KORDA, Mr Mark, Partner, KordaMentha
CHAIR: I want to thank Mr Mark Korda for being available here today. I want to note that Mr Korda and KordaMentha have had repeated private meetings with myself and other senators as we have undergone this inquiry into MIS. I appreciate KordaMentha always making themselves available both in Canberra and in Sydney to have private conversations. This is, I think, the first time they are actually formally appearing before us and before this inquiry. Mr Korda, I want to specifically ask you questions about where things are at with Timbercorp and with Gunns. Before we get to those specific questions, there is an overview here of the whole issue of MIS. I know you have strong views on managed investment schemes themselves. I want to give you the opportunity to discuss that and to give any kind of an opening statement.
Mr Korda : I reiterate: we have an hour or so this morning, but the firm and the partners are more than happy to answer any questions relating to the MIS schemes and their viability, or whatever. I have been involved in many of the agricultural MIS issues, including Environinvest, Willmott, Gunns, FEA, Timbercorp and many others in the non-agriculture MIS. Those, of course, are problems including Westpoint, LM investments, Octavia, City Pacific, et cetera. I have not been involved in Great Southern at all. That is the one we have not been involved in. I have either been the administrator, liquidator or receiver of all those entities—either myself or with my other partners.
As you would appreciate, in those capacities we operate under the Corporations Act. Principally, our objective is to are either save the business or collect in the assets of the business and pay out the creditors. That is what we do under the Corporations Act. We are a bit of an umpire, so to speak. We try to settle competing investors' and creditors' claims. You would probably appreciate that we sort of pick up the pieces of what has gone wrong. So, at any time, if you need to find out things about these schemes we will be more than happy to answer. The MIS is very complex, particularly legally complex. It is interesting that—and I can leave this with the committee—there is a book called Insolvent Investment, edited by Stewart Maiden. There are 367 pages relating to the legal issues of the MIS schemes, including Gunns, Timbercorp—everything. I have probably been involved in most of those cases. It is very interesting.
I have been involved with a lot of them, but I thought I might restrict my opening comments to Timbercorp. There is Timbercorp Group and there is Timbercorp Finance. So I will split it in two. Timbercorp Group consisted of 41 companies and had 36 schemes. They operated those schemes over forestry, almonds, olives, et cetera. There are approximately 18,400 investors. They put approximately $2 billion into these schemes to 2009. I think, importantly, probably another $1-2 billion would have had to be put into those schemes to get them to viable states if they were about to happen. Timbercorp was funded by—it had debt. It raised equity and raised funds through the MIS schemes. Timbercorp horticulture, particularly, got caught up in the GFC, which happened in 2007-08 with Lehman Brothers collapsing. In April 2009, I was appointed administrator-liquidator—I will not confuse the terms—of Timbercorp over the 41 companies, and a various number of my partners looked after companies in that group.
CHAIR: Before you move on, I want to ask you one question on the evidence that you have given, because we have been given different evidence here. I note that this is not the area that you specialise in but that you have been around this a lot. Is it your opinion that, while the 'collapse' of Timbercorp was brought forward by the global financial crisis, in hindsight the business model itself would have been sustainable long term if not for the GFC? That is a bigger question for us, about MISs in general.
Mr Korda : It is such a broad question. We could take that on notice and answer that. Maybe if I show you where we got to, it might help a bit. We were appointed over the forestry schemes. The forestry schemes had 96,819 acres of forestry over about 600 properties. Two hundred of those properties were leased predominantly from farmers and the remaining properties were effectively owned by Timbercorp and leased back. The forestry schemes needed to fund obligations of approximately $29 million a year. Timbercorp ran out of cash and could not fund its obligations. You were probably not going to get much income for 10 years—$29 million a year, leases and operating costs, but no cash. Paint a picture?
Going to the almonds schemes, we had eight schemes of almonds on 10 properties covering nearly 12,000 hectares—so they were huge. I think we had around three million almond trees up in northern Victoria. To meet the crop for 2010—so this is where you understand MIS—the crop to plant, fertilise, put water in et cetera was $247 million, of which the crop proceeds probably would have been about $100 million. They were small crops, and immature. That $247 million had to be provided by the growers and so, when we were appointed as liquidators, we did not ask for the $247 million.
Senator BACK: Your reference to the term 'grower' actually means the investor, doesn't it?
Mr Korda : Yes.
Senator BACK: We became a bit confused with this. Normally when we would speak of a grower, we would speak of a farmer growing something, but in fact it is the city- or urban-based investor who you are referring to as the grower.
CHAIR: As far I as I understand it, under the tax ruling they had to be referred to as growers—didn’t they? It is tied in with the tax ruling.
Mr Korda : I think that is correct.
Senator BACK: So am I correct: the grower is the urban investor?
Mr Korda : Yes, I could call them investors. That is as distinct from people who borrowed money from Timbercorp Finance or banks; we call them borrowers.
Senator BACK: I am sorry—as opposed to?
Mr Korda : If they had a loan for that, like from Bendigo or from Timbercorp Finance, we call them borrowers.
Senator BACK: Or they could be a bit of both.
Mr Korda : Yes. Then there were the olive schemes. We had eight schemes, conducted on seven properties, covering nearly 7,000 hectares and nearly two million olive trees. It would cost $60 million to set the 2010 crop, and the likely proceeds were $34 million. The group had no funds to complete those. When we were appointed liquidators we decided it was not in the best interests of the growers to put in another $300 million to $400 million for 2010; whether they would have put it in was another question, but we did not think it was in their best interest. This is where I get to your question, Senator. What happened was that because we were in winter—April 2009—a large number of people worked to get all of that land and those properties and businesses sold by October 2009. In forestry that is because you are running into the fire season and if you do not pay your rent—$29 million—you lose your trees. In horticulture, in September you need to start putting water on the crops and paying for electricity—that is a minimum of $1½ million a week. You have to fertilise. You have to get bees—we actually paid for the bees: $3 million for 2 billion bees. All of those businesses were what I would call saved. The MIS scheme was not saved—the shareholders lost money—but we saved the actual businesses that were there. They continue to this day and there are probably 2,000 or 3,000 people in rural Victoria who have kept their jobs, either full-time or on a casual basis.
The vagaries of that were that I did not think the olives were particularly viable. Subsequently the guys who bought that have put a whole big company called Boundary Bend together. I work with Rob McGavin a lot. We saved that business. My understanding is that it is going well. The price of almonds has gone up to $8 a kilo and the Australian trade has gone down to 75c, and there is a drought in California, so they are making good money. Forestry is being continued as a going concern, so those plantations will keep going. In terms of saving a business it was really hard work, but that was the outcome. Would you set them up again? No. You would not plant olives again.
That is the Timbercorp group and its really key operations, and that took the first six months. We often get comments such as, 'Gee, you like to drag out jobs.' We were principally done, except for all the legal issues and everything like that, by September or October 2009. It was massive effort. We could give you lots of facts that you need to help you through your managed investment scheme inquiry and to determine what should be done, but there will not be any more forestry schemes, will there. No-one is going to invest in them. Shall we move to Timbercorp Finance?
Senator BACK: Yes, that would be good.
Mr Korda : There are a lot of facts, and we have got most of the facts because we are just cleaning it up, so we are a bit impartial. Timbercorp Finance had at any one time up to $1 billion in lending to 15,000-plus borrowers. Broadly, what happened was an investor would want to purchase an MIS for, say, $100,000. The investor would borrow the money from Timbercorp Finance in June of a particular year. Sixty per cent of the MIS would be borrowed from Timbercorp Finance and 40 per cent would be either paid in cash or borrowed from somewhere else. They would then receive a tax deduction of up to $46½ thousand. The idea was that many investors would then pay off their housing loan, which was a non-deductible debt. They now had a tax deductible debt with Timbercorp. That is what many of the financial planners were trying to achieve. There are other people, such as a lot of financial planners, who invested in these as well because they thought they would be good for superannuation et cetera.
I think your office is familiar with Craig Shepard. Craig and I were appointed administrators, liquidators et cetera in April 2009. At that time, Timbercorp had 7,500 borrowers owing $480 million. We got involved with this book in April 2009. From 2009 to 2014 the borrowers litigated against Timbercorp Finance saying that they should not have to pay their loans. Senator Back, that is the case. So when you talk about Justice Judd, that is who heard the case brought by the Timbercorp borrowers, who were represented by McPherson and Kelly against, effectively, Timbercorp Finance and Timbercorp Securities, which we represented. We are looking after those companies. Here was the borrower's dilemma: should I pay my loan out and stop incurring the fixed interest rate, because these were fixed interest rate loans; they were not variable rate loans?
CHAIR: And it was 15 per cent compound interest. Is that correct?
Mr Korda : No. I will come back to interest rates. Should I pay out—or refinance or whatever you do—and stop incurring interest, or do I not pay and, if I win the court case, I pay nothing? It was a dilemma, a real dilemma. We could only ever take the money. If you wanted to pay out, we took your money and paid back the creditors. But many thought, 'I will pay further legal fees and I will win and pay nothing.' A number of people had stopped paying their loans to Timbercorp Finance because they thought, 'This committee is going to win and I'll have to pay nothing.' The litigation was lost in the Supreme Court, then on appeal and then at the High Court. This delayed us from collecting loans, and it is the single reason why this administration has taken so long.
Where are we today? There are 5,300 borrowers who no longer have a debt with Timbercorp Finance—it has been refinanced or paid off. That is 5,300 borrowers who have resolved their loan. We now have 2,200 remaining borrowers. What can you do if you are one of those 2,200 remaining borrowers? I will try to keep it simple, but there are three things you can do. The first is that you can take a 15 per cent discount—you can settle tomorrow with a 15 per cent discount. For five years we have had a 15 per cent discount in place. Even when they lost the court case we left the 15 per cent discount in place. It is non-negotiable. We get people all the time—friends of friends, friends of the firm, lawyers of the firm—saying, 'Come on, do a special deal with me.' Craig Shepherd and the team are resolute that there is a 15 per cent discount. The second thing you can do is continue to litigate. There is continuing litigation in the Supreme Court that we are case managing. Some of that is run by Slater & Gordon, Maurice Blackburn and various others. The third thing you can do is join the hardship process. I think this is an area of grave concern to the committee so, rather than those first two, I will focus on the third—the hardship process.
CHAIR: Before you get to that, can I get another figure from you. You are down to 2,200 outstanding customers or investors, or whatever you want to call them.
Mr Korda : Yes. We call them borrowers.
CHAIR: What is the size of the loan book now?
Mr Korda : It is $380 million.
CHAIR: What did it start at in 2009?
Mr Korda : It was $480 million.
CHAIR: How much has been paid? You may have to take that on notice.
Mr Korda : I will answer that before the end of the session. Someone will give me the figure.
CHAIR: You have $380 million. If it were all paid today, what would be the overall figure as opposed to what it would have been if it had been paid on the first day of going into receivership? On the first day of receivership it was $480 million. How much has been paid up to now? Then we will add $380 million to it, and that will show what this delay has cost.
Mr Korda : Good. Going back to the three things you can do: you can take your discount, continue to litigate or go into the hardship process. You can go into the hardship process for many reasons: ill health, disability, business failure, loss of job, loss of long-term employment, death, divorce or bad advice from financial planners. We do not really care. It is the position you are in, not the reason, that will determine the outcome of our hardship process. I will say that again: it is the position you are in, not the reason, that determines the outcome. I think that is clear.
I will briefly talk about the Timbercorp hardship process. We employ 20 people in Timbercorp Finance—not out of our professional fees; they are normal workers paid their average wages. No-one underestimates the difficulty of these hardship issues—we have heard them first hand—especially where people have lost trust in their financial advisors and their lawyers, and also when they are scared of liquidators and their lawyers. The hardship process has been in place since the end of the litigation, and this was substantially enhanced over the last 12 months because we needed to improve our processes. A number of the senators have had great input to that. We have improved our hardship process, and we are happy to take any advice to deal with it. There is a whole process; I will not go through it all.
Importantly, one of the great things we did, in September last year, was to appoint an independent hardship advocate, Catriona Lowe, who is very well credentialled. Catriona is there to help each of these people in hardship to resolve the issue. She has an independent mandate and she is fiercely independent—recognising, though, that the borrowers do not have to pay her; Timbercorp pays her. She has a small team and works independently with all the borrowers. She also appoints independent former financial counsellors to assist the borrowers. The borrowers do not pay for any of these costs. We pay for them. Why is that? It is not anything magnanimous, we just think it is a good business decision. We need to clean this up and the sooner we clean it up, the quicker we can get out of there and the creditors get their money.
Senator BACK: In relation to the 2,200, can you give us a breakdown of what the numbers are that fit into each of your three options?
Mr Korda : I can get a subset of that.
Senator BACK: Good.
Mr Korda : I can say that currently we have 395 applications in hardship process and 110 have been dealt with. We meet weekly with Catriona Lowe to deal with all the cases. The time-consuming part of the process is collecting and verifying the information. We are not completely anal about it, if Catriona says this is enough information we need to know and this person cannot pay then get on with life. Once the information is done, it is generally one to two weeks before the case is resolved. All our people that work in Timbercorp Finance have been put through mental health and suicide training. They need to recognise when they have a distressed customer on board and to get that customer to Catriona Lowe. If Catriona Lowe says to us that she has a customer with a serious issue, it is not unusual to finish a process in a day or two. We have to rely on the independent hardship. Let me talk about the hardship results broadly. It is hard to talk about individual cases because of the privacy act, but at least we can talk about the cases.
CHAIR: You are the one who is insisting on privacy conditions in a lot of the contracts.
Mr Korda : We had a contract originally that said 'confidentiality'.
Senator BACK: Privacy has to be respected.
Mr Korda : We are trying to be helpful.
CHAIR: They will not let people out of them though.
Mr Korda : I think you are referring to the clause that we had in our settlement agreement that you could not disclose that. If someone will not sign up because of that clause, we cross it out. That is our policy, and has been since probably December. It was causing grief with some people that they could not talk about their settlement. We are basically saying there is a 15 per cent discount or you will be dealt with on a case-by-case basis. Substantially all the hardship cases resulted in payment of less than the principal owing under the loan. Interest for us is really not an issue in the hardship cases.
CHAIR: Can you say that again, please?
Mr Korda : I just do not have the exact numbers. Let's say that your loan was $50,000 and now there is $40,000 of interest, substantially all of them are settled for less than $50,000. We do not actually worry too much about the interest in hardship cases and how it has been calculated or whatever. If they are in hardship, they are usually not going to have enough money to pay the principal, let alone the interest. It is something that we do not think about much. We reach the agreements on a case-by-case basis. There have been loans that have been fully written-off.
There was one example of an employee of a financial planner, who was put into the loan by their boss. Three weeks later they got retrenched, it should have been in the loan, so it comes in on the hardship process four years later to us. At interview they fill out a form and they go to Catriona and tell her that they have lost their job, that they are living with their mum and dad, they have a five-year-old son and they are working part time. It is not hard to write off the loan, is it? Why would we do anything else?
CHAIR: I do want to get to a few specifics around that if we can. I am conscious of the time. Is there anything else that you wanted to cover?
Mr Korda : I only had two things on my sheet. The second thing was that out of the 7,500 borrowers that we have handled over six year, we have initiated three bankruptcies, end of story. We cannot find the people. We do not initiate bankruptcies. This is a bit of a myth. We have not sold and cannot sell someone's house. We just cannot do it. Just to give you a little bit of information, there have been 11 parties that have come to the Senate inquiry and talked about their loans and what they have to pay. Five have been settled under the hardship process. Four continue to litigate, and two are still in the program. I will finish there.
CHAIR: Thank you, Mr Korda. I want to acknowledge that your team have been very helpful with our officers and that when we have brought individual cases they have looked into them. I note that things like bringing on Catriona Lowe were a response to concerns that other people had raised, and it is appreciated that you have been so receptive.
Let us not puss*foot around the issue here. Let us see what the real issue is as far as I am concerned. There are people who went into these schemes with their eyes wide open and—buyer beware—made bad investment decisions, and they lost money as a result. That is investing. That is life. There are people out there who have lost money. It is unfortunate when they lose money, but this is the market environment. People went into these schemes for a whole bunch of different reasons, and some of those people lost money. That is what happens when you invest or grow or whatever you want to call it. Park all of them to one side.
There is a much smaller group of people—and I think you have touched on this—who, not just in my opinion but in the opinion of ASIC and others, are victims of financial fraud, misconduct and inappropriate advice and behaviour. These are people who, through no fault of their own, got themselves in a situation where effectively the system let them down. What we are talking about here is a reasonably small subset of people. They are the stories and tales that we have heard some of this morning from a different thing, but we are not talking about the majority of people here; we are talking about a very, very small subset. These are the people that would otherwise fall. We are talking about hardship.
Mr Korda, I know I have said this to you privately, and I say it again: one of my concerns regarding the hardship program is that your criteria that you have set do not look at the circ*mstances of people—how they found themselves within the debt. They only treat them as having the debt once they have the debt. If I am a victim of financial misconduct or crime or fraud, I am not treated any differently as a victim as opposed to anyone else. Your hardship provisions, as I understand it, do not take that into consideration when doing the processing. Is that right?
Mr Korda : Correct. We look at the ability to repay the loan. That ability may have been affected by your having lost your job, your having had a divorce or your ill health. You may have had a lot of other investments. I heard someone say that some people have $1 million or $2 million worth of debt and one house, so they have other investments. There are a whole lot of reasons why they cannot pay. One of those will be because of bad financial advice or fraud. We just say, 'It's about whether you can pay or not, and let's deal with that issue, not the root cause of it.'
CHAIR: But the hardship does not take into consideration—again, I think you touched on it yourself. Again, we can talk about this later; it does not need to be the focus of today. But I would ask you to reconsider. Your hardship provisions do not take into consideration the psychological distress and pain that have been caused to the victims of financial misconduct and crime; they only look at financial capacity to pay. I feel that your scope is not broad enough. I will park that for another question.
Mr Korda : I do not know much about Great Southern, but I happened to sit here before and there was a certain financial planner. The equivalent in Timbercorp is—
CHAIR: Peter Holt.
Mr Korda : the Holt Norman Baker financial planner. There are 485 borrowers of Holt Norman. Of that, 200 are left; 285 are somehow resolved and whatever. Two hundred are left. Of that, 85 are in the Holt Norman action group, which you are familiar with—
CHAIR: Yes, of course.
Mr Korda : and 51 of them are in the hardship program now. You have said all that.
CHAIR: On that, though, Mr Korda: again, can I ask you to reconsider something. Part of the agreements that people have to sign when they are doing a settlement with KordaMentha is releasing their right to be able to pursue Mr Peter Holt. We were given this evidence two days ago. I see someone up the back shaking their head to say that that is not the case, but we were given that evidence just as recently as two days ago—
Mr Korda : Let me just clarify that with the actual facts. It was true that we had that clause in there. The idea was: we just do not want to be involved, because, when they sue, say, Holt Norman, they automatically join Timbercorp, and we have to go to court all the time. So we were trying to stop our costs and our time. The reality is: we took that on board, and that is no longer part of any settlement deed.
CHAIR: We also have a gentleman here—I do not want to name him—who has told us this, and perhaps straight after this the two gentlemen from KordaMentha in the back can have a private conversation with him. But I have heard these stories in the past about people having spent 10 months or longer from when they handed over documents to KordaMentha to when there has actually been an offer or a settlement placed on the table. I appreciate that every case is different and that I am generalising here. Mr Korda, what I would urge is this—and, again, this is the frustration from a lot of people who we have been dealing with who have gone through a very harrowing, difficult and long process. There is the pressure and expectation for the production of continuous documents. You are dealing with people who have already been through a lot, and I feel that, at times, there is not enough appreciation of that. I know that this is something that, privately, Catriona Lowe and others have raised with you guys as well. Is there enough of an appreciation that you are dealing with people in very difficult emotional circ*mstances, as to the expectation on them? Sometimes the expectation, from a one-size-fits-all organisation such as yours, which is looking at 2,200 people, is not actually catering to the fact that some of the information does not exist, and some people just need to have these things settled now, and 10 months is too long to wait?
Mr Korda : I agree with you. We need to take that on board. And I know the time pressure. I know that we do settle things in 24 hours sometimes when it is critical. I heard, the day before yesterday, David talking about that, and he did put his information in, in 10 months; it took us seven months for him to consent to an independent review. The independent review took two months, and we are dealing with it. I understand, but we had to wait for him to give us the consent, and it took seven months. We should not just take isolated examples. The overall thing is: these, particularly the ones in Holt Norman, have been under a significant amount of stress from a whole lot of different angles. Surely we should make sure our process takes that into account and deals with it. I hope we are doing it, and, if we are not, we are happy to look at it again, take everybody's suggestions and make sure we do it. We have to go through the process, but there is no limit to the amount of people we need to employ to get this thing done. I do not want to be sitting there in five years' time dealing with it; I have got other companies to save.
CHAIR: That all sounds well and good, but you guys are all getting paid to be sitting here; you are not sitting here for free. What if this takes five more years? I am not saying you are responsible for the delays; I appreciate there is a separate issue about the legal action and the legal advice that people are given that has dragged this process out, and I accept that. But over that entire period you and all your people were getting paid.
Mr Korda : Correct. But would I personally want to sit in on a court case against Macpherson and Kelly for three years, or get onto the next job and fix it up? That is what we would rather do; that is what our people would rather do. I can tell you, Craig Shepard does not need to sit down—and you saw some of the people today—all day and every day with these seriously stressed out people, dealing with personal loans. We do not even do bankruptcy, as a firm; we do corporate stuff. But it is part of the loan book for the liquidator who has to bring it in. We would rather not be doing this, but we have to do it. And we do get paid; you are right.
CHAIR: When do you see this coming to an end? How much longer does it have to go?
Mr Korda : In the normal course of events, some of the loans have five or seven years to run. People are on repayment terms, and that is how they have restructured their loans. As to when I think the stress will come out of it, everybody who needs to be in hardship should have been dealt with by the end of the year. That is 2,200. But it will be an ongoing process.
CHAIR: So are you saying that your view is that everyone in the hardship—
Mr Korda : The problem is: we have 395 people in the hardship process. It will go as fast as it needs to go. I do not know how many of the 2,200 people that are not paying, that are relying on litigation or on committees like this to get their loans forgiven, are in hardship. They are not paying. We just do not know.
One of the unfortunate things that happened is because of the legal case—I will not say it took that long; it did not take that long; it was a quick legal case by normal standards. But there is a statute of limitations imposed to say that, by April of next year, we will have had to either collect the loan or issue a writ if it has not been paid. That is the unfortunate part about why we are accelerating everything at the moment. That is a terrible situation: there is a person who is already stressed out and they get a writ served on them. We try not to do that, but, at some point, if we are not in dialogue and we are not dealing with them, we will have to do that because the statute of limitations runs out.
CHAIR: Finally, there are two things I want to confirm that you have said to me. Firstly, at this point in time, if I were in the hardship program and a Holt, Norman, Ashman, Baker Action Group member or whoever, then, as to the contract, firstly, I would not necessarily have to sign a confidentiality agreement for you to sign the contract?
Mr Korda : Yes.
CHAIR: And, secondly, I would no longer have to absolve myself of my rights to be able to pursue—
Senator Back interjecting—
Mr Korda : Yes.
CHAIR: And, finally, for those who previously did sign an agreement with you which has restricted their ability to pursue Peter Holt—because there was a period in the past where that was a requirement of the contract—would you be prepared to release those people from the contracts?
Mr Korda : Yes.
Senator BACK: Could you just comment quickly on the fixed interest rate.
Mr Korda : When these loans were taken out—and we have done a bit of a review of it—you could either pay in cash or get a loan from a bank or Timbercorp. Timbercorp pricing was about what a personal loan would have been at the time. Remember: interest rates were high—I think 7½ per cent in 2007-08 was the RBA rate, as compared to two per cent today; so 7½ per cent, and maybe there would be a margin of three per cent, so maybe 10½ per cent. As with all personal loans, they get fixed for the term; they are never variable rate loans. So, if the rates had gone up, they would be still at that. But they have gone down.
Senator BACK: In terms of these hardship clauses—where, in most instances, you have said, interest has been forgiven and, in some instances, fully written off—what is the tax treatment of those, from your viewpoint as the liquidator of the company? Are they tax deductible?
Mr Korda : We have massive tax losses, so it is irrelevant.
Senator BACK: I have a couple of questions I really want to relate not to your evidence today as much as to that yesterday in Launceston. It is on forestry. You did refer, in the forestry context, to fires and to losing trees, and to the lessees in default of paying their quarterly or monthly leasing fees. Can you explain this to me, because it seemed to be a grey area yesterday: if a farmer leases some of his property and trees are grown on that, and the lessee, for the reasons you mentioned, ceases to pay, the contracts seem to say that the trees revert to the farmer, the landlord, and yet there seem to be many instances in which that has actually been challenged, although it is there contractually in black and white that the trees revert to the farmer. What is the case?
Mr Korda : I have a personal view that the trees revert to the farmer. But it depends on the documentation. So all the schemes could be different, but in Gunns and Timbercorp our view and our legal advice is that it reverts to the farmer.
What happens is that the investors, the other growers, want to argue otherwise because they lose their trees just because Timbercorp did not pay the rent. So you have the farmer wanting the tree and not paying for it and the grower wanting to keep it. So there is this big fight, which has been in all the courts now. We have amicably resolved all the ones we have worked on. In Timbercorp, when we sold forestry, we used the deposit from the sale to pay all the rent. The rent was on foot, so the farmers could not take the trees back. We then transferred all of those leases to Global Forest, which is a big player, and they continued to make the payments. So in Timbercorp there was no default on those leases. Gunns is different.
Senator BACK: Okay. I won't ask you about those that are associated with others. You have made the observation, I think, that the global financial crisis was a big issue. My association with Timbercorp, which was fairly arm's length, was mainly in Western Australia, where initially—and I will give you an alternative view to the failure being due to the global financial crisis—it involved good quality land with high rainfall and some chance of achieving some of the projections of 250 tonnes per hectare, although in WA it was highly unlikely. What then happened, of course, was that there was a demand for more and more land, whether it was land purchased by Timbercorp or land leased from farmers, and it increasingly went into lower rainfall areas, poorer quality soil types and poorer quality management. I do not know much about the genetics of Tasmanian blue gums but they sure as hell did not perform on the south-east coast of WA. So I want to put to you the view that, prior to and subsequent to the global financial crisis, in many instances it was simply projected yields that were totally and utterly unrealistic. Is that a reasonable comment?
Mr Korda : If I took all of Tasmania, the E. nitens and nitens, those schemes were particularly affected by the fact that when the global financial crisis happened there was no demand for paper, especially fine-quality paper, and no demand for woodchips, and the exchange rate went to $1.10—
Senator BACK: But that was at a time when there was very little actual production going on—very little harvesting was going on by that stage. It was still well into the future.
Mr Korda : We hired 200 people to restart it. You would be correct if you said that because of the influx of money across the industry there were stupid increases in the prices of land and a lot of money may have been spent if they did not have that amount of money.
Senator BACK: And you were not involved at the time, so this in no way reflects on you. Please understand that. But from what I have been able to learn even when the projected yields of 250 tonnes per hectare were demonstrated to be absolutely and utterly false, there seemed to be no downgrading of the yield projections for the ongoing sales of the product.
Mr Korda : I understand. I do not know about that.
Senator BACK: It is not something upon which you could pass any comment. The question is: were subsequent investors duped because the yields projected in the original prospectuses fell very far short, and yet there was no adjustment made?
Is it the case that many of these schemes were advertised and based on an expectation that because the tax office had given a ruling for another applications, other promoters just assumed that the tax office ruling would also pass over to their project and, therefore, in presenting their prospectuses to potential investors they really had no knowledge that the tax office ruling for somebody else was in fact going to transfer to their projects?
Mr Korda : As I understand it, it was relatively simple for forestry. Then the tax office used to make rulings or give private rulings on the horticulture. In fact, in 2008 they effectively said that horticulture could not be tax deductible, and then that got reversed in court after that, but it all collapsed.
Senator BACK: As an extension of that, particularly if you are a new primary producer, you must be able to claim your primary production status annually. I know there were certain forgivenesses given in forestry because there is not a capacity to actually have an annual income, but if fire had gone through a forestry coupe or a fungal disease, as we saw on a site visit yesterday, decimated the trees then a small part owner of that particular block could in no way demonstrate that they were now a primary producer, because there was going to be no primary production on that land. How did that get handled? Is it the case that effectively their investment was then gone?
Mr Korda : We did not deal with the individual taxpayer deductibility; we dealt with the companies. So I would have to defer on that question.
Senator BACK: That is reasonable. I just thought that from your expertise you might have been able to respond.
Senator KETTER: Just in terms of the hardship program, to start with, you say there are 2,200 remaining borrowers and you have 395 hardship applications, of which I think you said 110 had been dealt with.
Mr Korda : Yes.
Senator KETTER: Are the remaining 285 still in progress, or have some been rejected?
Mr Korda : They are still in progress. I think we have rejected two.
Senator KETTER: That is a relatively small number of people going through the hardship program out of the total 2,200. Do you have some thoughts about why that is?
Mr Korda : Three things will happen: there are those waiting to see what happens on the next set of litigation, there are those waiting to see what might happen out of any other processes—so their loan will be written off; there are people like that—and there are people that cannot trust anybody and are very wary of going into a hardship process. So it is taking time. We have made a real focus on the Holt Norman people because of their circ*mstances. I think to get 51 into the program is word of mouth spreading: 'Hey, listen. Come in and see Craig Shepard and do your things—you've done the deal.' There are 15 deals we did there where the repayments are less than $1,000. Some are written off in full. What do we want to keep on going for? If we want to bankrupt someone, it costs us $10,000 or $15,000.
CHAIR: So putting aside the moral argument, just from a purely commercial point of view—this is something you have said to me privately, Mr Korda—in a lot of these circ*mstances the amounts are so small that the act of pursuing someone to bankruptcy does not make commercial sense.
Mr Korda : We do not like doing it, but why do it when it is so expensive? It does not make sense if we can settle for $1,000. We need the information to make the decision. Once we have the information, we can make the decision.
Senator KETTER: You say you have rejected two applications so far.
Mr Korda : Yes.
Senator KETTER: That is based on the fact that that person's representation that they are suffering hardship has been investigated by Ms Lowe and that has been found to be not the case?
Mr Korda : They might owe $50,000 and have a house worth $500,000 with no mortgage on it. That is not hardship.
Senator KETTER: You have given us some evidence which seems to be in conflict with some of the information that has been provided by submitters, who have talked about what is referred to as a 13 per cent penalty interest rate.
Mr Korda : I gave you a typical loan, so I got to 7½ plus a three per cent margin, which gets you 10.5. The default rate is about 2.75 per cent, so that is how you get up to about a 13 or 13½ per cent rate. I was answering a question of the senator specifically. I could actually tell you. I broke this down yesterday. We have 297 loans on a zero rate. We have 1,200 loans on one to 13 per cent, and we have 4,100 loans on 13 to 14 per cent. The rates used to be 7½, a margin of three, and the default rate is 2.75. So, simplistically, you get to 13. I am trying to simplify it. The default rate is 2.75. There could be some variations on that. Some could be zero; some could be a bit higher. I am trying to update you.
Senator KETTER: One submitter has indicated that in his opinion: the administrator, KordaMentha, was directed by the ANZ to show no mercy and get every cent they could at 13.5 per cent compound interest.
Mr Korda : It is not true. First of all, we are the independent liquidators of Timbercorp Finance. ANZ, among other people, happen to be the creditor. They can't actually tell us to do that anyway. Legally, they can't do it, and they haven't done it either.
CHAIR: Who are the creditors at this point in time?
Mr Korda : ANZ Bank is a creditor. Perpetual is a creditor. There are a number of what I would call a finance bond, which are mum and dad investors. We expect all of those creditors to be paid out in full. That is our expectation. And the balance of any loan moneys that are left, that are collected, will go to the Timbercorp Finance group, because it funded a lot of the loan.
CHAIR: Your view is that ANZ and Perpetual are the two largest.
Mr Korda : Yes.
CHAIR: Do you know what the breakdown was at the start of the process?
Mr Korda : It was $150 million, ANZ; $90 million Perpetual; and bonds, which are mums and dads, $10 million.
CHAIR: So there is only $250 million, but the loan book was $450 million to start with.
Mr Korda : Because Timbercorp itself put equity or debt into it. So it goes back—
CHAIR: So $150 million was ANZ and $90 million was Perpetual and then there is the $10 million. You expect they will be repaid in full, with interest?
Mr Korda : Yes.
CHAIR: So they will lose no money out of this?
Mr Korda : No. The other Timbercorp creditors will be the loss makers. The banks put in $250 million. The Timbercorp group and its shareholders put in another $250 million.
CHAIR: What is the level of interest? Is it bond rate interest?
Mr Korda : It varies on the facilities.
CHAIR: Roughly, with the bond rate we are talking 10 or 15 per cent interest here—
Mr Korda : The borrowers are on a personal loan, which is a fixed rate. The company's borrowings are on a variable rate, so it is probably eight per cent.
Senator KETTER: Following on from that—and you touched on this earlier, I think—at a time when we have low interest rates, we are talking here of people being subjected to 13½ per cent interest rates. Can you talk us through that.
Mr Korda : If I could put it simplistically, these were taken out as personal loans. The whole industry in personal loans is really a fixed rate loan. When you take out a loan for a car or a boat or anything, the whole industry is really a fixed price. So all our loans were fixed. As liquidators, we come in and collect the book. All we can look at is the contractual documentation. That is why they are fixed at that. Hence, the dilemma for many of the people is: if I win the court case, I don’t have to pay anything; if I don't win, gee, I've got a high interest rate, so I should have refinanced. That is the dilemma.
CHAIR: Mr Korda, you have been very generous with your time and you have to go in 10 minutes, which you did mention when you first came in, so we will not keep you beyond 12 o'clock. I have a couple of questions on that. In your role as the independent liquidator, you report to the creditors. How does it work? Explain to me how it works.
Mr Korda : Because these companies are all in liquidation, we effectively work on behalf of all the creditors. Under the law, the creditors can appoint a committee of inspection.
CHAIR: And the creditors are largely ANZ and Perpetual?
Mr Korda : It depends what company you are in. In Timbercorp Finance, that is the case, yes.
CHAIR: Is their power proportionate to their level of debt?
Mr Korda : No.
CHAIR: They are not all equal partners.
Mr Korda : Basically we report to them and keep them up to date. They have to approve our fees—the only way you can get paid is if the committee approves—
CHAIR: I am not worried about you getting paid, Mr Korda. I am sure you have sorted that out.
Mr Korda : Yes—but ultimately the liquidator has the power to make all of the decisions et cetera. There are a few matters where you need to get approval from a committee, like if you want to compromise debts. The best way I could summarise it in layman's terms is that they can advise but they cannot do.
Senator BACK: With regard to Timbercorp Group now, are the landlord farmers treated as creditors? If so, are they preferred creditors in consideration of lease fees not paid?
Mr Korda : They are creditors but they are not preferred.
Senator BACK: They are creditors.
Mr Korda : It gets complicated, but they tend to be the creditors of the responsible entity, not the parent company, which never has any money.
CHAIR: Again, I am obviously not an expert in the Corporations Act, and I completely accept that you are governed by the Corporations Act in what you can and cannot do. You talk about how the creditors can set up a committee. Within that committee structure, is their influence—or votes or however it works—proportionate to the size of their debt? Is it one creditor, one vote?
Mr Korda : It is one creditor, one vote.
CHAIR: It is one creditor, one vote?
Mr Korda : Yes, on most committees.
CHAIR: Does that mean that for you to be able to change, say, how you pursue hardship provisions beyond the scope that you have already been granted would take a vote of the committee? How does it work?
Mr Korda : They get to vote on our fees. Other than a few minor things, it is in our power and it is our decision to make these hardship programs, not theirs.
Senator BACK: Not the creditors?
Mr Korda : Not the creditors. All of the powers are invested in the liquidator. The good reason for that is that a lot of the time you have huge, competing claims between the creditors, and a lot of the time you are the umpire. In these very difficult MIS schemes, where there were significant disputes between the growers, the MIS, the banks and everything like that, we went to court and got directions. That is how you resolve it if you cannot negotiate. Forestry was terrific. We did great negotiation, we sold it, we got the growers to agree and then we went and got it approved in the court. There was a big fight in horticulture, so we just went to the court and said, 'This is the best we can do, Your Honour, this is the sale price we got to.' His Honour said, 'Are there any objectors?' They go through the process and then the judge says, 'Okay, sell.'
Senator BACK: This is interesting.
Mr Korda : We are protected by the court when it is really contentious or people want to litigate.
CHAIR: With ANZ's $150 million and Perpetual's $90 million, do they get paid as you go or do you pay them at the end of the process?
Mr Korda : We pay them as we collect the money.
CHAIR: As a proportion of the—
Mr Korda : Yes. So, for example, Perpetual is almost down to zero.
CHAIR: What about ANZ?
Mr Korda : ANZ is about $75 million.
CHAIR: So you are not paying as a proportion. ANZ is still owed $75 million. Do you anticipate that it will all get paid out roughly this year or next year? I guess that depends on when you settle.
Mr Korda : It has been five years and we are halfway through. I do not have that calculation, but we could send you a note on that.
CHAIR: The final question: was your team able to get that figure?
Mr Korda : Sorry, what was the question again?
CHAIR: When it first went into liquidation there was, I think, a figure of $450 million—
Senator BACK: It was $480 million. The remaining outstanding is $380 million.
Mr Korda : The opening balance was $485 million. The payments received are $300 million, we have written off $112 million and there is interest of $312 million, leaving a total of $385 million.
CHAIR: And that changes day to day, so these are rough figures you are giving us.
Mr Korda : That is where we are today, yes.
CHAIR: When you walked in, the place was a mess. You put the books together. You have a loan book. I know there is a whole other story about what went on up until the day you took over, and that is a whole other story which you are not responsible for. There are serious questions, I believe, about the conduct of Timbercorp prior to administration, but you came in. We have discussed this before, Mr Korda. You are the ambulance, effectively. You come in after the car crash has already happened. So put that aside. When you walk in, there is $485 million. If that had been paid that day, it would be $485 million. At this point in time, $300 million has been paid.
Mr Korda : Yes.
CHAIR: So $312 million is the figure which is just interest.
Senator BACK: Interest, yes, and $112 million written off.
CHAIR: So you pay back the $75 million to ANZ, and let's say you still owe $100 million and everyone paid today—which is not going to happen, but we will assume it for the purpose of these figures. That would mean there would be $285 million of interest profit—or not profit but additional revenue that has been raised.
Mr Korda : There will be cash in Timbercorp Finance of $285 million under your assumption.
CHAIR: What happens? Where does that $285 million go?
Mr Korda : That goes back to the Timbercorp Group, the public company, because it lent or put in equity of $250 million.
CHAIR: And you are also the administrator for that?
Mr Korda : Yes.
CHAIR: So where is that going to go?
Mr Korda : That will go to the creditors of the Timbercorp Group.
CHAIR: Who are the creditors of the Timbercorp Group? Sorry, I am very conscious of time and I know you are going to have to go in a few minutes.
Mr Korda : There is a banking facility of $200 million, which has various constituents in it. There are some bonds of $50 million. I would have to get you the rest—there are unsecured creditors and all that.
CHAIR: So the bulk of it is going to go to this banking facility of $200 million. I guess you know the question I am going to ask: where does that $200 million go?
Mr Korda : The banking syndicate, off my memory, consists in equal proportions of ANZ, BOSI—which is Bank of Scotland International—and Westpac.
CHAIR: It sounds like you are doing this broadly from memory, and I appreciate you are doing your best. I am sure this will be on the public record: out of that $200 million, what is the breakdown between ANZ, BOSI and Westpac? Do you have those figures?
Mr Korda : We can get those.
CHAIR: Are you able to take that on notice.
Mr Korda : Yes.
CHAIR: But I guess the broad point—you are saying this as a matter of fact—is that the banks in this equation, who have lent money through Timbercorp Finance, through either one avenue or the other avenue—there are two different avenues where they can invest—are going to get repaid in full.
Mr Korda : No. We actually do not know what the end outcome is going to be.
CHAIR: Yes—if the scenario I just outlined happened.
Mr Korda : In the scenario you outlined—
CHAIR: It is hard to see how they do not if there is $285 million and you still owe $385 million and interest is compounding, but other things could happen. You could lose a court case.
Mr Korda : I think it would be remarkable if that were the outcome. I do not know, because it is not my business, but I assume the banks have long ago provisioned those amounts.
CHAIR: Mr Korda, thank you so much for being here. That was an incredibly helpful process, especially walking us through the numbers and the arrangements. Again, your office has been incredibly helpful in private meetings. But the concern that I have—I cannot necessarily speak on behalf of other senators, though I am sure I am sharing their sentiments—in going through this inquiry has been the stories of the individuals. There are people here—I accept the circ*mstances they have found themselves in are not the fault of KordaMentha—who were victims of financial misconduct and fraud. I think the more attention can be given to them the better.
Mr Korda : Through the chair to the other senators, if you need information, we have it all. It does not take much to get it. We understand that dealing with people that have borrowed too much money for whatever reason, particularly if they have gone through financial planners who have broken their trust, is extremely difficult for everybody.
CHAIR: Some of them are victims of fraud as well.
Mr Korda : Yes, and so it is difficult. Our people have all been trained to work on the thing, and we will just work through as best we can with as much empathy as we can within the law.
CHAIR: Thank you, Mr Korda.
