The tragic personal consequences of the collapse of Banksia securities

This does no more than set out the opening paragraphs of Justice Clyde Croft’s judgment of 16 February 2018 about the 2012 collapse of Banksia Securities,

owing some $660 million to investors, including many retirees in regional and rural communities in Victoria. … Any judge hearing applications of the kind presently before the Court could not but be moved by the tragic personal and economic consequences …”.

Justice Croft says it is “incumbent upon legislators and regulators to carefully examine the events that led to the collapse of Banksia and take any lessons that flow from this into legislative and regulatory reform as a matter of urgency”. He refers to Banksia as “the result of spectacular “gatekeeper” failure”. Even though the moneys recovered were better than expected, the significance of the losses should not be downplayed. Many people “invested in a secured debt security under the prudential and statutory oversight of a professional trustee. They were, in my view, justified in thinking their money was safe”. 

The opening 6 paragraphs follow in full (references omitted): 

 

“1 In October 2012, Banksia Securities Limited (“Banksia”), a non-bank property lender, collapsed owing some $660 million to investors, including many retirees in regional and rural communities in Victoria. At the time of its collapse, Banksia owed approximately $663 million to approximately 15,622 debenture holders and had 956 loans outstanding to third party borrowers, totalling approximately $527 million.

2 It is widely recognised that the collapse of Banksia had a devastating general impact on many parts of Victoria and elsewhere, and particularly on the regional community in and around Kyabram, and a profound personal impact on the lives of many individual debenture-holders transcending the economic losses that are the subject of these proceedings. The personal anguish and the tragic personal consequences in many cases flowing from such events cannot be underestimated. Any judge hearing applications of the kind presently before the Court could not but be moved by the tragic personal and economic consequences, and could only wish that the clock could be turned back and events made to unfold differently. Of course, this is not possible and all the Court can do now is to have full regard to the best interests of the debenture-holders in light of the realities of the present situation and the resources available. The litigation flowing from the Banksia collapse has, unsurprisingly, been the subject of considerable public interest and concern. The issues of principle as to the duties of professional trustees and the directors of financial institutions raised by these proceedings are all of considerable general importance. It is incumbent upon legislators and regulators to carefully examine the events that led to the collapse of Banksia and take any lessons that flow from this into legislative and regulatory reform as a matter of urgency. At least if legislators and regulators do take heed in this way, some good may come out of what is to many debenture-holders and communities an unmitigated disaster. 

3 From the perspective of the special purpose receivers of Banksia, Mr John Ross Lindholm and Mr Peter Damien McCluskey (“the SPRs”), and their legal advisors, the collapse of Banksia was the result of spectacular “gatekeeper” failure. At every turn, those “gatekeepers” charged with duties to safeguard the interests of others, namely the debenture-holders, failed to do so. At the statutory apex of the regulatory structure designed to protect the interests of debenture-holders was Banksia’s trustee, The Trust Company (Nominees) Limited (“Trust Co”). Banksia’s position is that Trust Co’s performance of its statutory and common law duties was totally inadequate.

4 At this stage there has been a return to debenture-holders of 82 cents in each dollar of outstanding principal. However, having regard to accrued interest since the collapse of Banksia—now over five years ago—the effective and true return to debenture-holders is approximately 76 cents in the dollar. This means that debenture-holders are still owed approximately $172 million in outstanding principal and accrued interest under the Banksia Trust Deed. Consequently, whilst the realisations achieved by the SPRs are perhaps better than initially expected, the losses are still very substantial and significant, particularly when regard is had to the demographic profile of the debenture-holders.

5 As I have observed in more general terms, it is, of course, not possible to attach a dollar figure to the stress and wider impact on many elderly rural investors in having their day-to-day savings accounts frozen under a cloud of uncertainty and for only 76% of those savings ultimately to have been gradually returned to them over an extended period of time. I accept that, to them, the suggestion made in some quarters during the course of this litigation that the significance of the losses should be downplayed because the SPRs succeeded in recovering over 80 cents in the dollar of principal, is doubtless of little or no comfort. It bears particular emphasis that they invested in a secured debt security under the prudential and statutory oversight of a professional trustee. They were, in my view, justified in thinking their money was safe”.

 

The Judge then went on to deal at length with matters involving a proposed settlement of various claims. This included approval of the legal fees and the litigation funder’s commission. The final scheme will need further approval from the court in due course.

 See Re Banksia Securities Limited (Rec & Mgr Apptd) (in liq) (No 2) [2018] VSC 47

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