THE directors of failed investment group Babcock & Brown, and the firm's auditor, Ernst & Young, are being sued for at least $160 million in damages following court action by the liquidator.
An application filed with the Federal Court on Wednesday alleges that for three years, starting in 2005, the directors of Babcock & Brown Ltd allowed a breach of capital reduction contravention provisions of the Corporations Act.
They are also alleged to have breached BBL's own constitution, by authorising multimillion-dollar dividends which were $160 million shy of its profits. In the process, it is alleged they reduced the share capital of BBL.
The defendants in the action are former chairman Jim Babcock, managing director and chief executive Phil Green, former deputy chair Elizabeth Ann Nosworthy, and directors Geoffrey Martin, Dieter Rampl, Joe Roby, Martin Rey, James Fantaci, Michael Sharpe, and the auditor Ernst & Young.
Babcock & Brown was one of the high-flying investment stocks during the noughties and at its height was worth $10 billion. But its complex ownership structure and huge debt burden brought it down after the global financial crisisand it went into liquidation in 2009.
The company's failure and the loss of shareholder value has been the subject of a long-running probe by B&B's liquidator, Deloitte, which last year conducted public examinations in the Federal Court of the group's former executives and auditors.
The application lodged this week alleges that by adopting the dividend proposal, the directors failed to regard the interests of BBL separately from the interests of other companies in the Babcock & Brown group.
The court document details that payment of dividends for the previous financial year were to be paid from revenue due to be received in the coming financial year from Babcock & Brown International Pty Ltd (BBIPL).
"The corporate structure and financial arrangements entered into by BBL and BBIPL required the directors to pay particular attention to ensuring BBL did not pay dividends out of profits or reduce its share capital without authorisation, given that BBL owed substantial obligations to holders of Babcock & Brown subordinated notes [and] the rights of those holders ... was subordinated to the rights of the bank financiers of BBIPL."
It is alleged the directors breached their duty to exercise reasonable skill, care and diligence in authorising the dividend payments. For the year 2005 they authorised a $32.9 million dividend, although BBL had retained earnings of only $5.5 million.
The following year $56.3 million in dividends was paid (against retained earnings of $10.6 million), and for the year 2007 nearly $97 million was paid in dividends, against retained earnings of $11.95 million.
It alleges the auditor reviewed the proposed dividend memorandums, and if it had conducted the audit with "reasonable care skill and diligence" it would have recognised "that BBL's retained earnings were insufficient to pay the dividends, and the effect was to reduce the share capital of the company".
It failed to report the contravention to BBL's board or management, failed to report the contraventions to ASIC, and should not have expressed an opinion that the financial reports were in accordance with the act.
"Had Ernst and Young reported the contraventions or apprehended contraventions to BBL's management or board or to ASIC, BBL would not have paid dividends otherwise than from profits and thus would not have suffered the ($160 million) losses," the documents said.
The defendants are yet to respond to the allegations. The matter is listed for an preliminart hearing on 9 September.
Frequently Asked Questions about this Article…
What is the liquidator suing Babcock & Brown directors and Ernst & Young for?
The liquidator, Deloitte, has filed a Federal Court application seeking at least $160 million in damages. The claim alleges that between 2005 and 2007 the directors authorised dividend payments that breached capital reduction provisions of the Corporations Act and Babcock & Brown Ltd’s (BBL) constitution, effectively reducing BBL’s share capital and causing significant losses to the company and its shareholders.
Who are the defendants named in the Federal Court action against Babcock & Brown?
The defendants named in the action include former chairman Jim Babcock, managing director and CEO Phil Green, former deputy chair Elizabeth Ann Nosworthy, directors Geoffrey Martin, Dieter Rampl, Joe Roby, Martin Rey, James Fantaci, Michael Sharpe, and the auditor Ernst & Young.
What exactly did the liquidator allege about the dividend payments?
The liquidator alleges the directors authorised multimillion‑dollar dividends that far exceeded BBL’s retained earnings for each year from 2005 to 2007. Those payments allegedly were authorised in a way that breached the company’s constitution and the Corporations Act, and the court documents say dividends were paid from revenue expected in a later year rather than from current profits.
How much were the dividends compared with retained earnings in 2005–2007?
According to the court documents cited by the liquidator: in 2005 a $32.9 million dividend was authorised while retained earnings were $5.5 million; in 2006 $56.3 million was paid against retained earnings of $10.6 million; and in 2007 nearly $97 million was paid against retained earnings of $11.95 million.
What role is auditor Ernst & Young accused of in the lawsuit?
The liquidator alleges Ernst & Young reviewed the proposed dividend memorandums and, had it conducted the audit with ‘reasonable care, skill and diligence’, it would have recognised that BBL’s retained earnings were insufficient to pay the dividends. The claim says Ernst & Young failed to report the contraventions to BBL’s board or management or to ASIC and should not have expressed an opinion that the financial reports complied with the Corporations Act.
How could this legal action affect everyday investors or former shareholders?
The action is part of a long-running effort by the liquidator to recover losses from the collapse of Babcock & Brown. For everyday investors, the case is relevant because it concerns recovery of shareholder value lost when the company failed. The lawsuit seeks damages that could increase recoveries for creditors or shareholders, but these are allegations and outcomes depend on the court process.
What caused Babcock & Brown’s collapse and when did it go into liquidation?
The article says Babcock & Brown was a high‑flying investment stock worth about $10 billion at its peak, but a complex ownership structure and a huge debt burden left it vulnerable during the global financial crisis. The group went into liquidation in 2009.
What is the current status and next step in the court case?
The application was filed in the Federal Court and the defendants had not yet responded to the allegations at the time of the article. The matter was listed for a preliminary hearing on 9 September. Deloitte — the liquidator — previously held public examinations in the Federal Court of the group’s former executives and auditors.
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