In a letter sent by the bank's top lawyer, Anna Lenahan, last Friday, Australia's largest bank savaged Ms Carnell over her appearance on a 60 Minutes program that accused the bank of driving a Queensland construction company into liquidation.
The show quoted from a condition report by Ms Carnell, who was appointed the small business and family enterprise ombudsman last year, that accused the bank of "highly unreasonable or potentially unconscionable" conduct over CEC Group.
"This guy was growing his business with the bank right beside him egging him on, saying 'You are fantastic Roy,' and literally within weeks they had changed the goalposts, and that's so unfair," Ms Carnell said on the program, which aired last Sunday.
Cairns Builder Roy Lavis on the Cairns Esplanade Boardwalk that was built by his company, CEC Group. Brian Cassey Photographer
Ms Carnell denied on Thursday she gave her report to the show.
Under managing director Roy Lavis, CEC expanded from property subdivision in Cairns into speculative housing construction. When the global financial crisis hit property prices, CEC shares plunged and it breached its banking covenants.
The Commonwealth Bank didn't foreclose on its loans, and Mr Lavis sold assets to reduce the CEC's interest bill. The company limped along until May 2011, when a voluntary administrator was appointed because it owed payroll tax, superannuation and federal income tax.
The CEC case is emerging as a flashpoint between the banks and Ms Carnell, a Coalition appointee who has expressed support for a royal commission into the banks, a popular Labor policy dreaded by the industry.
Commonwealth Bank Group Chief Risk Officer David Cohen. Wayne Taylor
Kate Carnell denied she gave her report to 60 Minutes.
In her letter, the Commonwealth Bank's general counsel complained to Ms Carnell that she had broken a promise to keep investigations confidential, and to only use historical complaints against banks to determine if changes are needed to lending rules.
Ms Carnell said the bank had her report for months but didn't complain until it was quoted on 60 Minutes. Ms Carnell later clarified she received the complaint from the bank late last Friday. She said CEC's collapse had hurt many small businesses.
"I think we gave all sides of the argument a pretty good hearing," she said in a phone interview on Thursday. "It became a small business pretty quickly."
During private meetings with bank executives, Ms Carnell stated a version of events and tried to get witnesses to confirm that view, Ms Lenahan wrote in a letter seen by The Australian Financial Review. The objective of the questions appeared to be to confirm pre-existing theories rather than uncover information, the letter said.
Ms Carnell didn't let the Commonwealth Bank know which of its customers it had spoken to, what they said, and required the bank to answer questions without knowing why they were being asked, the letter said.
Using extensive footage of Mr Lavis, who it described as a "battler businessman", 60 Minutes portrayed CEC as a victim of a decision by the bank to cut off credit and engineer a default on its loan.
60 Minutes part 1. Roy Lavis
60 Minutes Part 2. Roy Lavis
The company, which was traded on the share market, was placed in voluntary administration by its directors when the tax office issued penalty notices after it stopped paying superannuation. The bank then appointed a receiver.
"The Commonwealth Bank threw money at him and encouraged him to expand," reporter Ross Coulthart said on the show. "[It was a] new low in their breathtaking arrogance."
In comments to the show that weren't broadcast, the bank's chief risk officer, David Cohen, questioned why Ms Carnell, who represents small businesses, investigated complaints from a company that had $169 million in debt and a market value at one point around $225 million.
"Given the complex financial circumstances and the significant financial deterioration of CEC, it raises real questions as to whether the Small Business Ombudsman's Office actually has the skills and the knowledge and the understanding to look at a case like this," Mr Cohen said.
Ms Carnell said she hired external experts to analyse CEC's collapse.
CEC's directors included federal politician Warren Entsch and former Queensland premier Robert Borbidge.
Some bank executives believe Ms Carnell, a former Liberal ACT chief minister, is being encouraged by the federal Coalition government, which is lagging in opinion polls, to criticise banks for political purposes.
Ms Carnell said she was an independent advocate appointed by the Governor-General.
This article was first published by https://www.afr.com/Author: Aaron Patrick
"CBA statement in response to 60 Minutes broadcast – 16 July, 2017"
Commonwealth Bank stands by its actions on the CEC matter. Our relationship with CEC Group has been the subject of several internal reviews and we have appeared before parliamentary inquiries where we have answered questions on this matter in a fulsome and transparent fashion. Below we set out a chronology of key facts on this topic, many of which were overlooked in the 60 Minutes broadcast.
Commonwealth Bank commenced a banking relationship with CEC Group, a stock exchange-listed company, in 2004. From that period to June 2007, CEC recorded strong financial performance with earnings before interest, tax, depreciation and amortisation (EBITDA) rising from $7m in FY05 to reach $23.5m in FY07.
Like many businesses, CEC began experiencing a marked slowdown in its trading performance in the latter half of calendar 2007 as the effects of the global financial crisis were felt across the Australian economy. Data from the Australian Bureau of Statistics shows that for the period between June 2007 and June 2009 more than 638,000 Australian businesses closed with the impact most severe in the boom states of Western Australia and Queensland. In that period 27% of businesses in Queensland failed.
CEC was always in charge of its own destiny and its accelerated growth profile, with land acquisitions forming an integral part, was a strategy driven by the company.
As part of its growth strategy between February 2007 and December 2007 CEC made 12 separate applications to CBA for additional funding for various purposes but with a large portion targeted for property acquisitions. This meant CEC’s total debt rose from $66m in February 2007 to $169m in December 2007. During that period, CEC produced proposals for a capital raising through a rights issue to bolster its equity base and proposals for the syndication of its borrowings were pursued.
In addition, CEC adopted a number of measures to reduce debt, including the sale of a number of non-core properties and a strategic change in approach to property development and sales. This was announced to the market in the Directors Report accompanying CEC’s Half Year Accounts to 31 December 2007 lodged with the ASX on 29 February 2008. That debt reduction strategy, implemented through asset sales during 2008, was controlled and managed entirely by CEC.
As is clearly evidenced by CEC’s Half Year Accounts to 31 December 2007, CEC’s trading performance had turned dramatically in those six months. The immediate consequence of that announcement was a fall of 38% in CEC’s share price to $1.05 at close of trading that day and a further drop to 60.5 cents at close of the following day’s trading. A further consequence was, with cash flow becoming an increasing problem, that CEC had breached a key financial covenant with CBA that required it to have enough funds to cover a certain level of interest repayments.
Although CBA was entitled to act on the breach of covenant CBA did not do so. Instead, CBA extended those facilities conditional on the implementation of the debt reduction strategy which CEC had already initiated and the appointment of an investigative accountant (McGrath Nicol) to work with CEC senior management in order to prepare an independent business review of the CEC Group and to assess CEC Group’s ability to meet its commitments to CBA. The McGrath Nicol reports were made available to CEC.
CBA provided multiple extensions of credit facilities between mid-2008 up until the board appointed a voluntary administrator in May 2011 following judgment obtained by the Queensland Office of State Revenue in February 2011 for unpaid payroll tax and land tax and the issue of director penalty notices in March 2011 by the Australian Taxation Office for unpaid tax in addition to other creditor demands. The extensions were granted by CBA to CEC notwithstanding CEC had committed a number of breaches, including monetary defaults.
The actions of CBA and CEC in that period are best understood through the lens of the three comprehensive reports produced by McGrath Nicol, with input from CEC. Those reports are thorough, incisive and fully transparent. The Phase Two Report of May 2008 notes the view of CEC management and Greg Kern (who was responsible for the accounting functions) that sustainable debt may be between $70m and $75m (compared to the $120m debt level it was carrying at that time and the debt of $169m in December 2007). CEC’s implementation of its debt reduction strategy during 2008 did not materially affect CEC’s ability to generate income since the assets sold did not generate any significant income.
CEC’s failure was in no one’s interests. Amongst the unpaid creditors, CBA incurred losses of $57m. Throughout its relationship with CEC, CBA worked with senior management to assist the CEC Group to continue operating as a viable business.
Correspondence from the managing director of CEC (Roy Lavis) to CBA and announcements by CEC to the ASX record CEC’s appreciation of CBA’s co-operation and assistance during its difficulties.
CEC’s trading performance is a matter of public record through its own disclosures to the ASX. The conditions of trading in Australia during the GFC are well known and the three reports from the investigative accountant were provided to the Small Business Ombudsman. Yet the report produced by the office of the Small Business Ombudsman appears to have given no weight to McGrath Nicol’s findings nor to the ASX disclosures.
This article was fisrt published by https://www.commbank.com.au