B&B liquidator’s response pays dividends

THE liquidators have demonstrated that the failed Babcock & Brown routinely declared dividends before it had the profits to cover them.

The question now is what, if anything, the liquidator can do about it?

The revelation came on Wednesday, at a public examination of former B&B chief executive Phil Green during a liquidator’s hearing in the Federal Court. Green was grilled by Peter Wood, senior counsel for liquidator Deloitte.

B&B is purely a holding company. The group’s assets are held by the operating subsidiary Babcock & Brown International which managed to stay out of administration.

B&B’s revenue came almost entirely in the form of dividends from BBI which enabled B&B to then declare dividends to shareholders of the listed company. At least, that’s what should have happened. Section 254T of the Corporations Act says dividends may only be paid out of profits. For that to happen B&B would first have had to receive dividends from BBI before it could declare dividends of its own.

Wood showed that the last dividend paid by B&B — a final dividend of 33c a share, 50 per cent franked, for the year to December 31, 2007– did not come from retained earnings but from dividends received from BBI after the close of the financial year.

The dividend required $97 million, yet at December 31, 2007 B&B had retained earnings of only $14.9m, which meant that B&B paid out at least $82m more than it was legally entitled to do.

Those were funds that may otherwise have been available for creditors. It’s arguable as to whether payment of the $97m was prudent, given the pressures that were already beginning to mount against B&B at the time.

A breach of section 254T doesn’t give rise to either a civil or a criminal penalty.

However, a possible option for the liquidator may be to seek to claw back the dividend payment from directors, on the grounds that they breached their fiduciary duties in paying the dividend.

The then directors were Jim Babcock (chairman) Phil Green (chief executive), Elizabeth Nosworthy, James Fantaci, Ian Martin, Dieter Rampl, Martin Rey, Joe Roby and Michael Sharpe.

Section 180 requires directors to exercise the degree of care and diligence of a reasonable person, to act in good faith in the company’s best interests and for a proper purpose, to not improperly use their position to advantage themselves or others, or to cause detriment to the company.

A B&B board committee took the decision to declare dividends but that does not absolve the board from responsibility. Green was a member of that committee and he received around $4m.

Another possibility may be that the liquidator could take civil proceedings against the directors for repayment of the dividends on the grounds that it constituted an unlawful capital reduction.

The argument would be that if the 2007 final dividend wasn’t paid from profits then it was paid from capital.

Section 256B1 says a company may reduce its capital if the reduction is fair and reasonable, does not materially prejudice its ability to pay its creditors and is approved by shareholders. The payment was not approved by the shareholders.

Section 256D1 says contravention of section 256B1 does not affect the validity of the capital reduction and the company is not guilty of an offence, but any person involved in the contravention is open to civil proceedings.

If the liquidator does take action over the dividend payment it will be interesting to see if IMF (Aust) funds the claim. IMF is already funding at least one legal claim for the liquidator, where B&B has brought proceedings in California claiming it is entitled to $9.5m which is held pursuant to the Babcock & Brown Executive Achievement Share Trust Deed.

The trust was formed to make distributions to overseas employees, many in the US, in relation to its bonus schemes. The trustee is located in California.

When B&B was placed in administration in March last year the trust held $9.5m which had not been distributed. B&B and BBI both lay claim to those funds.

It will probably be of no consolation to former B&B directors to know that legislation was before Parliament when the federal election was called to change the Corporations Act so that dividends no longer have to be paid only from profits but can also be paid out of cash flow, provided the company will remain solvent after payment.

Close, but fair

IN the end, the independent expert Grant Samuel views the proposed Newcrest merger/takeover of Lihir Gold as fair and in the best interests of Lihir shareholders, but it was a close run thing.

Grant Samuel values Lihir in the $4.28 to $4.83 a share range, well above their pre-Newcrest price — and, for that matter, their current price.

Newcrest is offering 1 of its shares for each 8.43 Lihir shares, plus 22.5c for each Lihir share.

Grant Samuel has valued Newcrest in a range of $33.50 to $34.50 a share, which values its offer in a range of $4.20 to $4.32.

On that basis, the high value of the consideration is slightly below the expert’s low value for Lihir, but as it is within the value range it qualifies as fair (albeit marginally).

Newcrest shares fell a further 39c yesterday to $32.92, which values the offer at $4.13 a share. Lihir shares dipped 4c to $4.06, which is 5 per cent to 15 per cent below the expert’s assessed value range, and indicates that it is tracking the Newcrest offer price.

The Lihir valuation is based on a gold price in the $US1200 to $US1240 an oz range and the dollar at US86c, with each 1c movement equivalent to 5c a Lihir share. Gold is now just under $US1200 an oz and the exchange rate is US87.75c.

Grant Samuel noted that when the proposal was recommended by the Lihir board it represented a premium of 36 per cent to 40 per cent to Lihir’s share price, but that Newcrest had subsequently underperformed global gold equities, largely because of a fall in the price of copper, which currently contributes more than half of Newcrest’s earnings.

Acquisition of Lihir would change the copper/gold equation and probably ensure that the shares attract the premium that investors attach to predominantly gold producers.

While the offer at present is only marginally fair it should be noted that Lihir has searched extensively, but so far in vain, for alternative offers, which suggests that the other potential bidders consider the Newcrest proposal already represents full value.

However, the Newcrest proposal is a scheme of arrangement and it’s possible, for strategic reasons, that a rival could lob a proposal shortly before the Lihir shareholder meeting to vote on the proposal. For that reason Grant Samuel’s view that the Newcrest proposal is in the best interests of Lihir shareholders is subject to the absence of a superior proposal.

The merger would create a $25 billion company and would be the world’s fifth largest gold miner. In the absence of the Newcrest proposal, Lihir’s share price would almost certainly be significantly lower.

bfrith@acenet.com.au

Liquidator settles $450m HIH claim

HIH Liquidator Tony McGrath has finally settled his $450 million claim against FAI Insurance's financial advisers and reinsurers, originally lodged in 2004, for an undisclosed sum.

The settlement had been held up by the intermittent refusal of one of 200 former partners in auditor Andersen, which had been brought in as the subject of a cross claim by the defendants, to sign the settlement.

Justice Patricia Bergin of the New South Wales Supreme Court ratified the decision by all parties that they would make a financial settlement in favour of the liquidator and then all parties would drop claims against each other, in what was threatening to become an extremely long drawn out case.

“”It’s a milestone,’’ said Mr McGrath after the brief court hearing.

”It will allow us to move forward rather than stay locked up for years in litigation, which would have compelled us to hold back further payments to creditors.’’

He said that to date he’s been able to pay out $1.2 billion to creditors of the defunct insurer, which collapsed in March 2001 with a deficiency originally estimated at $5.2bn. That has been adjusted downwards since to a number closer to $3.6bn, although that is still the biggest corporate collapse in Australian history.

The case was brought because HIH had paid just under $300m for Rodney Adler’s FAI Insurance in early 1999 after its books had been significantly improved by the use of at least two “financial reinsurance’’ polices whose effect was to make a looming $50m loss look like an $8m pre-tax profit.

The main defendants were Berkshire Hathaway subsidiary General Re, which provided one policy, US-owned reinsurance broker Guy Carpenter, which provided another, and Wall Street investment bank Goldman Sachs.

Goldman’s local subsidiary Goldman Sachs Australia was a defendant, as was its then chairman Malcolm Turnbull, because it had been takeover adviser to FAI.

Goldman’s advice to sell FAI shareholders was clearly correct but there was a strong contention in the original statement of claim that the FAI takeover defence documents, prepared by Goldman Sachs Australia, should have informed shareholders that the New York investment bank had in 1998 considered putting some of its own money into FAI, but had decided not to do so.

The biggest creditors of HIH now are the state and federal governments, the latter of which put up some $600m in a fund to pay out insurance claimants.

Mr McGrath said that to date he has paid out 40 cents in the dollar to insurance creditors of the FAI company, which he hopes to lift to 50c, and 45c to creditors of CIC — a company HIH bought in the 1990s before FAI — with a view to paying out 60c in total to CIC creditors.

The hardest hit creditors will be those of the main insurer HIH Casualty and General, which incurred losses of more than $1bn on some disastrous forays in the London insurance market. He said he hopes to increase the payment of 18c in the dollar, made already, to 35c.

He said he hoped to conclude the major part of the liquidation by around 2014, 13 years after its collapse, but noted that he still had some 2200 “open’’ insurance claims to settle and that between 50 and 100 “long tail claims’’, as they are called, were still coming in each quarter.

Liquidator to probe B&B directors

THE creditors of Babcock & Brown, the failed investment bank, have been asked to fund a campaign to have liquidators forensically examine whether directors acted solely in their own personal interests instead of their shareholders’ during the final months as the empire crumbled.

Creditors yesterday officially voted to liquidate B&B, the former high-flying investment group that failed in March after it was worth nearly $10 billion at the height of the bull market.

B&B collapsed under debt of up to $40bn across the group and liquidators from Deloitte are now keen to further investigate the motives of the board in the final few months when the company, started as a private investment group by Jim Babcock and Phil Green, started to unwind.

The deeper probe, however, will be funded by creditors despite the expectation that potential returns will be close to zero.

The return to B&B’s subordinated noteholders is expected to be just 1.5c in the dollar while shareholders will receive nothing.

The 8000 noteholders and creditors, which could be up to 30,000, were yesterday asked by Deloitte to voluntarily contribute $400 in a bid to raise up to $600,000 to finance the more in-depth forensic examinations of the company’s intricate debt-laden structure.

The closing date for contributions is September 15 and Deloitte confirmed a number of major litigation funders could become involved in the process.

The request came at a meeting of just a few B&B noteholders at a creditors meeting in Sydney.

Deloitte liquidator David Lombe said he was keen to investigate further the potential conflicts of interest between the directors on the B&B board, and the board of Babcock & Brown International, the main trading entity of the complex group of companies.

The probe will examine whether B&B traded while insolvent as it battled to stay alive, and whether troubled assets were not officially impaired by the board when they should have been.

“In particular, we are interested to further investigate a key question, at what stage did the B&B directors have regard to the interest of noteholders and creditors in making their decisions about the conduct of the group’s business,” Mr Lombe said. The official liquidation of B&B will grant Deloitte greater powers, but could prove embarrassing for the former board of the group which could be forced to publicly defend allegations of impropriety.

“Liquidation will allow us to investigate the matter in greater depth, conduct public examinations and, as a liquidator, receive increased powers to commence recovery actions,” Mr Lombe said. The collapse of B&B came after the bank built a “mini-Macquarie” model in which it would buy assets, create separately listed funds and implement high gearing levels.

It listed in 2004 at $5 a share and soared to a peak of $34.78 a share which gave it a market capitalisation of $10bn, with assets under management reaching $70bn globally.

An initial report from Deloitte found that B&B became insolvent in November last year, more than three months before it was tipped into administration after noteholders voted against a last-ditch bid to restructure B&B’s debt.

The run-down of B&B has resulted in a number of asset sales held by the main company, while the surviving satellite funds have cut ties with the Babcock name.

Liquidator told to pay $4.9m

STUART Ariff will not be taking his wife and family to the luxurious Tanjong Jara Resort in Malaysia any time soon.

He will not be sipping cocktails on the jungle-fringed beaches of Pangkor off the coast of Malaysia either.

Nor will he be buying $300 bottles of wine at upmarket restaurants, going to State of Origin rugby league matches in limousines or lavishing his wife and sisters with regular beauty and hairdressing treatments.

He has already done all of that and it didn’t cost him a cent.

But the party was officially declared over for the Sydney liquidator this week when he was banned for life and told to pay $4.9 million compensation to the myriad companies he gouged while charged with trying to salvage them.

Ariff, who until recently had a powerful network of business associates, and who scored a number of his administrative appointments courtesy of Tom Karas, a financier to underworld figures including Mick Gatto, was read the riot act by judge Patricia Bergin in the NSW Supreme Court for gross misconduct and “appalling behaviour” as an officer of the court, liquidator and administrator.

“My residual concern is his access to private individuals and private companies,” Justice Bergin said.

“I am not sure if I want some form of comfort to make sure members of the public are not at risk by the conduct of Mr Ariff.”

The civil case with the Australian Securities & Investment Commission is over, but investigations of his conduct are continuing.

For starters, ASIC is understood to have gone to the NSW Supreme Court on Thursday to get an interim order restraining him from leaving the country.

If he wants to contest the order, he will need to appear in court on Monday. On the same day he will find out if beer group Toohey’s bankruptcy application against him is successful.

The application was made in the Federal Magistrates Court in South Australia and joined by Ricoh Australia.

If he is declared bankrupt, a trustee will be appointed over his assets. The trustee’s role is to find any assets and recover them.

And wait for this: on September 3, the Australian Taxation Office will seek wind-up orders against, and liquidation of, his main company, S. Ariff Nominees (No 2).

Those glorious days of 2003, when Ariff started Stuart Ariff Insolvency Administrators, and quickly turned it into the administrator of 200 companies, must seem like a lifetime ago.

Watched by a group of his victims, Ariff on Tuesday sat stony faced in Sydney as Justice Bergin read out his apology and an attempted explanation of his actions.

“In hindsight, my eagerness to expand SAIA quickly by taking on such large administrations meant that I did not oversee or supervise the matters as closely as I should have and conducted myself in a proper manner. I have made many mistakes, errors and omissions while principal of SAIA. As a result of the investigations, complaints and media coverage the business of SAIA is all but over. SAIA is on the verge of insolvency,” Ariff lamented in his affidavit.

His laments fell on deaf ears. His victims felt no joy and Justice Bergin said in her judgment: “It is very difficult to understand that the payments, for instance in relation to the defendant’s overseas travel with his family, could in any way be described as an error.”

The case was completed in one day, with a listing of examples of gross misconduct.

Some of his worst excesses were levelled at carwash company CarLovers, which was once the country’s biggest listed carwash franchise before it fell into administration.

CarLovers’ main creditor, the Malaysian-based Berjaya Group reckons Ariff ripped out $13m in disbursements and fees over four years — about three times the company’s original deficiency of $4.5m declared by Ariff on July 17, 2003, just after his appointment.

Ariff admitted to charging CarLovers for family holidays, hairdressing appointments, big restaurant bills and other outlandish expenses.

For instance, there was a $208,300 consultancy bill involving Ariff’s father for services that had no relationship to the administration of CarLovers, a charge of $1450 for rebuilding his sister’s laptop computer, and a $214,033 charge to CarLovers for “Est to Complete” disbursements between August and October 2007, being disbursements that Ariff had not incurred or allocated until a later time.

He also admitted to misconduct in his role as administrator of Sid Fogg & Sons bus company.

He accepted ASIC’s allegation that he was paid $170,213 from a creditor of Sid Fogg for the GST component on proceeds from the sale of buses. Instead of handing the money over to the tax office, he used the money for his own remuneration.

He also admitted to wrongdoing concerning Bulla Tip, including the “fictitious” creation of a charge to secure a payment of $400,000 to State Securities, a company fronted by Mr Karas.

In this matter, Ariff admitted he accepted the appointment as administrator of Bulla Tip even though he knew, or ought to have known, that his appointment was improper, invalid and/or ineffective.

He admitted he told Bulla Tip’s creditors that State Securities had advanced $800,000 to Bulla companies under a loan agreement, when no such payment had been made.

He then paid Mr Karas’s State Securities $400,000 when he knew State Securities had not paid that amount to the Bulla companies.

Other admissions relate to improper payments for consulting fees and failure to accept an offer from a company to purchase land.

The case that really got the court going was HR Cook Investments, which was liquidated in June 2006 after the principal died, leaving the money to members of the family, including minors.

Ariff was appointed liquidator of HR Cook and used hundreds of thousands of dollars of its money for legal fees that had nothing to do with that company.

Ariff admitted to wrongdoing concerning numerous other companies, including MDC Entertainment, P&J Smith Engineering, Zelous Creations and Austen Entertainment. But the many victims want more.

Five companies joined forces yesterday to pen a letter to Minister for Corporate Law Chris Bowen to get involved and keep pressure on ASIC to continue what it said it would do in court and pursue further investigations against Ariff.

Separately, they spoke to The Weekend Australian about their nightmare encounter with Ariff over the past few years.

CarLovers spokesman Ian Fong said it was a shame ASIC did not act earlier. He said the Berjaya Group, the main creditor of CarLovers, had spent more than $1m in the past four years fighting Ariff in the courts.

“It’s a shame ASIC didn’t act when we made our first complaint back in 2005. The damage that Mr Ariff and his group caused would have been much less. Now it is nothing more than a hollow victory. Too much damage has already been done. Too many people and livelihoods have been hurt,” he said.

He has a point. The Berjaya Group, frustrated with ASIC, came to The Australian in 2007 and told their story. Within days many more victims of Ariff contacted the newspaper, and ASIC started action.

For many, the emotional and physical toll has been horrendous. Bill Doherty from Independent Powder Coating said he built his company from nothing over 13 years into one of the best in the industry.

“Ariff destroyed that in weeks. He then proceeded to sell off the major assets for a fraction of their value to one of his associates. Ariff sacked me from my own company. He proceeded to cut me off from access to any source of funds. This caused a great deal of stress to both myself and my partner, who subsequently had a heart attack.”

Martha Tsamis from MDC Entertainment said: “Finally he gets what he deserves. He has been wrecking peoples’ lives for years and the authorities did nothing to stop him.”

MDC, which operates Melbourne nightclub Chasers, was put into administration in 2007 byMr Karas, who acted as agent for his uncle Christos Karaglanis.

He appointed Ariff as administrator and on the same day that the administrators moved in, a well known identity in a bikie gang arrived on the scene.

ASIC sees the lifetime ban and $4.9m compensation order as a win. Shortly after the case finished, commissioner Michael Dwyer said he strongly endorsed the findings and orders made by the court.

“The decision sends a clear message to liquidators (who are officers of the court) about what is expected when liquidators charge for professional fees and outlays,” Mr Dwyer said.

Bernie Wood from Singleton Earthmoving also said justice had prevailed. “The disappointing aspect I feel is that it was only the enormity of the dollars involved in respect to CarLovers that made ASIC get involved.

“Small fish like me they had cast aside despite my pleas for help,” he said. “What ASIC have awarded Singleton Earthmoving (should we receive it) is probably about 20 per cent of what it has cost to date without considering the emotional strain over the past five years. It was still a great win.”

Ariff’s career as a liquidator is over, his website shut down, and his marriage in tatters. The tropical islands of Malaysia must seem a long way away.

Liquidator to escape grilling

LIQUIDATOR Stuart Ariff looks set to avoid a six-week grilling in the witness box over his alleged misconduct in relation to a number of companies as settlement talks with the corporate regulator continue.

Newcastle-based Mr Ariff, who was encouraged to get legal advice on to the matter when it was in court earlier this week, was yesterday represented by a lawyer.

The Australian Securities & Investments Commission is trying to ban Mr Ariff as a liquidator and administrator and is seeking more than $4 million for what it says is his failure to properly carry out his duties in relation to a number of companies over a five-year period.

It has taken action in the NSW Supreme Court and wants to question Mr Ariff on 60 issues, including one instance where he allegedly used $200,000 of company funds for personal trips with family members where there was no apparent link to his role as administrator.

The conduct relates to a five-year period.

Yesterday the court heard that talks were continuing and the matter might settle before its scheduled hearing date later this month. Mr Ariff’s lawyers will respond to a schedule of allegations prepared by ASIC and the parties will try to agree on a number of facts, which would then be presented to court.

If the case settles, Mr Ariff is likely to have to pay ASIC a fine and agree to banning orders.

Outside the court Mr Ariff’s lawyer confirmed the parties were trying to settle the matter.