Tuesday, 29 December 2015

Gunns' liquidator talks tough?

The Mercury reported here that Gunns’ liquidator, PPB Advisory,” has summonsed auditors Leigh Franklin and David Lumley of KPMG’s Hobart office to a public examination under the Corporations Act in the Supreme Court of Victoria early next year.”


“............PPB Advisory liquidator Daniel Bryant wants to examine KPMG about its review of Gunns’ 2008 financial statements, the audit of Auspine to June 2009 and all financial models relating to the audits of Gunns group’s financial statements between June 30, 2009, and June 30, 2011.

Liquidators have asked for documents about the $2.5 billion Bell Bay pulp mill, land valuations, biological assets and receivables in relation to the managed investment schemes.

The 2011 documents sought include the Bell Bay pulp mill project financial model dated June 2011, pulp mill cost summary dated May 31 and the pulp mill capitalised cost summary.

A public examination is an investigative process used by liquidators to search for assets, inquire into potential claims, discover any offences and provide some sense of resolution to creditors.”

At issue is trying to determine the date of insolvency.

As Voluntary Administrator (VA) PPB Advisory touched on these matters in its report to creditors in Feb 2013. Gunns’ approach to revaluing its assets and the role of auditors was questioned. At the time I blogged my thoughts:

The Directors always maintained that with asset sales, further capital and the cooperation of bankers it was always reasonable to assume that Gunns could pay its debts as and when they fell due.

The VA has now questioned this belief.

Quite clearly Gunns was insolvent when the banks refused its requests in September 2012.

What about  on 3rd July 2012 when the valuer told Gunns the value of its Tasmanian plantation estate had largely disappeared, meaning the likelihood of sufficient funds from asset sales had also disappeared ?

Maybe when Richard Chandler walked out early in March 2012 and Gunns soon discovered further capital raising would be difficult?

What about in January 2012 had the Directors revalued all assets for the Mid years instead of its practice of waiting for June to revalue. Had the values been lower the banks might not have agreed to roll over loans at the end of January 2012?

Or had Ms Giddings failed to give Gunns $23.5 million of IGA funds in August 2011 to enable the sham commencement of earthworks at Longreach, insolvency may have occurred in September 2011.

The VA has drawn attention to Gunns’ practice of only fiddling with asset values for the Mid Year accounts, with the approval of the auditor who reviewed the accounts as distinct from auditing the figures.

Most of the major revaluations for 2010, 2011 and 2012 occurred in the second half of the year. The valuations always involved an element of subjectivity because the principal assets were items like loans owing (some from disgruntled investors), future harvest commissions, trees, plantation land, and old assets in a declining industry with few willing buyers with any money.

The VA said ”given the quantum of these writedowns (particularly during F(ull)Y (ear)2012, if they had been brought forward this may have impacted on the level of support the Lenders were willing to provide to the Gunns Group and potentially resulted in earlier solvency issues......... given the significant quantum of the impairment charges and the high degree of variation between the writedowns/impairments identified in the half year review accounts as compared to the charges recognised in the end of year financial statements, we recommend that a liquidator ( if appointed) investigate in more detail the figures and estimates used to value Gunns’ Group assets as well as potential breaches by the auditor of Australian Auditing Standards.”

Maybe some nervous times ahead for the auditors?

PPB Advisory have a statutory responsibility to investigate breaches.  Often investigations are a bit half hearted if there isn’t a bucket of money to fight over. But increasingly auditors have found themselves as targets.

The liquidator’s wide ranging inquiry interestingly begins in 2008 with Gunns’ purchase of Auspine, which even to observers from afar looked like the beginning of the end for Gunns...... the last straw on the proverbial camel’s back coming at a time when MIS s were under pressure and the pulp mill still a dream.

Also under the microscope should be Gunns’ tree valuations particularly MIS plantations which in turn led to Gunns booking future expected harvest commissions as income and overstating its assets.

Gunns’ legendary recording of $68 million worth of future harvest commission in 2009/10, the year it took over management of Great Southern MIS schemes warrants a closer inspection and will shed light on how Gunns hid and manipulated tree growth rates and consequent asset valutaions. The book entry in 2009/10 had the effect of increasing current income by $68 million and puffing up the balance sheet. At best it was an intangible. In any event it was soon written off.

Hopefully the liquidator will be forensic in looking at Gunns’ approach to valuing trees and calculating future harvest commissions because it underlines the crucial determinant of the MIS model and why it failed.

To paste from my earlier blog:

The value of many of Gunns’ assets (viz its own trees, future harvest commissions from MIS crops and plantation land) critically depend on tree growth rates, so it will be interesting to see what these rates are (if the Liquidator ever says) which will not only (possibly) affect the value of assets and indirectly the solvency date but also the extent of damages against Gunns by Growers for losses resulting from the over ambitious projections contained in offers to investors.

Most of the Gunns’ assets have been under the control of KordaMentha as receiver of the secured assets. Growers’ trees were either  growing on land controlled by KordaMentha  (since sold to New Forests) or on third party owned land with significant rental arrears and hence haven’t been in an ideal position to fight for their rights.

To date PPB Advisory who have also been looking after Gunns’ MIS schemes since Sept 2012 have only paid lip service to the need to keep Growers up to date.

Sure they receive info about their legal position, but none about their commercial position.... the condition, growth rates, yields, prices of Growers’ trees.

Growers have been sidelined and kept in the dark whilst the liquidator and the receiver slugged it out in a spectacle fully funded by the Growers.

However it would represent a failure of public policy if the liquidator fails to fully reconcile the claims made in Gunns’ MIS offer documents with the outcomes of which only they are privy as they presided over the sale of MIS Growers trees as part of a land and trees package.

If the Growers have any remaining rights it surely must be a right to know exactly how their trees grew and how the dribbles of cash that eventually may come their way have been calculated?

Examining the auditors may simply be a ploy to discharge the liquidator’s statutory responsibilities. Cynics may even suggest it’s designed to extract a little more for the secured creditors.

Hopefully Growers may receive some much needed explanations. They’ve been let down by everyone else.



  1. PPB generally only inform grower investors once they have an outcome. This new proceeding of examination is public, and yet PPB describe it to me as confidential. SCI 2015 03684 will be next heard on Fri 22 Jan 16 in the Supreme Court of Victoria, and it is listed as a public hearing.

    Justice Judd has consistently directed that the URS 2013 valuation not remain confidential indefinitely, but then bowed to the Liquidator.

    He even highlights the exceptional circumstances surrounding the disclaiming of forestry rights on third-party land.

    "Ordinarily, a memorandum of advice would be produced to the court in which counsel made an independent assessment of the growers' prospects. The liquidators tendered, as a confidential exhibit, a letter of advice from their solicitors. The advice was brief. The liquidators wish to maintain confidentiality. To do so is unhelpful, as it prevents the court from adequately expressing reasons. It is difficult to envisage
    any real prejudice to future negotiations or dealings by exposing the advice, although the liquidators may have some sensitivity about its exposure in the context of continuing negotiations with third party landowners. It is also surprising that the liquidators would not wish to publish the advice upon which they have obviously relied to make commercial judgments that affect so many growers. Nevertheless, the
    advice will remain confidential, but not indefinitely." J Judd p39. SCI 2013 2095 Judgment 210514.

    Of ~100,000ha in Gunns controlled MIS, almost one-half has been left to PPB to do with what they please. And while recent advice has found grower investors should not be accountable for outstanding landowner rent based on PDS limitations of liability, no such arguments were advanced to protect growers in the hearing relating to trees on Gunns land. No reference to our individual agreements, limited liability nor role of the 'custodian' (hah).

    At my next opportunity, I will request what confidentiality limitations should apply to the URS valuation as well as the advice mentioned.

    Thank you for your support.

  2. Trevor, that would be great if you can get the valuation. Presumably it will contain the quantity and area info.

    The same should apply to the GSP schemes hopefully?

    We probably won’t get to see growth rates for trees on third party land?The Liquidators seem to be settling with third party landlords allowing them to take possession of their trees in return for giving up any claims to rental arrears. Except for Forestry Tasmania. Which is quite interesting. If FT get title to 14,000 hectares of GPL trees on FT’s land then FT will immediately sell them as part its plan to dispose of all hardwood plantation to pay for the costs of running FT for the this year 2015/16 and the next 2016/17.Maybe the Liquidator spots an opportunity to exert a bit of pressure on FT?

    FT’s been trying to dispose of it’s hardwood plantations for over a year and haven’t made much evident progress.

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