Image for Gunns, Solvency and the 30th June 2011

*Pic: John Gay leaves court. Pic: Garry Stannus

In an effort to determine the date of Gunns’ insolvency the Gunns’ liquidator PPB Advisory has summonsed the Gunns’ auditors at KPMG Hobart to a public examination under the Corporations Act - in the Supreme Court of Victoria.

In a bad tactical error John Gay, then both CEO and Chairman of Gunns, took the so-called Gunns 20 through the Victorian courts. The courts threw out Gunns’ now famous Strategic Litigation Against Public Participation case.

Victoria was chosen by Gunns and Gay, not to enhance the cause of justice, but to make it more expensive and difficult for those they wished to silence over the construction of a proposed Tasmanian Pulp Mill.

Recently and back on Tasmanian home turf Mr Justice Porter fined Gay $50,000 on his conviction for insider trading regarding a perceived benefit from the proceeds of a crime. A crime involving some $500,000, a sum which Gay has since been forced to repay.

These outcomes may have suggested to the Gunns’ liquidators that the Supreme Court of Victoria may be a more honourable place if one wishes to enhance the cause of justice.

The Victorian court will enquire, under the Corporations Act, into Gunns’ 2008 Financial Statements and modelling between 30 June 2009 and 30 June 2011; through detailed scrutiny of the records of KPMG Hobart.

This may be pointless as the Auditors on June 30th 2011 according to the Gunns Annual Report was none other than KPMG Launceston. How and why would the liquidators make this seeming mistake?

At stake in this matter are the assets of the still-millionaire directors of Gunns, Gay and Robin Gray had jumped ship in 2010 yet, Gay, L’Estrange and the Company Secretary Newman settled a seemingly unrecorded shareholder class action over breaches of disclosure obligations on 23 Dec 2015 with a payment of $4.9 million subject to a decision by the Federal Court on 21 March. Until then no details will be disclosed.

The Gunns directors as of 30th June 2011 were Newman, Simmons, Teissere, Millar, ‘Estrange with Chapman as the Company Secretary.

To trade whilst insolvent is a crime and this yet-to-be-finalised class-action settlement over breaches of disclosure may have set an interesting precedent for the liquidator.

It would be of great interest to know if the class-action lawyers had considered the payment from governments under the Inter-Governmental Agreement regarding the cancellation of Contracts, 917, 918 and the China Sale Agreement, all written with Forestry Tasmania.This huge cash and credit settlement agreed in Financial Year 2011 should be read in conjunction with Gunns 2011 Annual Report.

This politically-inspired payment was to wipe close to fifty million dollars of debt from Gunns’ bottom line at the end of the financial year in 2011; a crucial time as the company was then fighting for its corporate life.

This payment under the IGA was finalised on the 7th August 2011 and is, I suggest, the key to Gunns’ solvency but was only agreed at the last minute of the last day of the financial year, causing much political angst in Tasmania. As a result it was independently audited with limited terms of reference - as nominated by Minister Green who had twice been before the Tasmanian courts. 

The payment gave Gunns cash flow at the expense of their contractors; Gunns stating that it was solvent - or the IGA money could not be paid.

As a result of the pivotal timing of the payment I respectfully suggest that the court should consider the legality of this payment and Gunns’ solvency.

If it was illegal Gunns was probably broke before the end of the financial year 2011 as they could not pay their enormous debts under Contracts 917 and 918 to Forestry Tasmania.

ASIC has a flow chart regarding Insolvency for Directors:

Is my company in financial difficulty?

What do I do if my company is in financial difficulty?

What if my company is insolvent?

What are my duties as a director?

What are the consequences of insolvent trading?  This section draws attention to the fact that there are various penalties associated with insolvent trading, including civil penalties, compensation proceedings and criminal charges.

I have detailed my thoughts over Gunns’ solvency at this period in the Underbelly series published here on Tasmanian Times.  Underbelly Parts II, III and IV are particularly relevant to the matter of Gunns’ solvency (see Addendum 1 for an extract. ( The Underbelly series can be accessed HERE in John Hawkins’ extensive archive ).

The Underbelly series interestingly drew no comment from any of the participants mentioned.

I noted at that time that the relevant documentation should not be shredded.

I wrote an overview of the History of Forestry in Tasmania which can be read under Parliamentary Privilege in Hansard as tabled in Federal Parliament by Andrew Wilkie on Thursday 4 June 2015 ( Forestry Tasmania, Andrew Wilkie MP and the tabled document ... ). Addendum 2 provides an extract regarding the comments of Dr Julian Amos one-time Minister for Forests in the Labor Government over this payment and surrendered Contracts 917, 918 and the China Sale Agreement Contract.

Gay has since been found Guilty of Insider Trading and fined $50,000.

Gay has been forced to repay $500,000 in a separate trial over Proceeds of Crime.

Gay was Chairman of the Board of Directors of Gunns and it would now appear that he has settled on 23 December 2015 with the class-action lawyers despite resigning as a director in 2010.

Andrew Wilkie has called in the Federal Parliament for a Royal Commission or a Commission of Enquiry into the losses incurred by Forestry Tasmania and the corruption of due process in the Tasmanian forestry industry.

When the results of this case are made public in Victoria the scene may have finally been set for a sequel to the Rouse Royal Commission.

The liquidators may like to submit these two documents to the Court as background evidence regarding Gunns’ solvency as they raced against time to obtain permits under political patronage, for the mirage of a non – existent, “Substantially Commenced” Pulp Mill on the banks of the Tamar.

In return the Court in Victoria may care to comment over a possible misuse of public funds by the Political Establishment of Tasmania in the cancellation of Gunns’ contracts with Forestry Tasmania. 

Addendum 1

This is an edited extract from my series Underbelly which may assist in providing further background to Gunns’ financial position as at 30th June 2011.

“Between October 2010 and September 2011, Tasmania was unaware that Forestry Tasmania (FT) and Gunns were broke and that they were only to be saved by a large infusion of Federal money.

Forests Minister and Deputy Premier (Bryan) Green met with Mr (Bob) Gordon, CEO of Forestry Tasmania and Mr (Greg) L’Estrange, CEO of Gunns Ltd on 23rd of December 2010 to discuss various matters, including the outstanding payments owing under various invoices issued by FT to Gunns. The parties continued to meet and correspond at various levels and forums until the 27th June, but the core issue remained that no payments and no money were forthcoming from Gunns.

By the 18th April 2011 the relationship between Forestry Tasmania and Gunns was such that the outstanding issues between the parties could not be resolved. This impasse was still over the money - or rather the lack of it. To save itself further expense Gunns closed its chip mills and the woodchip port facility at Triabunna and sold the woodchip vessel. It had no Japanese or Chinese customers. A third contract the (China Sale Contract) had been terminated in April but Gunns was left with three shiploads of chips still stored, unwanted at Triabunna.

Forestry Tasmania could not survive these disasters if its largest customer did not, would not or could not honour its contractual obligations to take the agreed quantities of logs and pulpwood and pay the outstanding accounts, now dating back - in some cases - three years.

On the 16th June 2011 in an interview ‘in-camera’  that made it by error into Hansard (TT.16/6/2011). L’Estrange, the CEO of Gunns, confirmed this situation when he noted that, “Gunns does not believe the Contract is valid” and he spoke of both firms being under financial pressure.

Ten days later on the 27th June Bryan Hayes, General Manager Forest Products at Gunns, informed FT that:

“Gunns also formerly advises that its pulpwood requirement CoS 917 and CoS 918 in the financial 2011/2012 is zero. Other processes to terminate these contracts are in train and will take effect in due course…..”

Gunns wanted a Zero allocation by mid-June to the consternation of FT as it had sold or was selling all the working parts of its woodchip business.

Publicly Gunns was promoting the lie that it was looking for a social licence for the pulp mill by exiting Tasmanian native forests and moving to plantations; this to distract the people from the fact that its woodchip business had imploded.

At this point we have to look at how the money came over the horizon to cause peace in the woodchip camp and resolve the issue.

On 5 April 2011 the Kelty Interim Report from the Roundtable was presented to the Senate for tabling. Kelty had facilitated a Statement of Principles funded by the Commonwealth Government, which later morphed into the Inter-Governmental Agreement (IGA).The Liberal Opposition Shadow Treasurer in Tasmania, Peter Gutwein (now State Treasurer), was provided on the 5 August with a copy of the final - but date unknown - Kelty report, “as reportedly handed to the State Government on 22 July 2011”. The date has been crossed out as the contents of the final non-draft copy had not been settled, or for that matter, fully signed. It makes note of a Letter from FT dated 29 June 2011 and the Wilderness Society of 30 June but these are no longer attached on the Web copy; these missing documents are in the critical period at the end of June.

It states that the signatories (Roundtable) had reached an agreement on 22 June 2011 but makes no mention of compensation for surrender of the contracts. Kelty introduces, knowingly in this document, a new clause to help Gunns bolster its claim for Federal funds. I suggest that he did this in full knowledge that it was a lie:

“Recognition that Gunns Limited’s decision to exit native forests was associated with its decision to proceed with a plantation based mill.”

Kelty was having trouble with the date of this report. Gutwein should have picked up on this point when he had it in his possession. The sums of money to be dispensed - and to whom under the resulting IGA - was made finite when signed by Gillard and Giddings two days later on 7 August 2011.

A Question Time brief updated from 22 June to 4 July for the Minister in the Federal Parliament could indicate that the Government was covering its tracks, but this proposed statement was not altered:

“The withdrawal of Gunns from the native forest industry is a commercial decision and is not directly related to the Tasmanian Statement of Principles process”.

Under the IGA the Gillard Government was putting up $277 million - which included $15 million from the State Government of Tasmania. Of this $85 million was to go to contractors, to include $45 million under the Exit Grants program. This was the game-changer for Gunns and FT, but it needed valid contracts to claim the money.

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This document appears to show a last-minute change, an inset dot-point that gives only $45 million of this total to contractors; they received $44 million when the scheme was closed. Presumably most of the $40 million that remained had been taken from the pockets of the contractors by Minister Green to allow the exit of Gunns and FT from their disputed contracts.

A Briefing Note from Gordon to Green of 30th June 2011 was issued after L’Estrange had rung Gordon that day, indicating that Gunns wanted to commence negotiations for, in his words, “new contracts”.

“To inform the Minister that Gunns Limited has advised that it intends to negotiate terms for new agreements to replace Contracts 917 and 918 which Gunns previously gave notice of its intention to terminate.”

Gordon notes for some as yet unknown reason that:

“An agreement between FT and Gunns might be considered to be contrary to the Statement of Principles”.

From then on it was only a question of positive spin by governments to convince the people of Tasmania of Gunns’ so-called exit policy from Native Forests into plantations.

This phone call from L’Estrange to Gordon instantly changed the dynamics of the dispute.

L’Estrange must have got wind of, or he may even have lobbied for inclusion in any payout. He knew by the 30th June that new money was available and that if FT and Gunns played their cards correctly it would save them both from bankruptcy.

It was an instant and complete about-face from the above quoted Hayes’ directive of the 27th June for a zero timber requirement for 2011-12. In the intervening three days nothing had changed - Gunns still had no markets, no money, no woodchip facilities and no wish to pay. Further L’Estrange was convinced that there were no longer any valid contracts in place.

What happened during those three days: 28th, 29th and 30th June 2011 holds the key to this saga.

Elise Archer, newly-elected to State Parliament, a qualified barrister and solicitor, formerly the senior litigation lawyer with the Hobart firm Dobson, Mitchell was on the contracts case. In her FOI she asked FT for correspondence from Lipman Karam to Gunns regarding contracts 917 and 918, dated 28 June 2011. FT replied that it had no record of any correspondence from Lipman Karam to Gunns. This was a lie and Archer as a lawyer should have known better ... or was she warned off by the Liberal hierarchy under Eric Abetz, the former Federal Forests Minister. The firm is a very powerful player in the litigation and debt settlement stakes and its correct title is Lipman Karas (Google). It is a firm a lawyer such as Archer would be well aware of.

I ask do the documents still exist and will FT release the contents?

L’Estrange now had an immediate need to confirm or resuscitate the contracts because the exit money depended on “Continuity (Operational or otherwise)”. As a result, within a week, Gunns had backed off, reversing its former position over the scrapped contracts to continuity of existing contracts.

I suggest the CEO of a technically-bankrupt Gunns could now see a way out of the Gunns’ corporate death spiral.

Who hatched this plot: the Facilitator Kelty, the Gunns’ CEO L’Estrange, Gordon or Minister Green?

Gordon’s FT was owed $26.83 million and was to receive, under the IGA, only $11.5m, a loss presumably forced on the GBE by Minister Green. It is unlikely that Gordon played a substantial part other than going along with the concept that the contracts had remained valid, accepting the loss in exchange for a drawdown on the Green/Giddings Letter of Comfort issued in February 2011 for $110 million.

Kelty’s part was played; he still needed a feel-good result for the money and something to sell for the proposed lock-up of the forests; hence the Final Report clause as noted above. The exit of Gunns from their so-called contracts for cash gave all those involved a Media Release to dream over; it kept the ENGOs on-side, the public happy and the Facilitator smelling of roses.

When Gunns rejected the original offer of $11.5 million the cat was now among the pigeons, for there was only a fixed sum. How to get the additional money to satisfy Gunns became the pressing problem.

Somehow the whole sum of $23 million previously to be split 50/50 - or $11.5 million each - had to go to Gunns.

I suggest that Green recognised an immediate political opportunity from the Gordon Briefing Note of 30th June 2011. The State had only $15 million in the game; did that go to pay off FT? For someone or persons – as yet unknown – had to re-arrange the contractors’ portion of the monies to accommodate Gunns. I suggest that this was effected before the 7th August, taking the required additional millions from the contractors and putting them into the Gunns’ exit strategy.

The resulting IGA was signed off on 7 August 2011 and the money was paid on or about 15 September 2011 - $23 million in cash to Gunns and importantly its debt of $26 million to FT wiped via a payment of $11.5 million in cash to FT.

This may be considered a highly-questionable act as the contract cancellation, as initiated on April 18th by Gunns, would have come to fruition in a matter of weeks, as the 180 days was virtually up. Forestry Tasmania should then have placed Gunns into liquidation at little or no cost to the taxpayer.

This was a solution that neither Labor nor the Liberals would countenance for it was politically far more expedient for both to keep the pulp mill dream alive and Gunns and FT solvent.

The Deed of Settlement between the Crown and Gunns dated 15 September is prefaced by a series of extraordinary clauses in particular, Recitals D, E, and F. further at 7.1 Gunns Warrants that it is solvent.

Under recitals there are a large number of points qualifying and explaining the reasons for the payment of $25,300,000 dollars to Gunns Ltd. Clause 3 (a) payment and (b) relates to the China Sale Agreement, a contract which definitely had been cancelled by the beginning of May 2011.

This document can be accessed via the link below:

http://www.treasury.tas.gov.au/domino/dtf/dtf.nsf/LookupFiles/Deed-Forestry-Tasmania-and-Gunns.pdf/$file/Deed-Forestry-Tasmania-and-Gunns.pdf

I suggest that this dubious transaction is worthy of further investigation for a fraud may have taken place on the Commonwealth aided and abetted by the connivance and silence of all three of Tasmania’s political parties in an effort to keep Gunns solvent, the Pulp mill in play - and for the Greens the forests protected.

The implementation of the IGA in terms of FT and Gunns, was a process involving the Tasmanian Treasury, the Government’s legal advisors, and the Department of Premier and Cabinet. The decision to pay caused an outcry and was now in need of a clean public face.

The State Government hired Wise, Lord and Ferguson to review the process of determining the recommended position of the State and the Settlements to be made to Gunns and FT under the Tasmanian Forests Intergovernmental Agreement. This was a very limited task. (See No 4 below)

Under the review they identified the parties, the advice given by Treasury, the legal advice, the appropriateness of the proposed offer and outcome of FT and Gunns agreements. The firm looked at only the 12 correspondence documents - all supplied by Minister Green. It did identify that the advice given recommended the proposed outcome was the best commercial outcome possible and that Treasury’s first recommendation that the funds originally available ($23 million) should be divided equally between FT and Gunns.

More important is what they were not asked to do, to examine the unknowns i.e. the status of Gunns’ contractual situation following its decision to seek a stay of the contract termination in December 2010 and the final termination of contracts in April.

There were issues of what termination rights existed other than under the pulp mill clause or what is a reasonable view of the debts and liabilities owed to the Crown in the name of FT and the obligation to recover them.

The briefing clause 3.3 b, also mentioned in the Gunns 1 December 2010 letter, failed to mention the reason for using the clause i.e. no commencement of the construction of the pulp mill. Without that reason the period of the 180-day window enabled the contract period to formally expire in Oct 2011.

No new wood agreement existed; all negotiations had ceased by April following Gunns’ final renouncement of the contracts and letters cancelling wood orders. It is arguable that all contract relationships had ended by the end of this month - but maybe it was a case of what-we-do-not-admit-to-knowing rather than we-didn’t-know-because-they-didn’t-tell-us. 

It is of concern that the status of the pulp mill -  which was of major public interest - was not mentioned in any of the briefings, or mentioned in public. It is that provision only that enabled the fiction of negotiations for a new pulpwood agreement to be exercised by Gunns. 

To not quote the second part of clause 3.3 from the Gordon/Green briefing note could suggest that the parties knew that there was no pulp mill but that of more importance (to them) were the political implications for Government if FT forced Gunns into receivership.

Receivership or administration would have brought the contracts to an instant termination and no compensation or rights would have existed.

Given that Gunns would have had no contracts after October why the rush? The answer must have been Gunns’ financial position; for they were due to repay millions in the new financial year and the liquidator beckoned.”


Addendum 2

“1.12 Why did the Minister agree?

There is a precedent with regard to a possibly illegal settlement by Ministerial direction in the dubious payment to Gunns over The Take or Pay, China Contract, Contracts 917 and 918.

On 10 November 2014 Dr. Julian Amos, before the Legislative Assembly Standing Committee on Community Development, under oath, stated that the view at the time was that the Gunns’ contracts had been terminated.

This confirms my previously stated opinion the no compensation was payable to Gunns:

Amos - The view industry had at that time was that the contracts had been terminated. [China, 917 and 918] 

Shelton - The question is what was the money for?

Amos - The point I was making to you was that it seemed as though there was a wedge. The government had got itself into a wedge with the timeline issue where in order to resolve the IGA it had to resolve the conflict with Gunns, irrespective of whether that conflict was relevant or not. The fact was that there was a dispute, they had to get rid of the dispute and money was put on the table to get rid of it, irrespective of the merits of the case. That is my view.

Ms. O’Connor - You will recall that the government made the payment on the basis of the Solicitor General’s advice.

Amos - I haven’t seen the SG’s advice.

Ms. O’Connor - No, none of us have.

Barnett - … the letter from the Premier makes it very clear that the Crown legal advice says that it is appropriate, not required or compelled. The letter from the Premier makes it very clear that the Crown legal advice says it is appropriate, they are entitled to meet the objectives of the TFA according to her, but there is no requirement, no compulsion to pay. Is that the way you -

Amos – That is my reading of it.

Amos in his Aide Memoire issues for Consideration notes that:

General view that this was a joke … Gunns gets paid for a contract that was already surrendered, and gets out of its debt to FT.

End of Quote”

• Trevor Burdon in Comments: John, thank you for your investigation and elaboration on the phone today. Throughout the course of the MIS proceedings I have questioned the discrepancy between the paired Gunns (GNS) and Gunns Plantations (GPL) 2011 Annual Reports (both KPMG audited), and the S439A Administrators Report (PPB Advisory). The replacement of a GNS liability of $84m owed to GPL with one of $88M in the reverse direction remains unexplained. 19 Nov 2014 I spoke with KPMG partner, Leigh Franklin. He agreed that further investigation was required, and confirmed that he had not been approached to offer any opinion since GPL entered administration. I entered a statutory declaration as an exhibit to an early hearing. My call to him early August 2015 was put through to KPMG Legal Sydney, whose representative told me KPMG had no official role in the Gunns proceedings, and no interest or moral obligation to help correct or resolve the discrepancy. (Now that’s NOT what I expect of a Big 4 Auditor.) It is good that PPB are finally pursuing KPMG, and very unfortunate it is after the disclaiming growers interests. It seems that the top end of town is only called to account at the end of the matter when proceeds have been distributed, and funds to pursue legally almost exhausted. True to form PPB do not like us common folk involved before they have an outcome - even though we grower investors are paying them! My request yesterday for details of the hearing was met with …

• Anne in Comments: A lengthy and very detailed read, and thanks indeed to John Hawkins for setting the timeline of events out so brilliantly. The enormity of the truly appalling way Gunns, and both Liberal and Labor parties in Tasmania have so thoroughly and criminally duped and conned the Tasmanian public is mind boggling. Not sure Risdon is big enough to hold ‘em all, but as sure as all that’s holy they all deserve to be incarcerated there. And if this doesn’t deserve a Royal Commission - finally - then I don’t know what does. You might want to pour yourself a stiff drink first too!