Mr Martin and Mr Kenny, all of whom were unit holders in the Jolen Court Project. The interest of the executives in an associated venture was not disclosed.
The minutes of the meeting of Beneficial Finance's Board of Directors on 27 October 1989 record in respect of the Tribe and Crisapulli Group, under the heading "Action Items", that:
"Tribe & Crisapulli: A further credit submission had been forwarded to directors for consideration. Negotiations for this transaction had commenced prior to the account being placed on the watch list. The client had now been advised that the exposure limit had been reached. The Board requested that a default trigger be placed on the client's cash flow."
A review of the Tribe and Crisapulli Group's cash flow prepared for the purposes of that meeting showed that the Group had credit facilities from Beneficial Finance totalling $33.5M. There was also mutual involvement in five joint venture projects.
On 18 July 1990, a credit submission was presented with the support of the Beneficial Finance Credit Committee comprising Mr Baker, Mr J D Malouf and Mr Teroxy,() for a facility in relation to various Tribe and Crisapulli joint ventures, to repay external debt on one of those ventures, Monash Gateway, and to provide for ongoing interest and holding costs in respect of the Monash Gateway, Southbank and Carlton joint ventures. The submission sought an increase of the approved limit of the combined equity, debt and contingent liability from $14.46M to $29.06M in respect of those three projects, with the further proviso that a $2.8M contingency in respect of Southbank Joint Venture would require replacement by a $9.0M debt if the Bank did not extend that facility. That would have resulted in a Beneficial Finance exposure to the Tribe and Crisapulli Group of $35.260M.
Beneficial Finance's exposure to the Tribe and Crisapulli Group eventually resulted in losses for Beneficial Finance. In February 1991, the Board of Directors were presented by Management with a report that estimated that Beneficial Finance's losses in respect of the Tribe and Crisapulli Group would be between $3.0M and $12.0M. The report stated that a specific provision of $5.5M had been made, and $7.4M had been written off. Interest foregone was $6.5M, and the facilities to the Group were classified as non-accrual. The report stated in part:
"All facilities capped and in liquidation.
RELATIONSHIP RECAP: The relationship, incorporating both joint ventures and debt funding, grew on a deal by deal basis, over a six year period. Perceived expertise of the Borrowers during the term of the buoyant property market has not been sufficient to bring the Borrowers through the severe Victorian Real Estate market downturn. Both the nature of the borrower's real estate portfolio and the debt/equity structures employed to fund the portfolio contribute to the expectation of substantial losses on realization. Beneficial will now move to take control of the properties and institute a planned realization programme.
RISK PROGNOSIS: Best Case: loss $3-5M NOTE: Valuations in March/July 1990 reflect possible realisations in a reasonable but not fire sale market.
Probable Case: loss $7-10M Actual offers are well below those forecast figures and reflect market conditions.
Worst Case: loss $10-12M
STATUS UPDATE: Few positive events are evident as the Victoria market continues to deteriorate. Prices are severely depressed and regardless of price on some projects no buyers are evident."
43.5.5 CONFLICTS OF INTEREST
One of the executives involved in the Jolen Court Project, Mr Blunt, conceded that if the Tribe and Crisapulli Group became unable to meet its commitments generally, that would have had a direct impact on the Jolen Court Project, since its success depended upon Tribe and Crisapulli's capacity to obtain the $2.0M to complete the purchase of the land. That obviously would have implications for the investment in the project by the Beneficial Finance executives. It should be noted that Mr Blunt played no part in the credit approval process for any Tribe and Crisapulli proposal, and no finding is made against him.
Mr Kenny had a role in the credit approval process in relation to the Lameroo Lake proposal. He did not declare his interest to the Board. He stated that he did not perceive, at the time, that there was any potential conflict of interest. If he had perceived such a conflict, his "first instinct would be to make sure that as a middle manager, that management, and the most senior management is aware of a potential conflict of interest." () He conceded that in retrospect, should a similar situation exist, he would declare his interest.() Mr Kenny was comforted to some extent by the involvement of his superiors. I have considered his evidence, and whilst I find that he acted unwisely in this particular case, I am not prepared to find that he acted improperly in the discharge of his duties, and I recommend that no further action is warranted.
Another executive involved, the Managing Director Mr Baker, said that his ability to objectively deal with an application by a client for an increase in facilities would be affected if he was involved in a business sense with that particular client, and that:
"... one should not really be involved if that is the case. You should declare your interest and let someone else do it." ()
Mr Baker said that that would be the case even where the customer was seeking funding for a different venture.()
Mr Baker agreed with the proposition that it would be inappropriate to engage knowingly in the Jolen Court venture with the Tribe and Crisapulli Group, being customers of Beneficial Finance, if he was then to take steps to support further increases in facilities to the Tribe and Crisapulli Group without declaring his interest.() He claims, however, that although he was aware that Tribe and Crisapulli Group had "identified" the land involved in the Jolen Court Project,()it was not until after he had left Beneficial Finance that he became aware that the Group were to be involved in the Jolen Court Project as co-venturers. Further, as noted above, Mr Baker denied any knowledge of the fact that he had received a $0.1M loan from Beneficial Finance to fund his investment, even though he personally approved the advance of funds to the executives, including himself, which funds were in turn paid to Wanslea Willows.
Having regard to all the evidence, I am unable to accept what Mr Baker says in that regard. Under the arrangements described by Mr Blunt, it was incumbent upon Tribe and Crisapulli to arrange the balance of finance. It became apparent during the early part of 1990 that that was not going to happen. In about May 1990, according to Mr Baker, he became aware that there was a prospect of losing the deposit monies, since the first date for settlement, 28 April 1990, had passed. I find it difficult to accept that the question of Tribe and Crisapulli's involvement, and its failure to obtain finance, was not raised in the course of discussions about alternative arrangements for finance to complete the contract, particularly in view of Mr Simmons' diary note of 30 July 1990. Mr Reichert said in his submission to my Investigation that the investment was openly tabled and discussed with Mr Baker, who approved the involvement in the project.()
43.5.6 RELEVANT LAWS, AND ARTICLES OF ASSOCIATION
There are a variety of laws, statutory and non-statutory, and company regulations, that may be relevant to this matter, and to which I have had regard in making my recommendation in the following section of this Chapter.
In relation to directors:
(a) There is a general obligation upon directors to avoid a conflict of interest with the company of which they are a director. That duty arises from their fiduciary position. A fiduciary must not allow a situation to develop where his personal interests are, or may be, in conflict with his duty to the person for whose benefit he acts, in this case Beneficial Finance.
(b) Section 228 of the Companies Code requires a director who is in any way, whether directly or indirectly, interested in a contract with the company of which he was a director, to declare the nature of his interest at a meeting of directors of the company. The provisions of the section are in addition to, and not in derogation of, any other rule of law or any requirement of the company's Articles of Association.
(c) Article 23(10)(h) of the Articles of Association of Beneficial Finance require any director who is personally materially interested in some dealing with it, to disclose his interest at a meeting of the Board. The Article further provides that in those circumstances, the director may not vote on the question in which he was so interested.
In the case of both directors and executives of a company:
(a) Section 229(1) of the Companies Code requires that a director and "officer" of a company "act honestly in the exercise of his powers and the discharge of the duties of his office". The section sets a maximum penalty for its breach of $5,000 or, if there was an intention to deceive or defraud the company, a maximum penalty of $20,000 or imprisonment for five years, or both.
The term "act honestly" is not used in the sense of requiring probity or truthfulness. Rather, it means "act bona fide in the best interests of the company." As stated by King C J in Australian Growth Resources Corporation Pty Ltd v van Reesema [1988] 6 ACLC 529:
"The section ... embodies a concept analogous to constructive fraud, a species of dishonesty which does not involve moral turpitude. I have no doubt that a director who exercises his powers for a purpose which the law deems to be improper, infringes this provision notwithstanding that according to his own rights he may be acting honestly."
Section 229(1) would be breached if a director or officer acted in a way that put the interests of another party above those of the company in respect of a transaction.
(b) Section 229(3) provides that the directors, officers and employees of a company must not use company information for their own benefit. This section provides:
"An officer or employee of a corporation, or a former officer or employee of a corporation, shall not make improper use of information acquired by virtue of his position as such an officer or employee to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both."
(c) Section 229(4) of the Companies Code is closely related to section 229(3). It provides that a director, officer or employee must not make improper use of his or her position to obtain a personal advantage or to benefit another person without the authority of the corporation. The section states:
"An officer or employee of a corporation shall not make improper use of his position as such an officer or employee, to gain, directly or indirectly, an advantage for himself or for any other person or to cause detriment to the corporation.
Penalty: $20,000 or imprisonment for 5 years, or both."
The actual obtaining of an advantage by the officer or employee or anyone else, or the suffering of a detriment by the company, is not a necessary element of the offence.() A director, officer or employee who makes improper use of his or her office in an attempt to gain an advantage is guilty of an offence, even if he or she is unsuccessful. It is sufficient for section 229(4) that the person must have the purpose of gaining an advantage or causing a detriment, and must believe that the intended result would be an advantage for himself or herself or for some other person or a detriment to the corporation.
Sections 229(3) and (4) apply to directors, officers and employees. The sections may have application if the executives used information obtained as a result of their positions at Beneficial Finance, or used their positions, in an attempt to obtain personal advantage or advantage for an associate.
43.5.7 CONCLUSIONS
Executives of Beneficial Finance entered into a personal dealing in the form of participation in a venture with a client of Beneficial Finance, Viaduct Services Pty Ltd, a member company of the Tribe and Crisapulli Group, to which Beneficial Finance had a significant exposure. Viaduct Services had provided guarantees in respect of the liabilities of other companies in the Tribe and Crisapulli Group.
The success of the venture depended heavily upon the Tribe and Crisapulli Group's capacity to arrange finance to complete the purchase of the land that was the subject of the project.
Over the period of twelve months from the initial proposal and payment of the $0.5M deposit, to the date for settlement of the contract, it became apparent that the Tribe and Crisapulli Group were having difficulties in meeting its commitment to obtain $2.0M to fund the settlement payment. Certainly, the exposure of Beneficial Finance to the Tribe and Crisapulli Group was increasing.
In a situation where the Beneficial Finance executives were at risk of losing their investment in the event that Tribe and Crisapulli Group were not able to obtain ongoing funding from Beneficial Finance to meet commitments, a conflict of interest arose whereby those executives involved in managing the exposure to the Tribe and Crisapulli Group, and in recommending that facilities be extended to the Tribe and Crisapulli Group, had a direct interest in ensuring that Beneficial Finance continued to provide financial support to that Group.
43.6 REPORT IN ACCORDANCE WITH TERMS OF APPOINTMENT
43.6.1 REGARDING "SHADOW" SALARIES
In accordance with section 25(2) of the Act and Terms of Appointment A(h) and E, I report that, on the basis of the evidence described in this Chapter, I am of the opinion that the actions of Mr Baker and Mr Strutton may have constituted offences against the Companies Code, and the Taxation Administration Act 1953.
Whether any further action should be taken is, in the first instance, a matter for the Royal Commission to consider and recommend.
43.6.2 REGARDING JOLEN COURT PROJECT
In accordance with Section 25(2) of the Act and my Terms of Appointment A(h) and E, I report that, on the basis of the evidence described in this Chapter, I am of the opinion that the involvement of the Beneficial Finance Executives Mr Baker, Mr Reichert and Mr Martin in a proposed venture with a company in the Tribe and Crisapulli Group was, or amounted to, a conflict of interest or breach of fiduciary duty, and therefore illegal or improper conduct. I recommend that the matter should be further investigated.
43.7 APPENDIX
REMUNERATION SUMMARY APPENDIX A
YEAR ENDED 30 JUNE 1988
| NAME | PACKAGE | PROFIT
BONUS |
DISCRETIONARY
BONUS |
TOTAL
REMUNERATION |
| Mr J A Baker | 275,000 | 4,390 | 126,000 | 405,390 |
| Mr M Chakravarti | 160,000 | 5,268 | 54,000 | 219,268 |
| Mr F R Horwood | 160,000 | 4,829 | 54,000 | 218,829 |
| Mr J D Malouf | 150,000 | 4,829 | 36,000 | 190,829 |
| Mr G L Martin | 160,000/165,000 | 4,829 | 45,000 | 209,829/214,829 |
| Mr E P Reichert | 185,000 | 5,268 | 72,000 | 262,268 |
| Mr R N Sexton | - | - | - | - |
REMUNERATION SUMMARY APPENDIX A
YEAR ENDED 30 JUNE 1989
| NAME | PACKAGE | PROFIT
BONUS |
DISCRETIONARY
BONUS |
TOTAL
REMUNERATION |
| Mr J A Baker | 325,000 | 6,698 | 162,000 | 493,698 |
| Mr M Chakravarti | 200,000 | 6,698 | 86,400 | 293,098 |
| Mr F R Horwood | 200,000 | 6,698 | 64,800 | 271,498 |
| Mr J D Malouf | 180,000 | 6,698 | 54,000 | 240,698 |
| Mr G L Martin | 200,000 | 6,698 | 43,200 | 249,898 |
| Mr E P Reichert | 230,000 | 6,698 | 75,600 | 312,298 |
| Mr R N Sexton | 200,000/220,000 | - | 21,600 | 221,000/241,600 |
REMUNERATION SUMMARY APPENDIX A
YEAR ENDED 30 JUNE 1990
| NAME | PACKAGE | PROFIT
BONUS |
DISCRETIONARY
BONUS |
TOTAL
REMUNERATION |
| Mr J A Baker | 350,000 | 6,800 | 168,000 | 524,800 |
| Mr M Chakravarti | 225,000 | - | - | 225,000 |
| Mr F R Horwood | 210,000 | - | - | 210,000 |
| Mr J D Malouf | 250,000 | - | - | 250,000 |
| Mr G L Martin | 200,000 | - | - | 200,000 |
| Mr E P Reichert | 230,000 | - | - | 230,000 |
| Mr R N Sexton | 235,000 | - | - | 235,000 |