Senate Inquiry into Insolvency in the Australian Construction Industry
In 2015 I appeared as a witness at a Senate Inquiry into Insolvency in the Australian Construction Industry. One of the issues raised was the “voting value” of purchased debt with an example of a debt purchased for $30,000 having a voting value of $18m.
As a result of reforms that came into effect on 7 December 2018, debt purchased by a related party now has the voting value of the amount paid – not the face value, fixing the problem discussed in the Inquiry.
Tomlak Pty Ltd & Ors v Westpac Banking Corporation  VSC 79
This was an expert witness report about whether a lender had met their obligations under the Banking Code of Practice in the making of loans, and also in their enforcement of security. The engagement involved the preparation of a separate report, a joint report with another expert witness, and six hours of concurrent evidence in the Supreme Court of Victoria.
The following selected paragraphs from the judgement provide background to the case, and a summary of the work I performed:
“ Mr Gregory Butera and his brother Mr Joseph Butera have been residential builders and property developers in the northern suburbs of Melbourne and in the Frankston area since the 1990s. Their business, the ‘Butera Group’, typically involved the purchase of blocks of land with an existing single dwelling, the demolition of that dwelling and the construction of multiple residential units in its place.
“ The Butera Group pursued its property development business through three companies: Tomlak Pty Ltd (Tomlak), Raventhorpe Pty Ltd (Raventhorpe) and Benafield Pty Ltd (Benafield). Another company in the Butera Group — Kimpal Pty Ltd — generally undertook the building work involved in the property developments.
“ The Butera Group encountered financial difficulties in 2013 and 2014. Receivers were appointed in March 2014. The Butera Group attributes its demise to various failures by Westpac Banking Corporation in the period between 2010 and 2014. Westpac had been the Butera Group’s principal financier since 2003 and had funded many of the Butera Group’s property purchases and developments.
“ Tomlak, Raventhorpe and Benafield commenced separate proceedings against Westpac in relation to various claimed failures by Westpac in the period between 2010 and 2014 in respect of the above properties. In each of the proceedings it was alleged that Westpac engaged in misleading or deceptive conduct in contravention of s 18 of the Australian Consumer Law (ACL); unconscionable conduct in contravention of ss 20 and/or 21 of the ACL; and conduct in contravention of cls 2.2, 25.1 and 25.2 of the Code of Banking Practice 2004 (the Banking Code).
Commentary on the expert witness evidence:
“ The contention that Westpac failed to exercise reasonable care in forming its opinion about Tomlak’s ability to repay the loan was advanced principally by reference to expert evidence…”
“112 The unrealistic nature of…[the] standard imposed by…[the borrower’s expert] is highlighted by the following common sense evidence given by Mr Green, which I accept:
… you can’t say to your borrower, “I am not going to lend you the money to buy this property until you tell me what year and what month you’re going to start construction, until you tell me how many units you’re putting up there, what it will cost and how you are going to fund your share of the equity”. I don’t expect the bank to ask that and I don’t expect a – a customer of this size to provide that information.
Mr Green’s evidence was that such a request by a bank would be met with a borrower indicating that they could not provide the requested information and would take their business elsewhere.
“ I have accepted…[the bank manager’s] evidence as to why he decided to issue the demand for repayment of the Butera Group’s debts within one business day. In the circumstances which confronted Westpac on 27 March 2014, seen in the context of its previous dealings with the Butera Group…[his] reasons for taking this step were entirely understandable. I am affirmed in that view by Mr Green’s evidence, which I accept.”
G Capital Corporation Pty Ltd; Gertos Holdings Pty Ltd; Marsden Developments Ltd v Roads and Maritime Services  NSWLEC 12
This was an expert witness report which was accepted, unchallenged. The following selected paragraphs from the judgement provide background to the case and a summary of the work I performed:
“ These Class 3 proceedings comprise three objections to the Valuer General’s determination of compensation under s 66 of the Land Acquisition (Just Terms Compensation) Act 1991 (Just Terms Act) by…. related corporate entities.
“ The Applicants relied on three contracts of the sale of the Properties for a total of $56.5 million which had been exchanged on 28 June 2016 before the Properties were compulsorily acquired by the RMS. The contracts were made between the Applicants…and three purchasers…(the Purchasers). The Applicants state that three deposits of $50,000 were paid to them by the Purchasers, with settlement due on 28 June 2018.
My Expert Witness work
“ Mr Green chartered accountant prepared an expert report dated 23 November 2018. He was instructed to provide an opinion on the following matters. First, the lending institutions or banks that would have been willing to provide finance to the Purchasers that would have enabled them to complete the contracts of sale by 28 June 2018. Secondly, the terms on which any such finance would have been offered to the Purchasers. Thirdly, the inquiries that a lending institution or bank would have made of the Purchasers before agreeing to provide any such finance. Fourthly, the amount of money that a lender would have been willing to loan the Purchasers.
“ Mr Green concluded that there were ample lenders in the Australian market who would have been willing to provide funding to the Purchasers provided that they were able to demonstrate compliance with the criteria of the relevant lender. He described the terms on which any such finance would have been offered to the Purchasers and found that the funding required to settle the purchases was $59,822,165. He estimated the amount of money that a lender would have been willing to loan the Purchasers as:
|Bank Investment||Non-bank Investment||Asset Based||Bank Developer||Non-bank Developer|
|Max. Loan ($)||13,997,418||9,331,612||9,331,612||16,550,000||16,550,000|
“ The RMS contended that in addition to the unusual features of the asserted transactions, as a further and independent matter, there is ample evidence that the Purchasers would have been unable to access sufficient funds that would have enabled them to complete the contracts of the sale of the Properties:
“ The RMS sought to emphasise the unusual nature of the contracts of sale given that Mr Savell did not know who the Purchasers were acting as trustees for according to his cross-examination, see , and that there was no written communication between the Purchasers and the Applicants before the contracts were entered into. The evidence of the expert accountants Dr Ferrier and Mr Green that the Purchasers would have had difficulty borrowing the necessary funds to complete the purchases from financial institutions such as banks highlights the absence of any evidence from the Applicants about the likelihood of the contracts settling. Mr Green’s evidence identifies the likely substantial shortfall in the amount that various types of lending institutions would be prepared to lend given the contract prices, at . The basis for doing so is summarised in .
A selection of cases of interest in relation to banking expert witness matters:
The consequences of failing to present expert witness evidence where appropriate – Commonwealth Bank of Australia -v- Dinh  WASC 456
Two borrowers defaulted on a loan that was originally provided to help them purchase farmland in Carnavon. In due course the bank brought an action against them seeking to recover the money owed, and take possession of the security property.
Claimed non-compliance with the Banking Code
The borrowers resisted the Bank’s claim, arguing (amongst other things) that the security was unenforceable because the Bank breached its contractual obligation to apply the 2004 Code of Banking Practice (available here) by exercising “the care and skill of a diligent and prudent banker” in forming an opinion about the borrowers’ ability to repay the loan.
The borrowers argued that the banker should have verified information provided to them by the vendor of the property, that he had erred in making assumptions about their ability to improve the yield from the property.
The absence of expert witness evidence
The borrowers had failed to provide any expert witness evidence as to whether a prudent banker would have verified the information, or made the assumptions that their banker had made. The Court held that in the absence of such evidence, it could not draw the conclusions that the borrowers asserted.
The borrowers were unsuccessful on the point, and in the rest of their claim.
The importance of a firm factual foundation – Gooley v NSW Rural Assistance Authority  NSWSC 1314
The borrowers were a married farming couple in New South Wales. They were unable to meet their loan obligations, and in due course their farming properties had to be sold, leaving them with “virtually nothing.” They claimed compensation, arguing that their bank had breached the loan contract, and contravened credit and consumer laws.
Admissibility of the Expert Witness report
The borrowers sought to call opinion evidence from an economist and academic, who was instructed to “review the pleaded failure of the Bank with respect to the [borrowers] credit arrangements and to comment.”
The Court found that:
- “The legal assumptions were not articulated and the factual assumptions were not identified, at least explicitly. In general, [the expert] seems to have accepted, uncritically, every factual allegation made by the [the borrowers].”
- “The Evidence Act did not “make writings by an expert generally admissible. It is an exception to the opinion rule which provides that a fact cannot be proved by having someone express an opinion that it exists (s 76(1)). For the exception to operate, it is critical to identify the fact which the opinion is supposed to be evidence of.”
- In the circumstances the expert’s conclusions “were expressed at a level of generality that made it impossible even to begin to undertake the s 79 analysis.”
His report was wholly inadmissible.
Expert witnesses working together – Avwest Aircraft Pty Ltd as trustee for Avwest Aircraft Trust -v- Clayton Utz  WASC 306
Commentary in the judgement makes it clear that Australian Courts expect experts to be able to work together collaboratively:
 Two accounting experts were called as to quantification of damages…
 [Both experts] had impeccable credentials as experts. Despite that, somewhat unusually, each side criticised the other side’s expert in their approach to giving evidence before the court. CU claimed that [Expert A] had limited ability to give impartial assistance to the court. AVWest suggested that [Expert B] was cavalier and provided an estimate of loss so wildly divergent from reality that its application was unsupportable.
 The experts’ dealings with each other left a lot to be desired. As is common the experts were ordered to confer and provide a joint expert report. The Joint Experts Report (“JER”) was to provide a summary and set out matters of agreement and points of difference (referencing each expert’s position on the points of difference). That attempt to narrow differences ‑ and highlight the issues for determination ‑ failed conspicuously. The JER is some 81 pages (mostly in small font and sometimes very small font) with very little agreement. Indeed, there was limited ability to even agree on the points of difference. More disconcerting were the unnecessarily personal attacks that each expert made of the other’s work and conduct in the context of preparation of the JER.
 The experts’ approach to the JER was simply unhelpful. The JER ‑ which should guide the court’s consideration of the issues that are the subject of the competing expert evidence ‑ was unsuitable for the function it was supposed to fulfil. It provided no assistance to the court. The experts misconceived the purpose of the JER. A joint expert report should provide succinct identification of: (1) the matters on which the experts are agreed; and (2) the points of difference between the experts ‑ explaining, by reference to the expert reports, the reasons why each expert holds his or her opinion. It is not an opportunity to re‑state what is already in an expert report. All the more so it is not an opportunity to disparage the conduct of the other expert.
 In giving evidence in person, however, both experts endeavoured to provide expert assistance. The oral evidence was given in conclave following a protocol in which counsel for both parties, most helpfully, had identified topics for the concurrent evidence with suggested questions for the oral evidence‑in‑chief of the expert witnesses. Counsels’ identification of the relevant topics highlighted the experts’ areas of disagreement and made up for the deficiency in the JER. The experts gave considered oral evidence that focused on those areas in dispute. The nitpicking and confrontational approach evident in the JER fell away. I am satisfied that each expert genuinely attempted to do his best to assist the court by providing opinion evidence based on his specialised knowledge. I reject the criticisms levelled at [the experts] based on their respective approach to giving evidence.
When the borrower is an expert – Haynes v St George Bank  SASC 23
The borrower was an Adelaide based real estate agent who planned to retire from real estate work, buy a flower farm with borrowed funds, and then sell his city home to pay down the debt.
Bank criticised for relying on the real estate agent borrower’s knowledge of the real estate market
The city property took much longer to sell than expected, and sold for less, and eventually the real estate agent was forced to sell the flower farm too. He later took action against the bank, claiming it had failed to act prudently as required by the Code of Banking Practice 2004, when assessing his capacity to service the loan.
The Court held that:
“Had this been a different transaction involving a long term advance with a different, less experienced, less historically successful customer, the Bank’s financial analysis may have caused a diligent and prudent banker to pause, even to reject the application to extend the credit limit for the purchase of Longwood. Further, the Bank’s financial analysis, viewed in isolation, may have rendered the application as, at worst, marginal insofar as the Bank’s policy and guidelines were concerned and insofar as a diligent and prudent banker might have considered it.
However, consistent with the evidence given by [the bankers] and [the expert witness]…the transaction was one that a diligent and prudent banker was entitled to assess as “bankable” when all the circumstances are considered. Further, there has been no proved failure by the Bank to have exercised the care and skill of a diligent and prudent banker in selecting and applying the assessment methods, in fact, employed and informing its opinion as to [the borrowers]’ ability to repay the extended facility.”
The borrower was unsuccessful.
Common Sense preferred – Territory Sheet Metal Pty Ltd & Ors v ANZ Banking Group Ltd  NTSC 31
A sheet metal fabrication business which later became involved in building development and construction projects had experienced continuous cash flow problems and suffered losses on two projects.
To address its balance sheet problems the owners found a new equity partner who had promised to inject $400,000. He did contribute some $80,000 – but drew against that, and so there remained a significant funding need.
The company approached a new bank with a re-financing proposal which the Court found was “flawed in a number of respects” and “inaccurate to the point of being seriously misleading.”
The funding was approved, and settlement took place. However the net result of a series of transactions undertaken by the new director at settlement – described by the Court as “fraudulent conduct” – was that the company did not retain the benefits of the funds that it was liable to repay to the bank.
After the other directors discovered what happened they advised the bank and arranged a repayment program. The bank was able to recover the loan, but the repayment process drained the business of working capital, and the company entered into liquidation.
The borrower and the guarantors later took action to claim damages from the Bank. In summary they said that the Bank had known of information about the new director which it should have shared with them, and they criticised the Banks for providing “special clearance” on two cheques totalling $1.03m.
Expert Witness evidence
Expert evidence was available from several expert witnesses, addressing both loan processing and the process for the special clearance of cheques.
The Court preferred the “common sense” evidence of two experts who testified that the known circumstances surrounding the special clearances “raised obvious questions and should have caused a prudent banker to have clarified the situation with a director of [the company].”
The Court held that:
- Acting as a “prudent banker” in relation to the interests of the bank was not necessarily the same as acting as a “prudent banker” in relation to the interests of the bank’s customer.
- The presentation of the cheque for special clearance “was not only outside of any routine banking transaction…but was also one that cried aloud for proper clarification with the directors…[because] the circumstances were such as to put [the Bank] on inquiry.”
- “The failure to seek such clarification constituted a failure by [the Bank] to exercise the standard of care and skill of a reasonable banker in transacting its customer’s business” and constituted breaches of an implied term of the banker/customer contract.”
The Australian Banking Code of Practice as it applies to Lending to Business
The BCP is mandatory for members of the Australian Banking Association. Many ABA members incorporate it into their contractual terms, which means that in some cases it may apply to customers who would not otherwise meet the criteria.
A full version of the Australian Banking Code of Practice in effect from 1 March 2020, is available here from the Australian Banking Association. The following provides details on those parts most relevant to business lending.
The BCP applies to Australian small businesses:
A business is a “small business” if at the time it obtains the banking service all of the following apply:
(a) it had an annual turnover of less than $10 million in the previous financial year; and
(b) it has fewer than 100 full-time equivalent employees; and
(c) it has less than $3 million total debt to all credit providers including:
(i) any undrawn amounts under existing loans;
(ii) any loan being applied for; and
(iii) the debt of all its related entities that are businesses.
Responsible Lending to Australian Small Businesses
 If we are considering providing you with a new loan, or an increase in a loan limit, we will exercise the care and skill of a diligent and prudent banker.
 If you are a small business, when assessing whether you can repay the loan we will do so by considering the appropriate circumstances reasonably known to us about:
(a) your financial position; or
(b) your account conduct.
Where reasonable to do so, we may rely on the resources of third parties available to you, provided that the third party has a connection to you (that is, to the small business). For example where the third party is a related entity of yours (including but not limited to your directors, shareholders, trustees, beneficiaries or related body corporates), or is a partner, joint venturer, or guarantor of yours.
Enforcement of small business loans
 If you are a small business and in default under your loan, we will give you 30 days’ notice before we either require you to repay the loan in full, or take enforcement proceedings.
 If you remedy the default during the 30 day period, and no default of the same type has arisen during that period, we will not require full repayment or take enforcement proceedings.
 We may give you a shorter notice period, or no notice period, if:
(a) the default is unable to be remedied; or
(b) it is reasonable for us to do so to manage a material and immediate risk relating to the nature of the relevant default, your particular circumstances, or the value of the security; or
(c) we have already given you a period to remedy the default under paragraph, and you have not remedied that default.
 If you have an overdraft or on-demand facility, we may not be required to give you any notice
when we require repayment, but if a failure to repay that facility on demand also constitutes default under another loan with us, we will comply with this Chapter if we enforce that other loan based on that default.
Specific events of non-monetary defaults [applying to standard form small business loans]
 If you are a small business and you have met all your payment obligations under the loan terms, we will not take default based action against you unless:
(a) you or a guarantor is insolventgoes into bankruptcy, voluntary administration, other insolvency process or arrangement, or no longer has legal capacity;
(b) enforcement proceedings are taken against you or a guarantor or your or their assets by another creditor;
(c) early repayment is required under a separate financing arrangement you or a guarantor has with us, or default based action is taken against you or a guarantor by us, due to an event of default which is described in this chapter;
(d) we believe on reasonable grounds that you or a guarantor has not complied with the law or any requirement of a statutory authority, or it becomes unlawful for you or us to continue with the loan;
(e) you or a guarantor gives us information or makes a representation or warranty to us which is materially incorrect or misleading (including by omission);
(f) you use the loan for a purpose not approved by us;
(g) your assets or a guarantor’s assets are dealt with, or attempted to be dealt with in breach of the loan, or any security or other agreement with us without our consent;
(h) you or a guarantor do not provide financial information required by your agreement with us;
(i) you or a guarantor do not maintain a licence or permit necessary to conduct your business;
(j) you or a guarantor do not maintain insurance required by your agreement with us;
(k) legal or beneficial ownership, or management control of a borrower or guarantor or their business changes without our consent; or
(l) status, capacity or composition of you or a guarantor changes without our consent.
Remedying your non-monetary default
 We will:
(a) give you a notice specifying the grounds on which we consider there is a non-monetary default; and
(b) allow a reasonable time for you to remedy your non-monetary default, where it is able to be remedied, and notify you of this time period.
 If paragraph 81 applies, a reasonable time will not be less than 30 days unless it is reasonable for us to act to manage a material and immediate risk relating to the nature of the relevant default, your particular circumstances, or the value of the security.
 We will only act on a specific event of non-monetary default identified in paragraph 80, if the event by its nature is material, or we reasonably consider the event has had, or is likely to have, a material impact on:
(a) you or your guarantor’s ability to meet your or their financial obligations to us (or our ability to assess this);
(b) our security risk (or our ability to assess this); or
(c) our legal or reputation risk where paragraph 80(d) or (e) and (f) applies.
Specialised small business loans
 For the following types of small business standard form loans, we may include financial indicator covenants or special covenants tailored to the particular nature of these loans as a trigger for default based action:
(a) loans for property development; or:
(b) loans for a specialised lending transaction, where because of their nature, require additional covenants as a way of banks managing their risks, including margin lending, loans to self-managed superannuation funds, bailment, invoice discounting, construction finance, foreign currency loans and tailored cash flow lending.
When we decide not to extend a loan – How much notice will we give a small business before the end of a loan
 If you are a small business and you are not in default, and the principal owing on your loan is not due to be fully repaid at the end of its scheduled term by regular periodic repayments, we will give you notice of our decision not to extend your loan, at least 3 months before you need to repay your loan in full.
 If we decide to extend or refinance your loan, we are not required to do so on the same terms
Federal Court of Australia Rules governing the use of experts, and expert witness reports
Definitions – The following are defined by the Federal Court Rules Dictionary:
“expert evidence” means the evidence of an expert that is based wholly or substantially on the expert’s specialised knowledge.
“expert report” means a written report that contains the opinion of any expert on any question in issue in the proceeding based wholly or substantially on that expert’s specialised knowledge, including any report in which an expert comments on the report of any other expert.
The Federal Court Rules 2011 are available online, replicated below for convenience:
23.11 Calling expert evidence at trial
A party may call an expert to give expert evidence at a trial only if the party has:
(a) delivered an expert report that complies with rule 23.13 to all other parties; and
(b) otherwise complied with this Division.
23.12 Provision of guidelines to an expert
If a party intends to retain an expert to give an expert report or to give expert evidence, the party must first give the expert any practice note dealing with guidelines for expert witnesses in proceedings in the Court (the Practice Note).
Note: A copy of any practice notes may be obtained from the District Registry or downloaded from the Court’s website at www.fedcourt.gov.au
23.13 Contents of an expert report
(1) An expert report must:
(a) be signed by the expert who prepared the report; and
(b) contain an acknowledgement at the beginning of the report that the expert has read, understood and complied with the Practice Note; and
(c) contain particulars of the training, study or experience by which the expert has acquired specialised knowledge; and
(d) identify the questions that the expert was asked to address; and
(e) set out separately each of the factual findings or assumptions on which the expert’s opinion is based; and
(f) set out separately from the factual findings or assumptions each of the expert’s opinions; and
(g) set out the reasons for each of the expert’s opinions; and
(ga) contain an acknowledgement that the expert’s opinions are based wholly or substantially on the specialised knowledge mentioned in paragraph (c); and
(h) comply with the Practice Note.
(2) Any subsequent expert report of the same expert on the same question need not contain the information in paragraphs (1)(b) and (c).
23.14 Application for expert report
A party may apply to the Court for an order that another party provide copies of that other party’s expert report.
23.15 Evidence of experts
If 2 or more parties to a proceeding intend to call experts to give opinion evidence about a similar question, any of those parties may apply to the Court for one or more of the following orders:
(a) that the experts confer, either before or after writing their expert reports;
(b) that the experts produce to the Court a document identifying where the expert opinions agree or differ;
(c) that the expert’s evidence in chief be limited to the contents of the expert’s expert report;
(d) that all factual evidence relevant to any expert’s opinions be adduced before the expert is called to give evidence;
(e) that on the completion of the factual evidence mentioned in paragraph (d), each expert swear an affidavit stating:
(i) whether the expert adheres to the previously expressed opinion; or
(ii) if the expert holds a different opinion;
(A) the opinion; and
(B) the factual evidence on which the opinion is based.
(f) that the experts give evidence one after another;
(g) that each expert be sworn at the same time and that the cross‑examination and re‑examination be conducted by putting to each expert in turn each question relevant to one subject or issue at a time, until the cross‑examination or re‑examination is completed;
(h) that each expert gives an opinion about the other expert’s opinion;
(i) that the experts be cross‑examined and re‑examined in any particular manner or sequence.