Below is the twenty-fifth part of the serialized edited version of the National Provident Fund Commission of Inquiry Final Report that first appeared in the Post Courier newspaper in 2002/3.
NPF Final Report
This is the 25th extract from the National Provident Fund (now known as NASFUND) Commission of Inquiry report. The inquiry was conducted by retired justice Tos Barnett and investigated widespread misuse of member funds. The report recommended action be taken against several high-profile leaders, including former NPF chairman Jimmy Maladina. The report was tabled in Parliament on November 20 by Prime Minister Sir Michael Somare.
Executive Summary Schedule 2E Continued NPF Board approves sell-down by circular resolution
On March 19, 1999, by circular resolution, the NPF board approved the sale of the vast bulk of its equities and 50 per cent its shares in the Tower Limited.
The pressure for this sell-down came from ANZ and PwC. This was a legitimate (and perhaps inevitable) strategy because the crippling burden of servicing its debts was bankrupting NPF. Had a face-to-face board meeting been called however, it is possible that pressure to seek some form of Government bail out to provide time for a more orderly sale process may have built up.
Findings
It is true that the decision to sell-down the shares was one conventional solution to NPF’s crushing interest rate burden, as it enabled NPF to substantially reduce its debt to ANZ. However, it was accomplished by circular resolution in a climate of pressure from ANZ. If more time had been taken for a face-to-face board meeting, other options could have been discussed with ANZ and the Government.
On May 4, 1999, ANZ insisted that NPF’s debt be reduced to K25 million and the ANZ diary note makes it clear that pressure was being applied by ANZ but also that this mirrored NPF’s own strategy. There was discussion between NPF, PwC and ANZ about the timing of and procedures for selling the various shares.
Legal advice – no power to borrow
On May 26, 1999, Allens Arthur Robinson (Allens), advised ANZ that NPF had no power to borrow, that the loan agreements were invalid, that the interest owing would be irrecoverable at law and that there was some doubt whether or not the principle loan could be recovered.
ANZ withholds legal advice from NPF and adopts “exit strategy”
Clearly, alarmed by this unexpected advice, ANZ converted its previous debt reduction strategy to an exit strategy. ANZ realised that NPF was not aware of Allens’ legal advice and took care not to alert it to the situation.
ANZ’s review of the situation in September 1999, recorded that the debt had been reduced since January from $A53.7 million to $A24.3 million by means of share sales on the ASX and the aim was to have it reduced to $A10 million in December and fully retired by June 2000.
ANZ did not need more formal arrangements to enforce its exit strategy as it felt that NPF’s strategy to reduce debt “mirrors the bank’s own strategy to exit”.
ANZ and NPF management (Mr Mitchell) maintained close but unequal contact throughout the remainder of 1999 over the sell-down process. It was unequal because only ANZ knew that the loan agreement was invalid and that there were doubts about ANZ’s powers of recovery.
ANZ was entirely satisfied with the co-operative attitude of NPF. It is not known whether Mr Mitchell would have adopted a different approach if he had been aware of the potential weakness of ANZ’s legal position.
ANZ’s senior credit manager was quite explicit about ANZ’s role as the initiator of the exit program and its decision to cover up its knowledge that NPF lacked the power to borrow:
“. . . we have previously reserved our rights without prejudice – it was the bank which instituted the exit program, something marginally short of a formal demand which ultimately led the company to a review of its procedures and practices then to a change in the executive management of NPF and eventually to where we are today. Our security documents have been independently reviewed and whilst the scrip and attached documentation have proved robust, the lending powers of the fund have been queried.
“We have not pursued this issue as it would unnecessarily alert the executive of the fund to a potential problem with our papers and, as the CM alludes, the fund is otherwise pursuing legislation designed to restrict its future borrowing powers which leads us to the conclusion it is essentially ignorant of its present position. Our exit strategy is entirely appropriate . . .”
By December 21, 1999, the FCL facility had been reduced to an outstanding balance of $A676,000.
Findings
(a) After receiving the advice from Allens that NPF lacked the legal authority to borrow or pledge assets, ANZ made a commercial decision to withhold the information from NPF and its advisors and to reduce the loan to $A10 million by December 1999 and to obtain complete repayment of NPF’s debt by mid 2000;
(b) ANZ pressure to obtain reduction and then repayment of NPF’s debt was a major factor in NPF’s decision to retire debt by way of a sell-down of its equity portfolio;
(c) The advice given by Mr Marshall of PwC for NPF to sell-down its equities in order to retire debt and escape the crippling burden of its interest payments, mirrored ANZ’s own strategies to achieve the same result for its own benefit;
(d) During the crucial period when NPF was struggling for survival and required strong leadership and sound decision-making, its chairman and corporate secretary/legal counsel were engaged in criminal conspiracies which resulted in an actual loss to NPF of at least K2 million and further attempted frauds. This was occurring with at least the passive involvement of NPF’s managing director;
(e) The sell-down of equities strategy continued smoothly to the end of December 1999 by which time the balance owing on the ANZ facility was only $A676,000.
Fees and Interest charged for ANZ facilities
In addition to losses realised by NPF as a result of the sell-down process, NPF paid substantial fees and interest for the ANZ facilities:
Concluding comments
The loan facilities provided by the ANZ Bank constituted the fuel that powered up the engine of NPF’s aggressive high- risk investment activities throughout 1996, 1997 and into 1998.
ANZ senior executives were impressed by their assessment of the calibre of NPF’s Mr Copland, Mr Wright and Mr Kaul, who seemed to have such a good relationship with the supportive Minister for Finance, Chris Haiveta.
They were also impressed by NPF’s status as a major non- government financial institution and its recent profitable track record. They were lured by the possible profits for the bank if it could land NPF as its largest client.
In the excitement of combining with NPF as its major lender, ANZ management overlooked the fact that NPF was a provident fund whose Board of Trustees bore an onerous fiduciary duty to the fund’s members to manage it prudentially. ANZ was fully informed of NPF’s unbalanced, high-risk portfolio, biased heavily in favour of volatile PNG resource stock.
It ignored the fact that NPF was bound by government investment guidelines and proceeded to finance the high-risk investment strategy with a revolving kina credit facility and, even more dangerously, with an $A foreign currency facility.
As the pace of investing increased, ANZ increased the size of the $A facility and encouraged NPF to transfer its borrowing from kina to $A by making the two interchangeable in July 1997.
ANZ participated in overly optimistic conversations with the ego-driven and ambitious Noel Wright about exploiting market opportunities and manipulating corporate strategies in pursuit of the elusive “upside” hoped for by those who trade in resource stock. The ANZ officials adopted a more grounded approach in their own internal assessments, however, particularly when the ANZ PNG management’s proposals were reviewed by ANZ’s managers overseas.
At all times, ANZ ensured it was protected from exposure to the likely consequences of NPF’s investment activities by ensuring it had 150 per cent security cover, with the right to increase the cover to 160 per cent, plus a 10 per cent extra percentage as a buffer. ANZ also retained the right to be selective about the quality of the scrip accepted as security.
When the tide of economic circumstances eventually and inevitably turned against NPF, with falling share values, depreciating kina and rising interest rates, ANZ proceeded to mark the scrip held as security to “market” on a daily basis to ensure that the loan/security ratio was monitored daily.
From the start ANZ had imposed a negative pledge on NPF to stop it from borrowing significant amounts from other institutions. When it waived the pledge by allowing NPF to borrow K50 million (and then more) from PNGBC for the construction of the NPF Tower, it contributed to NPF’s financial collapse, as NPF could not finance two huge debts in the then prevailing economic climate.
Having taken so much care to protect itself from the possibility of NPF defaulting on the loan agreement it is surprising that ANZ did not take more care to obtain top class legal opinion on whether NPF had power to borrow in the first place. The opinion ANZ did obtain, from Carter Newell, was somewhat guarded, pointing to the legislative silence on the topic and basing its “go ahead” opinion upon an inference that the power to borrow would derive from the PF(M) Act, by assuming (wrongly) that NPF was a “public body” to which that Act applied.
The Carter Newell opinion concluded with a comment about the desirability of amending the legislation to specifically grant NPF the power to borrow.
The opinion lacked the air of certainty to be expected when laying the essential foundation stone for a very significant commercial edifice. Without the power to borrow the whole edifice of loan facilities, drawdowns and obligations would be likely to crumble. The commission finds that this was a situation where a second opinion should have been obtained, from eminent senior counsel.
When NPF’s financial structure began to come apart under the burden of its debt repayments and the falling value of its equities, it came to ANZ’s attention because NPF repeatedly breached the covenant to maintain the agreed ratio of security to debt.
ANZ immediately activated its protective mechanisms by requiring the transfer of more quality scrip to redress the balance and then insisting upon the sale of scrip so the proceeds could be used to reduce the debt.
While tightening up its documentation and security defences, ANZ sought more competent advice from Allens about NPF’s power to borrow.
On discovering that NPF had no power to borrow and that ANZ’s hopes of recovering its exposure to NPF without loss to itself were seriously compromised, ANZ altered its debt reduction strategy to an exit strategy. Realising NPF was unaware that the loan agreements were legally questionable, ANZ determined to recover interest first (the most vulnerable) and then principle, by way of rapid repayments, while ensuring that NPF did not become aware of the legal advice ANZ had received from Allens. ANZ actively encouraged the compliant NPF management in its sell-down strategy, saying that it mirrored ANZ’s own exit strategy.
There are diary comments from ANZ management that NPF’s financial disaster was an indictment of NPF management’s investment strategies. There are no comments admitting ANZ’s own responsibility as the lender which encouraged NPF into kina and $A loans to implement this strategy, without sufficient regard to NPF’s prudential obligations to its members or to its power to borrow under its enabling legislation. In a very real sense, the NPF financial disaster reflected ANZ’s own failings as a responsible lender.
NPF chairman David Copland, managers Noel Wright and Robert Kaul and NPF’s corporate lawyer Herman Leahy must bear the major responsibility for leading NPF into this situation, for not obtaining competent expert advice and for not fully advising the NPF board, particularly regarding the use and competent expert advice and for not fully advising the NPF board, particularly regarding the use and status of the ANZ facilities from time to time.
Likewise, the NPF trustees bear a very heavy responsibility for breaching their fiduciary duties to the members by allowing management to lead them into this predicament, for not insisting upon being kept informed of the state of NPF’s debt to ANZ pursuant to the loan facilities and in not tracking what equities were being pledged by management, on the board’s behalf, as security for the debt.
These matters are examined in detail in the separate schedules on the various investments.
Summary of Major Findings
1. ANZ extended loan facilities to NPF relying on wrong advice obtained from Carter Newell Lawyers that NPF was able to borrow;
2. NPF obtained no external legal advice in respect of the ANZ facilities concerning its ability to borrow and its power to pledge assets as security;
3. Mr Wright effected drawdown notices under the various loan agreements without proper authority. An NPF board resolution dated May 5, 1997, appointed the managing director and the deputy managing director as alternate signatories to the Board of Trustees. This did not authorise them to sign without board approval however. Drawdown notices to ANZ were, in the majority of instances, signed only by Mr Wright;
4. The NPF management and the Board of Trustees failed to critically review the terms and conditions of the facility ANZ offered and in not doing so, failed to negotiate improved facility terms;
5. NPF management and the Board of Trustees failed to adhere to the requirement to comply with tender procedures as prescribed by Section 60 of the PF(M) Act;
6. Minister for Finance Chris Haiveta provided approval for NPF to borrow from ANZ without obtaining any advice from the DoF. In addition, the approval of the K20m and $A20m facility was incorrectly provided under Section 56 of the PF(M) Act;
7. In respect of an additional K20m facility obtained from ANZ as detailed in a facility letter dated June 11, 1996, although Minister Haiveta provided NPF with approval for the facility, the Board of Trustees did not authorise this facility;
8. NPF management pledged NPF assets (cash, IBD’s and share scrip) without explicit approval of the Board of Trustees and without the legal power to do so;
9. Between May 5, 1997 and March 16, 1999, the Board of Trustees did not review management’s use of the ANZ facilities;
No mention was made in the minutes of meetings during this period of:
Drawdowns
Repayments of principal;
Specific use of facilities; and
Investments pledged to ANZ
10. NPF’s management team of Mr Kaul, Mr Leahy, Mr Wright and later Mr Fabila, failed in its duty to:
provide the trustees with relevant, timely and adequate information concerning NPF’s debt position;
establish relevant risk management procedures to mitigate borrowing risks;
properly inform the trustees concerning the pledging of additional share scrip when the value of assets pledged to ANZ fell below the required 150 per cent security coverage.
Specifically, Mr Wright and Mr Leahy acted without proper authority in assigning share scrip to the ANZ Bank in September 1998, as evidenced by Exhibits B1504 and B1505.
TO BE CONTINUED
