Babcock and Brown may have traded while insolvent: Report

Collapsed financial services giant Babcock & Brown may have been insolvent three months before it was placed in administration, according to a report from the company’s administrator.

The administrators, David Lombe and Simon Cathro, have also recommended that the company be liquidated.

The administrators’ report claims that Babcock & Brown “became insolvent at the latest on or about 29 November 2008. Accordingly, the BBL Board should have acted at this stage to suspend trading in BBL listed securities; to make an announcement to the market regarding BBL’s solvency and the implications…[and] to place BBL into voluntary administration.”

The company was not placed into administration until 13 March.

The administrator’s report also examines the key reasons for Babcock & Brown’s collapse and suggests that the company’s response to the global financial crisis was inadequate.

“The administrators believe that the collapse may have been brought about by a combination of weaknesses that the group carried into the GFC, and the responses of management, the BBL board and the BBIPL board to the GFC during the course of 2008,” the report says.

The report also notes the high levels of pay given to key members of management.

“In 2006 and 2007 approximately 50% of profits were used to fund remuneration. The remuneration policies put in place by the board served to encourage a culture of risk taking and rewarded short-term performance.”

Babcock’s collapse was one of the biggest corporate collapses in recent Australian history.

The company, which listed in 2004, was valued at $10 billion at the height of the global banking boom of 2007. But Babcock’s huge debt load of around $40 billion proved too deadly when the credit crisis struck in 2008 and the company eventually collapsed in March of this year.

Around 30,000 creditors are owned about $50 billion.