On 4 December 2024 the Financial Services Tribunal found that a journal entry processing a transaction on the last day of the month and reversed the very next day in order to reflect a loan as terminated in a regulatory return under the Mutual Banks Act of 1993 resulted in a misleading return which the Prudential Authority was justified in sanctioning by an administrative penalty.
The court applied the ‘substance over form’ doctrine and looked at the economic substance of the transactions. The economic substance of the debtor’s sale agreement was to enable the debtor to reduce its loan with the Mutual Bank without incurring any cashflows. The way in which the loans were recorded as repaid to justify the returns to the regulatory authority was used to mislead the Prudential Authority.
Section 53 requires a Mutual Bank to report its assets and liabilities and contingent liabilities and to provide the prescribed returns including returns relating to the extent and management of risk exposures and the conduct of business. These returns must be prepared in conformity with general accepted accounting practice.
Section 92(1)(c) of the Mutual Bank Act makes it an offence for any person to make a statement in a return which, to the knowledge of such person, is untrue or misleading in any material respect. The evidence showed that the representation made regarding the repayment of the loan which was based on a journal entry was clearly misleading. The loan had not been settled.
The imposition and amount of the administrative penalty was upheld by the Tribunal.