The banks did a sneaky thing as Eddy Groves' childcare empire was teetering at the precipice of collapse in 2008, a thing which may begin to unravel in proceedings before the Federal Court on Monday morning.
Led by Commonwealth Bank, the syndicate took a charge over $1.25 billion in ABC Learning debt.
This was no normal charge though.
It was granted orally, and apparently in haste, by Eddy Groves.
Its effect was to catapult the banks ahead of ABC's other creditors and leave taxpayers footing the bill for childcare workers and suppliers when the company fell into administration a few months later.
While the banks clawed back $100 million from the ABC ruin, the wages of childcare workers have had to be covered by taxpayers to the tune of $6 million through the government's General Employee Entitlements and Redundancy Scheme (GEERS). Suppliers are still out of pocket and staff superannuation and other entitlements are still owed to this day.
It is a cute irony that the lead bank in the syndicate (and trustee for the security) is Commonwealth Bank, whose reputation has been battered lately for the aggressive practices of its financial planners.
In this case too, CBA stands at the vanguard of aggressive insolvency practice, though the other banks are there with it, including Westpac, National Australia Bank and ANZ.
Ferrier Hodgson, liquidator to ABC Learning, is taking the lenders and their receiver McGrathNicol to court to question the validity of this oral charge. Did the banks know ABC Learning may have been insolvent at the time? Did they waive their lending covenants to get the deal done?
The action, which is funded by litigation funder IMF Bentham, hinges on the ''six months rule'', which has it that a charge is not valid if a company collapses within six months of the charge being struck.
The charge was granted on June 25, 2008. The next day, ABC finalised a big asset sale and the banks received $400 million. Two weeks later the oral charge was transferred to a written and registered charge.
ABC fell over another five months later, appointing Ferrier Hodgson as administrator in November. Now, as Ferrier seeks to retrieve the money paid under the charge, it will focus on whether the banks' syndicated loan of $1.1 billion was due and payable and whether there was a material impairment in ABC's capitalised licences. Did the banks provide a waiver of their covenants in return for the charge, thereby ensuring ABC remained solvent?
The answer is probably, yes. All indications are that the financial position of ABC Learning was at all times much worse than it was letting on to the market.
It was already operating cash-flow negative in December 2007 when it took an unsecured $1.43 billion facility with the banks. Note ''unsecured''. At the end of that month, ABC's accounts showed intangible assets at $3 billion, accounting for about 67 per cent of total assets and 140 per cent of net assets. Its liabilities were $2.3 billion.
It was what was not showing in the accounts which was even more suspect. Though regulators decided not to pursue Eddy Groves and his fellow directors, ABC had all the hallmarks of a Ponzi scheme.
ABC would overpay the developer to build the childcare centre. While it was being constructed and while ABC was waiting for the kids to fill the new centres, the developer would pay back some of that money to ABC and ABC would book it as revenue.
The music stopped when the income was revealed as fees from property developers rather than from paying parents.
The asset values in the balance sheet were an illusion. So it is highly unlikely the banks ever intended to lend Eddy Groves any new money but that their new facility was intended to stave off the inevitable - a declaration of insolvency - and buy time for Groves to sell assets. It was also to improve their security and leapfrog staff and small suppliers in the queue of creditors.
The annoying thing is that, not only did taxpayers have to cover ABC staff entitlements - thanks to this dubious oral charge - but they will also pay Monday's court costs in an action that would not have happened if the world of insolvency and banking were being policed.