Pistols at dawn: When the chaps of the Liberal Party fight

The Athenaeum Club on the Paris end of Collins Street advertises itself as a “social club for gentlemen of good character, attainment or promise” with “total respect for fellow members’ privacy”.

Like the Melbourne Club across the road, it is one of the traditional haunts of the city’s business elite. Former Western Mining boss Hugh Morgan, ex-stockbroker and brother-in-law to Rupert Murdoch John Calvert-Jones, and ex-ANZ chairman Charles Goode gather here.

Victorian Liberal Party president Michael Kroger leaves the Federal Court after taking on his party's biggest donor, the Cormack Foundation.Credit: AAP

These are also the chaps who for decades held the purse strings of the Liberal Party’s single biggest donor, the Cormack Foundation - a company formed from the proceeds of the sale of radio station 3XY in the 1980s.

To one or other of these clubs or nearby boardrooms, Liberal Party leaders and officials make election-time pilgrimages. They politely sit and listen as old money men ruminate on life, politics and policy. In return, they get to make their case for campaign funding support.

Ahead of the 2016 Federal election, this is precisely what Prime Minister Malcolm Turnbull did - at a lunch reportedly organised by Liberal stalwart and former party treasurer the late Ron Walker.

The party was in dire financial straits. It still is. Turnbull was after a $3 million hit. Cormack contributed one-third of that, a sorely needed $1 million to federal Liberal coffers. Turnbull himself later kicked in $1.75 million from his own pocket.

Malcolm Turnbull on a trip to Melbourne before the last federal election.Credit: Jesse Marlow

In the lead-up to the looming federal election, Turnbull may well make the trek to Melbourne again. This time, though, financial support is very uncertain.

The Cormack Foundation is now in an intense legal dispute with the Victorian branch of the Liberal Party, and has frozen all donations pending the outcome of a Federal Court case. The issue is who controls Cormack’s $70 million war chest, and the millions of dollars a year its blue-chip investments generate in dividends.

In the current financial year to date Cormack has, unusually, made no political donations.

For the Victorian party and its leader, Matthew Guy, the situation is worse still, especially in an election year; there will be no Cormack money until the local party agrees to reform of its administration.

Victorian Liberal Party leader Matthew Guy.Credit: Jason South

The Liberals, the party of fiscal responsibility, appear to have let their greatest financial asset slip through their fingers. But the battle for Cormack - a dispute coloured by ancient factional and personal hostilities - is also symptomatic of a deeper malaise around Liberal finances.

For all its trappings, the party of capital is desperately short of it. So much so that taxpayers may end up being its financial lifeline.

Money on their minds

As delegates gather for the 165th Victorian Liberal state council this weekend, money is front of mind. The top four points in an eight-point manifesto circulating on behalf of party presidential hopeful Greg Hannan are about finances. He is challenging the incumbent, and favourite, long-time political warrior Michael Kroger. (Kroger won the ballot on Saturday with 721 votes to Hannan's 448).

The manifesto’s first promise is to get the party "back in the black", the second is about restoring relations with the Cormack Foundation. "Cormack", and the party’s legal attack on it, is the talk of the party.

Slumping membership, a drying-up of corporate donations and the scandalous $1.5 million defrauding of party funds by the Liberals’ former state director Damien Mantach between 2010 and 2015 have left the Victorian branch, and to a degree Liberals nationally, in serious financial trouble.

Filings with the Australian Electoral Commission show that in 2015-16 the Victorian party’s debt peaked at $7.5 million, necessitating the sale of shares by its investment arm Vapold and the mortgaging of party headquarters at 104 Exhibition Street.

Debt remained above $2.5 million at June 30, 2017. To the horror of a good many members, the party is considering selling its headquarters of 40 years and then leasing it back.

Relatively speaking, Victorian Labor is in rude fiscal health, with less than $100,000 in debt and a reliable income stream from affiliated unions as well as support from business.

Money wins elections, goes the old adage. In Robert Menzies’ home state the Liberals have won just one poll in 19 years; one in five elections since Jeff Kennett was premier.

More than ever the Victorian Liberals need access to the Cormack cash. More than ever they look unlikely to get it.

What legal right the party has to that money is the subject of an unseemly battle between the party and the Cormack directors to be decided by Federal Court justice Jonathan Beach in the coming weeks.

The ugly public conflict has shaken the party to its core. This is not how gentlemen resolve their differences. But it is consistent with the combative style of Kroger, the renowned political brawler who made his mark as a union-busting lawyer and free market champion in the 1980s.

He is in his second stint as party president, after first winning the position at the age of 30 in 1987.

Scourge of the old guard

Brawler: Victorian Liberal Party president Michael Kroger.Credit: Justin McManus

As much as he was a threat to the labour movement, Kroger was also the scourge of the old guard, genteel small-l liberals who held sway in Victoria for years. Arguably he is still on that crusade.

Tension over the Cormack, and 3XY before it, are not new. In the 1970s, there were arguments when directors insisted they held the shares as individuals, not on behalf of the party. These disputes tended to be low-profile and regarded as family spats. The directors concerned were Liberal royalty, after all; people like Stan Guilfoyle, husband of former senator Dame Margaret Guilfoyle.

In hindsight these ructions reflected a serious problem that the party had long failed to address. The ownership of 3XY and Cormack was, and has remained, a grey area.

No one doubts that the “vibe” - to borrow from The Castle - of both 3XY and Cormack is that they were indeed part of the extended Liberal family, which was fine as long as everyone was getting along.

But relations have seriously soured over Liberal administration in the wake of the $1.5 million fraud by the now imprisoned Mantach.

On his return to the presidency in 2015, Kroger played a key role in exposing Mantach’s wrongdoing. Nonetheless, and understandably, the Liberals’ biggest donor was unimpressed that the party had allowed itself to be internally fleeced. Cormack was also frustrated by Kroger’s refusal to fully implement recommendations for administrative reform.

The fight begins

Cormack added to the tensions by making two donations of $25,000 to minor parties, Family First and the Liberal Democrats, which preferenced Labor in some seats at the 2016 federal election. Kroger was incensed. Even Cormack supporters acknowledge that the donations were unnecessarily provocative.

In mid-2017 the party wrote to Cormack demanding the board directors stand down to be replaced by hard-core Liberal party loyalists, including former MPs Richard Alston, Alan Stockdale, David Kemp and Michael Ronaldson.

The board dismissed the request. In response, in late 2017, the party launched its Federal Court action.

Cormack was established in the 1980s with the proceeds of the party’s sale of 3XY. Through canny investment and protection of the initial capital of $15 million, the Cormack war chest swelled to $70 million and generated about $60 million in dividends over time, the vast bulk of it going to the Liberal Party.

In its original claim to the court, the party argued that when the Cormack Foundation was established it was acting as trustee on behalf of the Liberal Party.

It later amended its argument to claim that two of Cormack’s three original shareholders, Hugh Morgan and John Calvert-Jones, had signed undertakings promising to use their “best endeavours” for the “benefit of the Liberal Party”, to ensure future directors did the same and to have their shares returned to the Liberal Party in the case of death or resignation.

The party believed those undertakings gave it effective control of Cormack. But over the years  the board swelled to eight, including another Liberal heavyweight, Charles Goode. None had signed similar undertakings.

Then, in mid-2017, Morgan and Calvert-Jones resigned from Cormack and rather than transferring their shares to the party, they simply cancelled them.

The party argues the two had breached the terms of their trust and has called on the court to reinstate the shares. Cormack counters that the undertakings were mere personal promises and hence not binding.

Charles Goode in 2007.Credit: AAP

It has also pointed out that the Liberal Party has never disclosed Cormack shareholdings in its books. Kroger says this was an error in the party’s accounting; one of many through the decades, it seems.

After a court hearing in March, both sides anxiously await the ruling by Justice Beach.

Ongoing hostility

A loss will be a major blow to the Victorian Liberals and to Kroger personally. Supporters from both sides of the dispute say the best outcome the party can realistically expect is control of two of eight shares in the Cormack.

It will be difficult for the party to spin this as a victory, particularly given the ongoing hostility within the Liberal family likely to flow from the court action.

"The real reckoning on this matter won’t come with the president’s election at state council [on Saturday], but after the court decision,’’ warned one former party office bearer.

Watching on are Liberal supporters who will also be assessing whether to donate to forthcoming campaigns in Victoria and federally.

"Why would they tip in to a party that has just sued its biggest donor?’’ asks one party insider.

Many Liberal elders insist the court case could and should have been avoided. But Kroger’s supporters say their man has taken a stand against Cormack that should have been taken a long time ago, for the good of the party.

They are scathing in the picture they paint of the men of the Collins Street gentlemen's clubs, the Cormack Foundation itself and its dictates about party administration. "This is Melbourne’s old money exerting its authority, trying to show it still runs this town,’’ says one.

Exactly how all this is being viewed by the cash-strapped federal Liberals is not entirely clear. There is little doubt, however, that as they prepare to do battle with Bill Shorten in the months ahead, they will be coveting Cormack’s cash.

The weak state of federal party finances was identified as a critical factor in the party’s poor showing in a report on the 2016 election by former trade minister Andrew Robb.

Federal implications

Given that Cormack has traditionally shared its largesse with both the national and Victorian Liberal branches, Malcolm Turnbull may yet end up the winner from the foundation’s feud with Kroger, attracting a bigger portion of its donations.

It is difficult to see how the outcome can be anything but negative for the Victorian Liberals.

Total legal costs alone for both sides - big-named silks including Allan Myers were in the thick of the court action - are likely to be upwards of $3 million; money that could have been spent fighting Labor on the hustings. Kroger has promised to contribute $1 million of his own money, but his detractors are wary about this.

No wonder there are welcoming noises from Liberal ranks about electoral funding reform.

In September Daniel Andrews promised to introduce Australia’s toughest political funding regime, including donations capped at $4000 and extra public funding. Labor is hopeful of striking a reform deal with the Liberals soon.

The changes would all but end Cormack’s contributions to, and sway over, the Victorian party; and the clubby lunch meetings at the top of Collins Street.

And short of selling more of the family silver - the party headquarters in Exhibition Street for instance - it appears Matthew Guy will be running his campaign on the smell of an oily rag this year.