Insolvency and Forestry Tasmania

If there are times when Forestry Tasmania’s appears secretive, maybe it’s because it doesn’t always know what’s happening.

It was unaware of its possible insolvent status until it was pointed out by its Lender, Tascorp, the State Government’s finance arm.

Forestry Tasmania’s recently released 2010 financial statements revealed that it had breached lending covenants. The breach which had been overlooked by the Directors was discovered by Tascorp when reviewing the 2009 financials.

This was disclosed by Treasurer Michael Aird in answer to a Question on Notice from Ruth Forrest MLC:
http://www.parliament.tas.gov.au/HansardCouncil/isysquery/d29954a8-6db3-4052-ba83-e3e338f98e1a/1/doc/

The Treasurer stated that without his subsequent Letter of Comfort to Tascorp guaranteeing Forestry Tasmania’s debts, Directors would have been unable to sign their solvency declaration that debts would be paid as and when they fell due.

Coincidentally the Secretary of the Department of Treasury, Don Challen is also the Chairman of Tascorp.

Barely a month after the Letter of Comfort was provided, Mr Challen in an address to Directors of Government businesses, outlined several principles of good corporate governance, one of which was the principle of appropriate disclosure to shareholders.

“Businesses should ensure that they have due procedures and policies in place to ensure that the information is timely, accurate, and meaningful, and the communication method is appropriate”, he said: http://www.treasury.tas.gov.au/domino/dtf/dtf.nsf/LookupFiles/20100910-DWChallen-address.pdf/$file/20100910-DWChallen-address.pdf.

Forestry Tasmania needed to be told by its Lender that it was in breach of a lending covenant. Its public response was to bury the disclosure in an obscure Note to the Accounts.

Mr Challen also described the two models for government businesses; State owned Companies (SOCs, Aurora Energy for instance) which fall within the ambit of the Federal Corporations Act and GBEs (like Forestry Tasmania) largely covered by the GBE Act as well as other enabling legislation.

The shortcomings of the GBE model drew the following remark: “Although from time to time amendments have been made to the Government Businesses Enterprises Act, it has been left behind somewhat and would require a major overhaul to bring it back into line with the Corporations Act.”

On the matter as to whether the insolvency provisions of the Corporations Law applies to GBEs like Forestry Tasmania, Mr Aird told Parliament last week “that there is always an expectation that all State owned companies or GBEs should be adhering to the general solvency provisions.” Trading in a solvent manner is usually a mandatory responsibility of Directors , not just an expectation.

Mr Aird explained that “if any GBE was acting in a way which indicated to me that they were trading while insolvent, it would require some action to be taken by government.”Not by the Directors apparently but by the shareholders. At times GBEs can be a law unto themselves.

Mr Challen further commented that “Treasury has therefore been considering for some time whether it is still necessary and worthwhile to continue to maintain two government business governance models.”

Given the likelihood that the 6 current GBEs will become SOCs, it appears to be an opportune time to consider which of Forestry Tasmania’s functions are best transferred to a SOC and which are best transferred elsewhere.