Contents:
April 2009
Contents:
The case of Perpetual Trustees Victoria Limited v Cipri [2008] NSWSC 1128 (noted in the Australian Banking and Finance Law Bulletin, March 2009) dealt with the enforceability of an all-moneys mortgage and a loan agreement where the signature of one of the borrowers was forged, and whether such a mortgage was a reviewable contract for the purposes of the Contracts Review Act 1980 (NSW) ("CRA").
In this case a husband and wife owned property as joint tenants. The wife signed loan documents in her own name, forged her husband's signature, then submitted the documents to the lender who approved the loan and registered an all-moneys mortgage providing for joint and several liability between husband and wife over the whole of the property. When the lender attempted to repossess the property, the husband, who had not received any of the loan money and had no knowledge of the existence of the mortgage, claimed that the mortgage was a forgery and did not secure any money or alternatively that the mortgage was an "unjust contract" under the CRA and should not be enforced.
Justice Hill cited the case of Provident Capital Ltd v Printy [2008] NSWCA 131 as authority for the rule that the personal obligation to repay the loan is distinguishable from an interest in land created by the mortgage. As the personal covenant to repay the loan was not an interest in land, it could not attain indefeasibility through registration and could not be enforced where there was forgery. Therefore, the wife owed the financier money under the mortgage in accordance with the terms of the loan agreement but her husband did not.
However, registration of the mortgage gave the mortgagee an indefeasible interest in the land despite the mortgage being forged because the joint and several liability clause in the mortgage secured all of the wife's indebtedness under the loan. This entitled the lender to exercise its power of sale over both the husband's and wife's interests in the land. The husband was unable to claim relief under the CRA because, as his signature had been forged, he could not properly be described as a party who signed the relevant mortgage. It was noted that the CRA was not intended to operate as an exception to indefeasibility.
In the case of Vance v Lamb (HC Wellington, CIV 2007-485-343, 2 December 2008, MacKenzie J), MacKenzie J found the director of a company, acting as the corporate trustee to a trading trust, liable under section 131 of the Companies Act 1993 ("Act") for losses suffered by the company. The proceedings were brought by liquidators against the director and the shareholder of the company.
Mrs Lamb and Mr Simpson formed a trading trust, Cuba Trust ("Trust"), and used substantial borrowings to purchase a property in Wellington for development. The property development encountered difficulties and GST was not paid when due. In an attempt to avoid personal liability as trustees, Lamb and Simpson resigned as trustees and appointed Upland Nominees Limited ("UPL") as the sole trustee. In October 2001, Lamb arranged the sale of the property. Simpson urged that the market be tested, but this was not done. There were insufficient funds from the sale to pay the GST liabilities and UPL was subsequently wound up on the application of the Commissioner of Inland Revenue.
The liquidator of UPL claimed against Lamb as the sole director of UPL and Simpson as the sole shareholder for breaches of the Act: reckless trading under section 135, for trading the company at significant risk of loss to its creditors; breach of duty pursuant to section 136, for incurring GST liability when they did not believe on reasonable grounds that the company could meet its financial obligations; and failing to act in the best interests of the company in accordance with section 131, by appointing the company as the sole trustee of an insolvent trust.
The Court held that there was no direct breach of director’s duties. Mere acceptance of trusteeship of an insolvent trust did not of itself constitute reckless trading and only future actions by the company as trustee could attract liability for reckless trading under the Act. There was insufficient evidence to establish that it was likely that a loss on sale would be incurred when the company was appointed trustee. Finally, the GST input credits had been obtained by the Trust before UPL became trustee. The Court held that liability for GST arose on the sale of an asset that belonged beneficially to the Trust not to UPL.
However, the Court held that UPL had breached fiduciary duties it owed as trustee to the Trust. UPL could not have been satisfied that the sale was at market price and that it was in the best interest of the beneficiaries. UPL was bound to sell the property at the best price obtainable, as would be expected of a prudent trustee, but instead had sold the property at the very bottom of the indicative range given by a valuer, and in a transaction that was not at arm's length. Lamb, as the sole director of UPL, failed in her duty to act in the best interests of the company, by failing to ensure that the company fulfilled its duties as trustee to the Trust, thereby breaching her duty under section 131 of the Act.
The Court also held that the loss to the Trust was not the amount of GST claimed by the liquidators, but the shortfall in the sale price of the property from its market value. Lamb was required to contribute this amount to the company as compensation.
In the case of Re Nylex (New Zealand) Limited (Administrators Appointed and in Receivership) and Nylex Engineering Systems Limited (Administrators Appointed and in Receivership) (HC Auckland, CIV 2009-404-121, 11 March 2009, Heath J) Heath J set out reasons for granting an application to extend the convening period in a voluntary administration under s239AT(3) of the Companies Act 1993 ("Act").
Administrators had been appointed to both companies by a resolution of directors and their appointment confirmed at the first meeting of creditors. The Act requires that the administrator then call a "watershed meeting" within 20 working days of his or her appointment to decide the future of the company. The court has the power, on the administrator's application, to extend this period.
Heath, J considered that an application to extend time requires a balance to be struck between the expectation that an administration will be relatively speedy and the need to ensure that undue haste does not prejudice sensible and constructive actions directed towards the object of the regime, namely maximising returns for creditors. Because of the complex situation faced by the Administrators in this case, including significant cross-border issues arising from the administration of the parent and related companies in Australia, the extension was granted with an order that the Administrators advertise that fact in national and regional newspapers.
The case of Chellew v Excell & Ors (HC Auckland, CIV 2008-404-302, 22 December 2009, Allan J) considered the rule against self dealing by a trustee.
Ms Excell owned a half interest in a residential property in Tauranga. A trust owned the other half interest. Ms Excell was one of two trustees of the trust. The trust sold its half interest to Ms Excell at market value, subject to an interest-free mortgage.
The residuary beneficiaries of the trust lodged a caveat against the property, claiming a beneficial interest in a half-share of the property. They claimed that their interest in an appreciating asset (the property) had been harmed by the replacement of that asset with a mortgage which enjoyed no capital growth.
The primary argument for the beneficiaries was that the sale by the trustees to Ms Excell was caught by the rule against self-dealing by trustees. The trustees relied on Holder v Holder [1968] 1 Ch 353 as authority for the proposition that, notwithstanding the apparently imperative character of the rule against self-dealing, there nevertheless exists a residual discretion for the Court to refuse relief.
It was held that the Court had no discretion to decline to enforce the rule against self dealing. The Court was not satisfied that the approach in Holder v Holder had attracted any significant support. The ordinary rule against self dealing does not permit any question to be raised as to the fairness or unfairness of the contract entered into.
The trustees had made no application to the Court, nor had they obtained the consent of the residuary beneficiaries for the sale. It followed that the sale was liable to be set aside and Ms Excell was directed to execute a registerable transfer of the interest in the property to the trustees.
In Northern Crest Investments Limited v Robt. Jones Holdings Limited (HC Wellington, CIV 20089-485-2673, 11 March 2009, Associate Judge Gendall) the key issue was whether a statutory demand issued by Robt. Jones Holdings Limited ("Landlord") against Northern Crest Investments Limited ("Tenant") could be set aside on the basis that there was a substantial dispute whether or not the debt was owing or due under section 290(4)(a) of the Companies Act 1993 ("Act").
The Landlord and the Tenant had entered into a lease for a term of six years from 7 March 2005 to 6 March 2011. The lease was terminated as a result of default by the Tenant. The parties agreed that the termination took effect from 25 August 2008. The Landlord was unable to re-let the premises and claimed rent and parking fees for periods subsequent to 25 August 2008 pursuant to a specific term of the lease.
The Tenant argued that the amount claimed represented unliquidated damages for breach of the lease rather than a "debt" due and could not therefore be the object of a statutory demand. Conversely, the Landlord argued that it was a "debt" and sought to rely on the Court of Appeal's decision in OPC Managed Rehab Limited v Accident Compensation Corporation [2006] 1 NZLR 778. In that case, the Court of Appeal determined that a restitutionary action for money had and received was so similar to an action for the recovery of a debt that it could be treated as a "debt due" for the purposes of section 289 of the Act. By analogy, the Landlord argued that whether the amount claimed was properly described as "damages" or "debt" was not relevant.
The Court disagreed. On a proper interpretation of the lease it was held that the lease did not entitle the Landlord to issue a statutory demand for post termination rental as it was not a "debt" due from the Tenant.
In relation to the unpaid parking fees, the amount was found to be a "debt" as these had been billed in advance. Therefore the application to set aside the statutory demand was successful only in part and the Tenant was ordered to pay the amount of parking fees billed prior to termination of the lease.
In Re Octaviar Ltd; Re Octaviar Administration P/L [2009] QSC 37 (6 March 2009) Justice McMurdo of the Supreme Court of Queensland declared that a charge on property was void as a security to the extent it would secure a new liability that had not been notified to ASIC pursuant to the Corporations Act 2001 ("Act").
On 31 May 2007 Fortress Credit Corporation (Australia) II Pty Ltd ("Fortress") and Young Village Estates Pty Ltd ("YVE") entered into a loan agreement. Octaviar Ltd ("Octaviar") guaranteed YVE's obligations ("YVE Guarantee"). No security was granted to Fortress.
On 1 June 2007 Fortress made a loan under a cash advance facility agreement ("Facility Agreement") to a company later renamed Octaviar Castle Pty Ltd ("Castle"). Castle was a wholly owned subsidiary of Octaviar. Octaviar guaranteed Castle's indebtedness under the Facility Agreement and granted security in the form of a deed of charge ("Deed of Charge").
On 22 January 2008 Fortress and Octaviar agreed in writing that "the YVE Guarantee is a Transaction Document for the purposes of the Facility Agreement".
On 29 February 2008 Castle's debt to Fortress was repaid in full. Had the Deed of Charge only secured the obligations under the Facility Agreement, it would have been discharged at this point. Fortress and the deed's administrators contended that, from 22 January 2008, the Deed of Charge also secured Octaviar's obligations under the YVE Guarantee.
The Deed of Charge secured obligations that arose under or in relation to a Transaction Document, as defined in the Facility Agreement. The Court concluded that the language used in the definition of Transaction Document in the Facility Agreement was not limiting and it was therefore open to Fortress, Octaviar and Castle to agree, as they did, to make the YVE Guarantee a Transaction Document.
The question then arose whether there was a fresh charge that needed to be registered with ASIC pursuant to section 263 of the Act or, in the alternative, a variation of a charge that would, equally, need to be notified to ASIC, pursuant to section 268 of the Act. The consequence of failing to lodge the notice required was that the charge, or the variation (to the extent of the increased amount secured), would be void.
The court determined that the obligations secured by the Deed of Charge were increased when the parties agreed that the YVE Guarantee would be a Transaction Document. As s268(2) of the Act referred to an increase in the amount of the debt or an increase in the liabilities, Octaviar was required to lodge notice of the variation with ASIC setting out the particulars of the variation and the letter agreeing that the YVE Guarantee was a Transaction Document. As Octaviar had not lodged such notice within the required timeframe, the charge was void to the extent it secured the obligations under the YVE Guarantee.
In JS Brooksbank & Co (Australasia) Limited v EXFTX Limited (in receivership and liquidation) formerly known as Feltex Carpets Ltd [2009] NZCA 122, the Court of Appeal reversed an important High Court decision on the application of the Personal Property Securities Act 1999 ("PPSA"). The High Court case was outlined in the May 2008 edition of the Banking Law Update.
The supply agreement between JSB and Feltex provided that delivery of goods would be made only on receipt of cleared bank funds. Subsequently a batch of wool was delivered by JSB's agent to Feltex without payment having been made. Feltex realised the mistake, and set the wool aside. Feltex then went into receivership. Feltex's financier, ANZ, had a perfected security interest over all of Feltex's present and future property. Feltex's receiver claimed that ANZ's perfected security interest applied to the wool. JSB brought a claim against Feltex for conversion.
The High Court held that the supply agreement created an in-substance security interest within the terms of section 17 of PPSA. JSB had not perfected that security interest. Accordingly ANZ's security interest had priority. The High Court also found that conversion was not available because JSB's agent had voluntarily delivered the wool to Feltex.
The Court of Appeal determined that the supply agreement specifically required receipt of cleared funds by JSB prior to delivery of the wool, and title passing, to Feltex. The supply agreement was not intended, "in substance", to secure payment in the manner contemplated by section 17 of the PPSA. Furthermore, the Court of Appeal decided that ANZ's security interest had not attached to the wool. Under section 40(1) of the PPSA a security interest attaches to collateral when the debtor has rights in the collateral. Here, however, the goods were not sold under the supply agreement and Feltex had no right of possession. As a result the position was not affected by the PPSA as JSB did not have a security interest and ANZ's security interest had not attached to the wool.
With respect to whether JSB was entitled to sue for conversion the Court of Appeal again reversed the decision in the High Court. Following an examination of the express, implied and ostensible authority of JSB's agent, the Court established that employees of Feltex were aware of both the terms of that agency and the necessary conditions for an agent to release the wool to Feltex, namely that payment be made. Feltex knew that the agents were not authorised to release the wool. JSB did not acquiesce to the delivery of the wool nor did it make representations to Feltex that the agents were authorised to deliver it. Accordingly, JSB was entitled to sue in conversion for the return of the wool.
On 16 April 2009 the Ministry of Economic Development released a discussion document dealing with proposed changes to the Securities Regulations 1983. The proposals fall into three categories:
- Provisions to deal with the "simplified disclosure prospectus" regime to be introduced by the Securities Disclosure and Financial Advisers Amendment Bill.
- Provisions dealing with the financial statements required to be included in prospectuses.
- "Technical changes" to correct or improve various issues in the regulations.
Simplified disclosure prospectus
The idea of a simplified disclosure prospectus is that a listed entity which is subject to the NZX continuous disclosure rules may offer securities to the public under a brief offer document, on the basis that potential investors will be informed by the material that has already been publicly released through NZX.
Amendments to the Securities Act to allow for the simplified disclosure prospectus regime are contained in the Securities Disclosure and Financial Advisers Amendment Bill introduced into parliament in March. However, the most important aspects of the regime will be contained in regulations, which have not yet been drafted.
The regulations will provide that the regime may be used by listed issuers for the issue of equity or debt securities. The securities offered must rank equally with or preferentially to the issuer's existing listed securities. The policy behind this is that disclosure made for the purposes of a particular listed security will constitute adequate disclosure to make an assessment of the risks of a higher ranking security but not a lower ranking security.
The discussion paper also asks whether the application of the simplified disclosure regime should be limited to "non-complex" products.
Financial statements
A prospectus under the Securities Act is required to contain, or in some circumstances refer to, financial statements. The discussion paper makes a number of proposals in respect of financial statements. The most significant are:
- The regulations presently set out requirements for financial statements, interim financial statements, and summary financial statements, which differ from the requirements of the applicable financial reporting standards. The proposal is to change the regulations so that all of these statements may comply solely with the financial reporting standards.
- The definition of "borrowing group" in the regulations currently includes the issuer and any guaranteeing subsidiaries of the issuer. It does not include the parent company and any sister companies of the issuer which may be included in the borrowing group. The proposal is to amend the definition so that all guarantors of the securities are included in the borrowing group.
- The regulations presently require that in respect of an initial public offer of equity securities, or an offer of participatory securities, a prospective statement of cash flows for one year must be included in the prospectus. The discussion paper points out that this does not provide much useful information. The proposal is that the regulations will be changed to prescribe that a full set of prospective financial statements be included in prospectuses in circumstances where a prospective statement of cash flows is presently required. This will improve disclosure. However, it will require the inclusion of a substantially greater quantity of financial information in the classes of prospectus in question.
There are a number of other detailed proposals in respect of financial statements and related matters.
Technical changes to the Regulations
The appendix to the discussion paper sets out 55 detailed changes to the regulations. The regulations have been in force for 25 years, and many provisions have become outdated or irrelevant. The changes proposed will update and clarify the regulations, and for the most part are unlikely to be controversial.
The discussion paper requests submissions on the proposed changes by Friday, 8 May. A copy of the discussion document can be found at:
http://www.med.govt.nz/upload/67526/changes_to_the_securities_regulations.pdf
The Financial Advisers Act 2008 ("Act"), to be implemented by the end of 2010, is designed to lift the standards of professionalism and accountability of financial advisers, thereby giving investors greater confidence in the advice they receive.
On 20 April 2009 the Securities Commission released a staff paper for the purpose of outlining possible approaches in relation to the standards of competence for authorised financial advisers under the Act which are to be contained in a Code of Professional Conduct ("Code").
The Act expressly requires the body responsible for drafting the Code (the Code Committee) to consult with interested parties in preparing the draft Code, and a key object of the staff paper is to lay the foundation for that consultation.
The staff paper focuses its discussion on ways for establishing competence standards for financial advisers under the draft Code. A copy of the staff paper can be found at: Staff Paper On Authorised Financial Adviser Competence.
On 3 April 2009 NZX announced that its proposed amendments to the Listing Rules (discussed in the March issue of BLU) became operative. The changes are as follows:
- Rights issue reduced timeframes: NZSX/NZDX Rule 7.10.10 has been amended so that an issuer undertaking a rights issue need only provide notification to the market five business days prior to the record date. Additionally, Rule 7.10.2 has been amended so that the closing date for applications to be received for rights issues may be 12 business days after the mailing of entitlement letters.
- Directors remuneration by share issue: Amendment to Rule 3.5.1 enabling director remuneration to be payable either in part, or in whole, by way of shares.
- Issue of securities within 20%: Amendments have been made to Rule 7.3.5 so that during any given 12 month period an NZSX listed issuer may issue up to 20% of the total number of shares on issue at the start of that period, without the need to seek shareholder approval. This Rule has also been amended to allow directors, employees, and associated persons of employees and directors, to participate in such a placement provided the directors voting in favour of the resolution to approve the issue provide a certificate that the participation of those persons is in the best interests of the issuer and fair to all other holders of equity securities.
- Employee share issue-director participation: New Rule 7.3.9 permitting directors and associated persons of a director to participate in employee share issues, provided their participation is determined by criteria applying to employees generally.
- Buyback of shares from employees: Amendment to Rule 7.6.1(f)(i) to permit an issuer buying back shares directly from employees, rather than requiring employees to sell those shares on market.
- Increase in financial assistance for acquisition of shares: Amendments to Rule 7.6.4 raising the level of financial assistance able to be provided for the acquisition of shares, from 5% to 10% of an issuer's market capitalisation. In the case of financial assistance provided to employees of an issuer, this limit has been raised from 2.5% to 5%.
- Rights issue and private placement-pricing: Rule 8.1.3 has been amended so that the issue price for a rights issue may be at a discount of 15% of VWAP over a 5 day period, rather than the current Rule being a maximum of 10% of the VWAP over a 20 business day period.
- Related parties-material transaction: Amendment to Rule 9.2.2, definition of Material Transaction amended from 5% to 10% of an issuer's market capitalisation, and for the provision of services, amended from 0.5% to 1% on an issuer's market capitalisation. An additional requirement however has been inserted to require an issuer to make an announcement to the market regarding a Related Party Transaction where that transaction is in excess of 5% but less than 10%.
Timing issues in voluntary administration
Credit rating agencies: Time to act
Creditor's scheme of arrangement vs voluntary administration
Issue 2, 2009, of the Companies and Securities Law Journal contains three articles of interest.
The first article is entitled Voluntary administration: Patterns of corporate decline by James Routledge and David Morrison. The article discusses the option of voluntary administration for companies in financial distress as offered by Pt 5.3A of the Corporations Act 2001. The authors present an analysis of empirical data on voluntary administration in Australia to suggest that directors cause businesses to trade in extenuating financial circumstances for too long a period before entering the company into voluntary administration thereby shortening the chances of a successful business rescue.
The aim of voluntary administration is to maximise the prospects of corporate rescue or, if salvage is not possible, to get a better return for creditors and members than would result from an immediate winding up of the company. Specifically, the legislation has four primary objectives, namely, to ensure:
- speed, and ease of commencement, of administration;
- minimisation of expensive and time-consuming court involvement and formal meeting procedures;
- flexibility of action at key stages in the administration process; and
- ease of transition to other insolvency solutions where an administration does not by itself offer all the answers.
The voluntary administration process is designed to give some "breathing space" to insolvent or near-insolvent companies by placing a moratorium on creditors' claims against the company for a brief period. It provides an opportunity for creditors, company managers and an independent administrator to work together to formulate a strategy to address the company's problems. However, despite being one of the most popular forms of external administration in Australia, only 10% of companies that used the system have resumed normal trading. This raises issues as to whether voluntary administration is being used effectively.
The authors' empirical analysis of a sample of the data available from ASIC involved the application of various ratios (e.g. equity to debt, assets to liabilities) to companies grouped by the outcome of voluntary administration. The analysis suggested that more timely action would protect resources and enhance prospects for business recovery. This accorded with prior research on corporate business failure which showed that there is a period of rapid deterioration in the financial affairs of a company immediately prior to insolvency. The significant decline observed immediately prior to companies entering voluntary administration suggested voluntary administration was used primarily as a last resort. The authors conclude that earlier entry into voluntary administration could well halt decline, preserve resources and minimise financial exposure suffered by stakeholders.
The second article is entitled Credit rating agencies: Time to act by Geneviève Brunner.
The involvement of rating agencies in structured finance transactions has raised the question of whether the ratings allocated by rating agencies to structures containing sub-prime products contributed to the subprime crisis. Credit rating agencies are subject to little formal regulation or oversight and their liability has been limited by regulatory exemptions and First Amendment (freedom of speech) protections.
Brunner provides a historical overview of the development of the main rating agencies and how they attained their influential role while remaining largely unregulated and with minimal exposure to civil and criminal liability. The Credit Rating Agency Reform Act 2006 (US) was introduced with the aim of improving ratings quality and fostering greater accountability and transparency in the credit ratings industry. This approach has been widely criticised and the Act described as toothless.
Case law has developed in such a way as to protect rating agencies' opinions under the free speech principle in the First Amendment to the United States constitution. The rating agencies are protected from liability unless they were malicious in knowingly giving false ratings. Brunner considers it unusual that you cannot sue on a rating agency's "opinion" when you can sue on the fairness opinions of investment banks, the audit opinions of accounting firms and the legal opinions of attorneys.
Brunner posits a number of reforms to improve the ratings process: increased accountability, competition, transparency and disclosure of information by rating agencies in tandem with greater oversight by the Securities and Exchange Commission. However Brunner also suggests that investors need to assume more responsibility for credit analysis than simply relying on a rating.
The third article is entitled The future role of creditors' schemes of arrangement in Australia after the rise of voluntary administrations by Rebecca Langley. The article highlights the benefits and success of the voluntary administration procedure and the difficulties associated with creditors' schemes.
A scheme of arrangement is a court-approved compromise or arrangement between a company and its creditors that modifies the creditors' rights. Section 411 of the Corporations Act 2001 (Australia) ("Act") empowers the Court to sanction any such compromise or arrangement between a company and its creditors. A similar procedure exists in New Zealand under Part 15 of the Companies Act 1993. Since the introduction of the voluntary administration procedure, creditors' schemes have been rarely used. Creditors' schemes remain useful in particular circumstances due to the limitations of voluntary administration and can also be used in a number of situations outside an insolvency situation.
The main advantages for the scheme company is the scheme's flexibility, the opportunity to continue trading, avoidance of insolvency stigma and the avoidance of insolvency-related clauses in contracts. However disadvantages include high costs, the time taken to implement the scheme and the uncertainty surrounding the Court's discretion whether or not to sanction the arrangement.
By way of comparison Langley outlines the characteristics of the voluntary administration procedure. Positive aspects of a voluntary administration include the 'breathing space' afforded to a company by the statutory moratorium on creditors' claims; greater flexibility and speed of implementation; greater simplicity and relatively low cost; and no mandatory Court involvement. Disadvantages of the procedure include control of the company being vested in an external administrator; the requirement that directors initiate voluntary administration only where the company is or is likely to become insolvent; and its application only to Australian companies (creditor's schemes are available to foreign companies that are registered under the Act).
While Langley acknowledges that the adoption in Australia of the Model Law on cross-border insolvency is likely to result in greater cross-border recognition of voluntary administrations, and an attendant further decrease in the use of insolvent creditors' schemes, in her opinion there will continue to be a role for creditors' schemes until ambiguities with the Model Law are resolved.
Langley proposes a number of reforms of the law regarding creditors' schemes and the voluntary administration procedure. It is argued that the scheme of arrangement procedure should continue to operate to ensure a greater number of options are available to companies to contract with their creditors. Most importantly, Langley proposes amendments to clarify the operation of voluntary administration in cross-border situations and to alleviate the perception that the procedure is only available to insolvent companies.
Syndicated Loan Agreements and Individual Lender Rights
COMI: The Sun around which Cross-Border Insolvency Proceedings Revolve: Part 3
The 4th issue 2009 of the Journal of International Banking Law and Regulation containstwo articles of interest.
The first article is entitled The management of loan syndicates and the rights of individual lenders by Philip Rawlings. The article considers the leading cases, including the recent New York decision in Beal Savings Bank v Viola Sommer, in relation to clauses in syndicated loan agreements purporting to give control over key decisions to the majority of lenders.
The author notes that the current economic crisis has compelled contracting parties to examine their rights and obligations closely, leading to closer scrutiny of those terms that inhibit unilateral action. This new focus may present additional challenges to syndicate management clauses, which seek to shift control from the individual lender to a majority of banks, in order to maintain the unity of the syndicate in their dealings with the borrower.
A criticism of syndicate management clauses is that they empower the majority to oppress the minority. The courts in the United States have determined that the majority need not consider the interests of the minority when they exercise a power conferred on it. In Redwood Master Fund Ltd v TD Bank Europe Ltd, Rimer J stated that the Court would only allow a challenge to an action or omission by the majority where there is evidence of bad faith or where the majority's action is "so manifestly disadvantageous, discriminatory or oppressive" towards the minority that is must have been motivated by dishonest considerations. It would not be enough to show that the minority suffered a mere disadvantage, or the majority had obtained an advantage or protected its own interests without regard to those of the minority. If the lenders have chosen to abandon their rights to the majority, the fact that the majority uses this power for its own benefit and thereby disadvantages the minority is not a reason for the court to interfere, in the absence of bad faith.
The author also examines whether syndicate management clauses prevent an individual lender from bringing an action against a borrower contrary to the wishes of the majority. In Beal Savings Bank the Court decided that, although the credit agreement did not contain a term precluding an individual action, the agreement indicated that the lenders intended to act in concert with each other and had relinquished all of their rights, except as expressly mentioned. The conclusion of Kay C.J., who delivered the opinion of the majority of the court was that, "an agreement that intends to have individual depositors proceed independently should so provide explicitly." Smith J. delivered a powerful dissent maintaining that although a lender could agree not to bring an action without the consent of the majority, this "...should be stated in plain language in the document", and in the absence of such a term, each lender would be free to take action against the borrower. However the author remains unconvinced by the reasoning of Smith J as he ignored that various terms of the agreement revealed an intention on the part of the lenders to act collectively.
The author concludes that when reviewing syndicate management clauses, the safest position is for each lender to assume that individual action cannot be taken, unless the contrary is expressly provided.
The second article is entitled COMI: The sun around which cross-border insolvency proceedings revolve: Part 3 by Simona Di Sano. The article is part of a series that focuses on European Community and United States ("US") cross-border insolvency provisions and the application of the insolvent's "centre of main interests" ("COMI").
This article examines recent amendments to Italian insolvency laws in response to the financial difficulties of the Italian airline Alitalia Linee Aeree Italiane SpA ("Alitalia"). The article also addresses the 2008 decision from the United States Bankruptcy Court for the Southern District of New York ("US Bankruptcy Court") and its recognition of Alitalia's insolvency proceedings as a foreign main proceeding under Chapter 15 of the US Bankruptcy Code ("Code").
Alitalia had been in poor financial condition for several years and had been propped up by government subsidies. To help save Alitalia from bankruptcy, the Italian government adopted a new emergency insolvency decree law known as the Legge Marzano Bis in 2008, which altered the extraordinary administration procedures for large undertakings providing essential public services.
Various assets of Alitalia located in the United States were the subject of proceedings in the US Bankruptcy Court. The Court held that Alitalia's COMI was clearly in Italy as the majority of its services were provided and business decisions made in Italy. The ensuing recognition of a "foreign main proceeding" under Chapter 15 resulted in the protection of Alitalia's assets in the United States. Questions as to the "real" location of the assets or decision makers of the company were not even considered. This was in stark contrast to the cases involving the purely financial entities such as SPhinX and Bear Stearns Master Funds considered in the second article of the series.
The author concludes that the Court managed to uphold the purposes of the Code while ensuring fair treatment for Alitalia's creditors around the world and pursuing the priority scheme under Italian bankruptcy laws. This decision has been lauded as the most important application of Chapter 15 to an Italian company to date.
ISDA announces successful implementation of 'Big Bang' CDS Protocol: Determinations Committees and auction settlement changes to take effect
On April 8 2009 the International Swaps and Derivatives Association ("ISDA") announced the implementation of its 2009 Credit Derivatives Determinations Committees and Auction Settlement CDS Protocol ("Protocol"). The Protocol is the final step in the process of "hardwiring" auction settlement terms into standard credit default swap ("CDS") documentation. The new terms, which are contained in ISDA's 2009 March Supplement to the 2003 Credit Derivatives Definitions ("Supplement"), are incorporated into existing CDS documentation where parties adhere to the Protocol. Three of the major changes included in the Supplement are addressed below.
First of all, the Supplement adds the concept of Auction Settlement as a Settlement Method. This eliminates the need for ISDA to publish a separate protocol for each specific credit event in order for parties to cash settle CDS transactions.
Secondly, the Supplement incorporates resolutions of the "Determinations Committees" into the terms of standard CDS contracts. These newly formed Determinations Committees will make binding determinations on important issues such as: (i) whether a Credit Event has occurred, (ii) whether an auction will be held, and (iii) whether a particular obligation is "deliverable". Globally, there are five Determinations Committees including an Australia-New Zealand Determinations Committee.
Thirdly, the Supplement adds credit event and succession event "look back" provisions (or back stop dates) into the CDS documentation that institute a common standard effective date for CDS transactions. Under the Protocol, these "look back" provisions will come into effect for legacy transactions on June 20, 2009.
These developments will create greater certainty to transactional, operational and risk considerations for treatment of CDS for parties adhering to the Protocol, or for those parties who bilaterally agree to incorporate the Supplement into existing CDS documentation.
Company contracts, and reckless trading: Re Global Print Strategies Ltd
Back to the future? Reflections on views of the Ministry of Economic Development for limiting auditors' liability
The March 2009 issue of New Zealand Business Law Quarterly contains two articles of interest.
The first article is entitled Company contracts, and reckless trading: Re Global Print Strategies Ltd by Peter Watts. The article critically analyses Stevens J's judgment in the recent High Court decision of Re Global Print Strategies Ltd in relation to a director's powers to bind the company and breaches of section 135 of the Companies Act 1993 ("Act"), the prohibition of reckless trading.
The liquidator of the company brought proceedings against the directors for reckless trading. Two of the three directors sought to reduce the size of the damages for which they might be found liable under section 135 by challenging the validity of contracts entered into with the company's main creditor. They argued that the third director, by executing the contracts alone, had purported to commit the company without their authority or consent.
Stevens J ruled that the contracts bound the company, citing section 18 of the Act. Broadly, section 18(1)(e) provides that a company may not assert against a person dealing with the company that a document issued on behalf of the company by a director with actual or usual authority to issue the document is not valid or not genuine unless the person has, or ought to have, knowledge to the contrary.
Watts suggests that (a) section 18 does not confer authority on a director, or preclude the company from denying the lack of authority of a single director to bind the company, and (b) there is authority that a single director does not have authority to contract on behalf of a company where the contract is one of significance, unless either the company has only one director or the signatory is held out as the managing director.
Watts then points to a fallacy among lawyers that there is a presumption of regularity that automatically operates with company contracts. The presumption only applies once it is established that there was a holding out of the relevant agent as having authority to make a contract. In short, section 18 only covers procedural irregularities. It does not obviate the basic requirement of the outsider to establish the credentials of those purporting to bind the company.
While Watts considers Stevens J's decision correct he suggests a different basis for the decision. Because the third director owned 80% of the company's shares and was married to the company's day-to-day manager (while the other two directors were not actively involved in management), she could be considered a de facto managing director to whom broad powers had been delegated.
Furthermore, the other two directors may have become estopped from denying the third director's actual authority and the validity of the contracts. When the defendants had become aware of the contracts they had raised no objection to them, and may even have benefited from them.
Watts goes on to criticise the view endorsed by Stevens J that a penal element can be included in an award under section 301 of the Act in respect of a breach of section 135. Again, because Stevens J did not make such an award Watts does not dispute the outcome of the case. The author contends that due to the rewording of section 320 of the Companies Act 1955 in section 301 of the Act there is no longer any basis for a penal award. There is however a discretion for judges to award less than the loss caused by the breach if the creditors have been just as careless as the directors.
The second article is entitled Back to the future? Reflections on views of the Ministry of Economic Development for limiting auditors' liability by Michael Keenan.
In April 2008 the Ministry of Economic Development released a paper which suggested legislative changes to limit auditor's liability for professional negligence by either imposing statutory caps on awards for damages or permitting incorporation of auditing firms with limited liability, or shifting from joint and several liability to proportionate liability.
The author considers that the imposition of a statutory cap on awards for damages would be unjust in the event that a claimant was awarded damages in excess of the cap. In addition, if coupled with the requirement that the minimum professional indemnity insurance cover be at least equal to the amount of the statutory cap, the change would be self-defeating insofar as it would perpetuate a cause of the problem it is designed to solve, namely the "deep pockets syndrome" endured by auditors.
As regards the incorporation of auditing firms with limited liability, Keenan observes that this would not address the central issue of auditors' personal liability for professional negligence. The courts' approach to the "shield" of incorporation remains uncertain and prone to change, as highlighted by the recent decision in Body Corporate 202254 v Stephen Frederick Taylor. In that case the Court of Appeal reinstated a claim against a director of a construction company (in liquidation) for damages for negligence. In view of such uncertainty, it would appear imprudent for auditors to rely on limited liability incorporation to protect them from personal liability for professional negligence.
With respect to the abandonment of auditors' joint and several liability, Keenan notes that the Law Commission rejected the argument in 1997 and re-affirmed that the apportionment of civil liability is based not on ensuring equity between co-defendants but on ensuring recompense for the plaintiff.
The author concludes that not only are the Ministry of Economic Development's proposals ineffective or unpalatable but that the objectives have already been achieved. First of all, it has become accepted practice for the terms of engagement of an auditor to include a disclaimer of liability for negligence, a cap on the amount of damages that may be claimed by the client and a time limit on the instigation of proceedings. Secondly, audit firms can include in their audit reports disclaimers of liability to third parties. Keenan considers it remarkable that the inclusion of disclaimers has not been more widely and rapidly adopted by audit firms in New Zealand given existing judicial opinion that a disclaimer negates the duty of care and therefore the possibility of negligence.
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