- More fuel for the ASIC fire
- The soft underbelly of the regulator
- FTI Consulting Statement in relation to the Kagara Administration
Perhaps the most annoying tactic in the black art of public relations these days is to respond to questions, not by answering them, but by answering related propositions which were never put in the first place.
Journalist: Did you eat Rice Bubbles for breakfast this morning?
Spokesperson: We deny categorically that we ate Coca-Pops for breakfast this morning.
By responding to a question which was never asked, the subject of any allegation is then free to elaborate with robust indignation and pharisaic self-righteousness.
This is precisely what has occurred over the past week in the case of Kagara.
Questions were put to both the Australian Securities & Investments Commission (ASIC) and Kagara, a once billion-dollar resources group. Kagara is controlled by no less than four administrators from FTI Consulting.
We append online the questions and the responses of both parties.
We asked Kagara’s administrators, collectively and individually, to confirm that Kagara had spent $40 million on the Einasleigh low-grade copper exploration project and sold it for $2.28 million a year later.
We also asked the administrators from FTI why their Creditors Report suggests that $14 million of loans have been received from Investec in three tranches when Kagara’s Form 524 filings (company payments and receipts) show only two tranches totalling $4 million.
Rather than responding to these and other specific questions, the administrators from FTI chose to wax on in a carefully worded statement about what a brilliant job they were doing.
Specific questions to ASIC about the process of delivering an accounting relief order to the administrators – contrary to ASIC’s own guidelines – were also met with a response about what a great job they were doing.
So that long-suffering creditors and former employees of Kagara might better understand what has happened – apart from the administrators, bankers and lawyers taking out $14 million in fees in a year – here is the guts of it:
Einasleigh is the key. This subsidiary of Kagara held a low-grade copper exploration project in Queensland – which we were told by a local contractor last week was literally underwater.
Piecing together the transactions which preceded the demise of Kagara in April 2012 – and with the forensic assistance of University of New South Wales accounting expert Jeff Knapp who examined the receipts and payments disclosures – in late 2011, Kagara splashed $20 million to buy Einasleigh from another company, Copper Strike ($16 million cash and four million in shares).
Then, around December 2011, there is a $19.6 million loan from Kagara to Einasleigh that was used to acquire ‘mining leases’ for Einasleigh. That transaction does not appear to have been disclosed, apart from an obscure mention in two tables in the Report to Creditors.
The directors of Kagara did not disclose this $19.6 million transaction in either Kagara’s quarterly filings with the ASX or, in the statement of cash-flows in its financial accounts for December 2011.
This transaction would probably have been audited and disclosed in the June 30, 2012 financial accounts, if they had been prepared. That is now hypothetical. As revealed last week, Kagara won a relief order from ASIC which means the administrators do not have to produce financial accounts that cover this transaction.
Further, the FTI Consulting Report to Creditors alludes to this transaction but it does not explain or discuss this transaction. Nor does it show Einasleigh receiving cash of $2.28 million for the sale.
The Form 524 filings show a cash receipt to Einasleigh for $2.28 million (‘sale of Central Region’) but this receipt is not disclosed in the Report to Creditors.
The administrators, Michael Ryan, Mark Englebert, Quentin Olde and Stefan Dopking have declined to speak with Business Day despite repeated requests.
Einasleigh only has one creditor, Kagara, which indicates no other parties may have looked closely at the transactions. Yet all companies in the group share the same bank accounts.
Among the other discrepancies between the Report to Creditors and the Form 524 Filings are the Investec loans.
Kagara plunged into administration only six months after ANZ had lent it $40 million in late 2011. Besides calling in its $40 million loan, the bank demanded Kagara provide $22.5 million in cash backing for environmental bonds.
Previously, ANZ had been prepared to guarantee Kagara’s environmental bonds. Now, a long term liability had become an immediate liability requiring $22.5 million in cash.
At March 31, 2012, Kagara reported cash at hand of $8 million. But by April 29, only $400,000 remained. Kagara had the cash sucked out of it.
So, FTI turned to the merchant bank Investec to bankroll its administration at an effective interest rate of 20.4 per cent.
The Report to Creditors indicates that Investec had ‘made available to administrators’ $14 million. This apparently had been made in ‘a series of tranches and three separate credit requests’.
However, the Form 524 filings for Kagara show only $4 million was lent by Investec: a receipt of $3 million on May 18 2012, another $1 million on July 31 and the $4 million is repaid in full on August 31.
Based on a rate of 20.4 per cent, the interest on the $4 million loan would amount to $193,381 in total.
But based on the Form 524s for Kagara, Kagara has paid Investec around $3.5 million for ‘bank charges and fees’.
The receipts and payments show that on May 18 Investec lent Kagara $3 million. The same day, Kagara paid Investec legal fees of $200,000 plus ‘bank fees and charges’ of $140,026.
So, more than ten per cent of the loan went straight from Kagara creditors back to Investec on the same day.
For perspective, Kagara put $22.5 million on deposit with ANZ, presumably at around 5 per cent, and borrowed $4 million from Investec at 20.4 per cent.
Investec was contacted but no comment was forthcoming.
Here are the questions put to Kagara’s administration
1. The $19.7m loan from Kagara to Einasleigh noted in Second Creditors Report. What was that for? What was this money spent on?
2. From your reports, Kagara pays $20m for Einasleigh in December 2011. In the same month it spends $19.8 million on something which has not been specified (Einasleigh $19.8m liability to Kagara). Then it sells Einasleigh for $2.28m in January 2013 (as per your S534 filing). Is this correct?
3. This latter transaction was signed off by you on May 28, 2013. Do you stand by your attestation that “The information given in the statement is true to the best of my knowledge and belief at the date of signing”?
4. Do you concede that some of the information which you have sworn in statutory statements may not be true? There appear to be some inconsistencies between your creditor reports and Kagara cash flow filings with ASIC.
5. What associations to the buyers, Snow Peak, have with Kagara directors past and present? Please provide details.
6. Your Creditors Report shows $14m loans from Investec in 3 tranches. Your 524 filings show two tranches: the first of $3m and then another $1m. That $4m was repaid in 105 days yet Investec still was paid $3.3m. What was this for? How do you explain the discrepancies?
7. Where in the Creditors Report is the $3.3m mentioned?
8. Your form 524 shows Kagara received GST of $2m net. Has the company paid GST on asset sales? Please quantify. Your receipts and payments show only $289k received versus $2m collected?
Questions for ASIC Commission John Price
1. There is no ASIC published policy that states “companies who are not trading (because they are in administration) may defer preparing their accounts until they become active again” What is the basis of your statement to the Townsville Bulletin and Fairfax media?
2. What do you mean by “not trading” and “become active”? Kagara has made sales after the administrators were appointed and continued to engage contractors and employees. Why do you say Kagara is not trading and inactive?
3. If ASIC’s published policy of many years was described by you, then:
(A) Why would FTI Consulting have needed to pay Mallesons for legal work concerning a court order for relief from financial reporting?
(B) Why would ASIC’s chief legal officer and special counsel need to get involved in Kagara’s application?
4. Are you familar with ASIC’s policies in RG 174 incuding RG 174.29 which states “We will not grant relief from the financial reporting obligations merely because a company is being externally administered. When forming opinions or making recommendations about a company, external administrators and directors should make allowances for all the company’s legal obligations including the obligations under Part 2M.3. Creditors should be made aware of the costs of meeting those obligations when considering resolutions about the company’s future.”
There was no response from John Price to specific questions. Mr Price responded to this story:
With this statement by John Price:
- ASIC rejects your inference of favouritism in our decision to grant conditional relief to Kagara’s administrators regarding the lodgement of the miner’s 2012 financial accounts.
- ASIC is not in the business of doing favours for anyone. We are an independent enforcement agency and our employees work here because they believe in what we are doing and they respect the public interest. Suggesting otherwise is a smear on the reputation of this organisation and more to the point, its hard-working men and women.
- ASIC has specific legal powers to grant ‘waivers’ from various requirements in the law. People regularly ask us to use these powers through formal letters that we refer to as relief applications. ASIC treats all financial reporting relief applications even-handedly, fairly and objectively.
- ASIC can exempt companies from lodging accounts, but uses that power sparingly given the public interest in companies disclosing their financial position. However, our published policy of many years is to allow companies who are not trading (because they are in administration) to defer preparing their accounts until they become active again. At that point their obligation to prepare and lodge those deferred accounts becomes due. We adopt this approach because of the substantial costs that creditors may otherwise have to bear in preparing accounts for a company that is no longer trading.
- In determining relief applications, ASIC attempts to achieve two broad objectives: first, consistency and second, definite principles. Our general approach to considering relief applications is available on ASIC’s website for everyone to see.
- In the matter of Kagara, we have granted deferral relief in accordance with our published policy. A condition to the reporting relief is that the administrators maintain arrangements to answer, free of charge, reasonable queries from the company’s members about the consequences of Kagara’s administration.
- ASIC understands Kagara’s predicament is a serious matter which has had devastating consequences for creditors.
- But the public can be assured in this matter all procedures and processes continue to be properly carried out.
Mr Price also wrote this letter to a newspaper:
13 June 2013
Letters to editor
Delivery by email: [email protected]
ASIC can exempt companies from lodging accounts, but uses that power sparingly given the public interest in companies disclosing their financial position. However, our published policy of many years is to allow companies who are not trading (because they are in administration) to defer preparing their accounts until they become active again. At that point their obligation to prepare and lodge those deferred accounts becomes due. We adopt this approach because of the substantial costs that creditors may otherwise have to bear in preparing accounts for a company that is no longer trading.
In determining relief applications, ASIC attempts to achieve two broad objectives: first, consistency and second, definite principles. Our general approach to considering relief applications is available on ASIC’s website for everyone to see.
John Price, Commissioner, Australian Securities and Investments Commission
In light of the conduct of the Kagara administration and the relief orders expedited by ASIC in unusual circumstances, we also contacted the federal minister in charge of corporate law and regulation, Bernie Ripoll.
Senator Ripoll said, “I’m satisfied that ASIC has acted in accordance with its role as regulator”.