August 2008

Contents:

 

CASES Boutique Tanneries Limited (In Liquidation) v Handley ANZ National Bank Limited v Shi Shen Lee Dorchester Finance (BOP) Limited v Labrador Holdings Limited and Ors LEGISLATION Privacy (Cross-Border Information) Amendment Bill Draft for consultation on the securities markets (disclosure of relevant interests by directors and officers) amendment regulations 2008

SNIPPETS Australia: Personal properties securities reform - draft bill issued for discussion; and Proposed national consumer credit regulation and unfair contract terms legislation recommended Financial markets and the biggest banks: lessons to be learned The difference a year makes in regulation RBNZ repo changes are positive, triple-As say World Bank retail kauri bond offer Shareholder litigation after Sons of Gwalia Ltd v Margaretic Receiver's liability in urgent relief applications Recommendations of the securities industry and financial markets association credit rating agency task force Financial services authority: feedback on the definition of capital Implementation issues relating to Basel II

The recent case of Boutique Tanneries Limited (In Liquidation) v Handley (HC Auckland, CIV 2006-404-2713, 24 July 2008, Dobson J) addresses breaches of director's duties under ss 131 and 135-137 and failure to keep company records under s 194 of the Companies Act 1993 in the context of a liquidation.  Breaches of director's duties can lead to orders under s 301 to repay monies to the company while failure to keep company records can lead to similar orders under s 300.

Boutique Tanneries Limited (in liquidation) ("Boutique") and its liquidators brought the proceedings against the defendant ("Handley"), the sole director of Boutique.  Boutique was placed into liquidation in August 2005 and there was a shortfall of $178,000, the amount claimed.  Few records were kept by Boutique, leading to evidentiary difficulties and Dobson J's overall impression was that Boutique was run in "a very informal and relaxed way, with scant regard to formal requirements".  Handley had suffered a series of strokes from 2003 onwards and it was acknowledged that this severe ill health had a significant impact on his ability to run the business. 

The main creditor was the Inland Revenue Department ("IRD"), which had been owed PAYE and GST liabilities since late 2001.  It was suggested that the point where Boutique was unable to pay its debts as they fell due was during 2002, evidence from a forensic accountant being that this point will often be reached once such IRD obligations have been outstanding for six months.  However, other creditors and suppliers had been paid up until the liquidation and on that basis Dobson J pushed this point back until mid 2003.

The alleged breaches of director's duties against Handley were:

• to act in the best interests of the company (s 131);
• not to agree, cause or allow the business of the company to be carried on in a manner likely to create substantial risk of loss to the company's creditors (s 135);
• not to agree to the company incurring an obligation unless the defendant believed there were reasonable grounds to believe that the company would be able to perform the obligation when it was required to do so (s 136); and
• to exercise powers or perform duties with the same care, diligence and skill that a reasonable director in the same circumstance would exercise (s 137).

Dobson J found Handley had breached ss 135 and 137 and it was unnecessary to make findings in respect of ss 131 and 136.  After mid-2003, Handley should have been aware that the growing IRD claims, as well as their preferential status, would lead to loss by the other creditors of Boutique.  Dobson J described the required standard in s 137 as that of a reasonable director assuming the responsibilities of a sole director of a small trading business, noting though, the lack of opportunity for detached guidance from a board, particularly a non-executive director.  It does not allow for a particular director's lack of experience or knowledge (or ill health in this case).

In determining the amount to ascribe to Handley as a result of the breaches, Dobson J followed the Court of Appeal's approach in Mason and ors v Lewis CA267/04 [30 March 2006].  The starting point is the deterioration of the company's financial position between the date of the first breach and the eventual liquidation and then three factors are assessed: causation, culpability and duration of trading.  Here, the breach started in mid-2003 so there were two years of continued trading, leading to the $178,000 shortfall.  Dobson J noted that the tanning industry as a whole had suffered a major downturn during the period and also that Handley's ill health acted to mitigate his culpability.  Taking these into account, his Honour set the appropriate contribution Handley should make at $100,000.

With regard to the failure to keep proper accounting records under s 194, it was clear they were not maintained but it could not be said that the absence of those records had contributed to Boutique's inability to pay its debts (for example, Boutique had not issued any cheques that had bounced), or substantially frustrated the orderly liquidation of the company.  Dobson J set the sum at $20,000 but noted that so long as the liability under s 301 stood, the liability under s 300 was to be treated as part of that sum.

ANZ National Bank Limited v Shi Shen Lee (HC, Auckland,CIV 2006-404-2282, 6 August 2008, Keane J).

ANZ National Bank Limited ("ANZ") sought to recover $302,328 from Shi Shen Lee ("Lee"), the balance of an advance made under a home loan agreement dated December 2001 ("2001 Agreement"). 

There were two principal sources of complexity in the case.  The first was whether the 2001 Agreement had efficacy, as Lee questioned the identity and authority of the person who signed on his behalf.  The second was that in August 2002 ANZ released, without seeking any repayment of principal, the mortgage over one of the two properties securing the advances made.

The 2001 Agreement was intended to replace a home loan agreement entered into by ANZ and Lee in December 2000 ("2000 Agreement").  Amounts advanced to Lee under the 2000 Agreement were rolled over under the 2001 Agreement.  The court accepted that the identity of the person who purported to sign the 2001 Agreement on Lee's behalf remained unestablished.  As a result there was doubt both as to whether the 2001 Agreement was operative and whether the 2000 Agreement was extinguished.  The Court found that ANZ's cause of action was under the 2000 Agreement.

The purpose of the 2000 Agreement was to finance the purchase of two properties in Mt Roskill.  ANZ took mortgages over both properties.  In 2002 ANZ released its mortgage over one of the properties to enable Lee to sell it.  ANZ did not seek any payment of principal at that time.  ANZ claimed this was in error because it failed to include, in its review of Lee's indebtedness, the new '94' account it had created for the sum rolled over under the 2001 Agreement, which then amounted to just over $340,000.  Obligations owed by Lee to ANZ under the separate '00', '93' and '95' accounts totalled just over $110,000, which ANZ decided was adequately secured by the remaining property.

In February 2005 Lee entered into an unconditional contract to sell a subdivision of the remaining mortgaged property and requested that ANZ discharge this mortgage.  ANZ, having now discovered its mistake, supplied the discharge in exchange for the full proceeds of the sale.  The proceeds cleared all amounts owed by Lee under the '00', '93' and '95' accounts and $53,089 of the amount owed under the '94' account.

Lee disputed that he owed ANZ any money under the '94' account and counter claimed for the $53,089.  Lee contended that around the time of the first sale in 2002 he had made a payment clearing that account.  However neither Lee nor ANZ could produce any record of such payment. 

Lee then argued that ANZ was estopped from denying that it had been repaid.  Lee claimed that he relied on ANZ's representation that the proceeds of sale were his to deploy, which he then invested.  The Court found that to raise an estoppel Lee must establish a representation on which ANZ intended him to rely and on which he relied.  ANZ, in complying with the request to release the mortgage, at most confirmed that it was not seeking any principal repayment.  Nothing further could be taken from it.  Accordingly Lee could not counterclaim for the amount that ANZ had applied in repayment of the '94' account and the Court found in ANZ's favour for the balance of the '94' account and interest accrued to the date of judgement.

Dorchester Finance (BOP) Limited v Labrador Holdings Limited and Ors (HC Tauranga, CIV 2008-470-169, 7 August 2008, Doogue AJ)

This was an application by Dorchester Finance (BOP) Limited ("Dorchester") for summary judgement against Labrador Holdings Limited ("Labrador") and related parties for failure to pay both moneys owing under a loan agreement and fees owing under a roll over agreement. 

The defendants opposed the application on the basis that Dorchester was in breach of the roll over agreement between Dorchester and Labrador and a separate roll over agreement between Dorchester and another company, Bethco Limited ("Bethco"), and therefore was not entitled to charge the fees.  The defendants also claimed that, if Labrador did owe the fees to Dorchester, Labrador had an equitable right of set-off.

The question of whether Dorchester was in breach turned on whether the availability period for drawdown under the roll over agreement had expired.  The Court found that the availability period had expired before the parties even signed the roll over agreement.  Given that the parties could not have intended the provisions of the roll over agreement to operate in this way the Court found it necessary to imply a term into the contract which would deal with the defendants' entitlement to take up the loan.  The Court determined that, having regard to all the documentary steps the defendants had to take to organise the security for the loan and to attend to execution, an availability period of one month from the signing date was a reasonable period.

While it flowed from this decision that, by its failure to advance the loan, Dorchester was in breach of the agreements, it was held that the defendants remained liable for the fees.  The requirement that Labrador pay the fees was independent of Dorchester's obligation to advance the loan.  If, following Dorchester's breach, the defendants had cancelled the contracts then they might have been excused the obligation to pay fees on the ground that section 8(3) of the Contractual Remedies Act 1979 excused them from further performance.  However the defendants had not done so and therefore remained liable for the fees.

Labrador claimed an equitable right to set-off the fees owed against costs it had incurred due to its inability to refinance while Dorchester refused to release the mortgage.  The terms of the mortgage extended to security for any "moneys which are now owing or shall hereafter from time to time be owing to the mortgagee".  The Court held such an expression to be wide enough to include the fees.  Even though it was in breach of the roll over agreement Dorchester was owed the fees and was entitled to retain and enforce the security.  Therefore no set-off was available. 

The judge noted that even if set-off was available, that would not have advanced the position of the defendants because the parties had contractually excluded any right of set-off.

The Court found that Dorchester, even if it was in breach of the agreements, had successfully negatived the existence of any reasonably arguable defence.  Summary judgement was granted against the defendants for the amount owing under the loan agreement and for the fees under the roll over agreement.

The Bill is to amend the Privacy Act 1993 and will implement aspects of the OECD framework for co-operation between privacy enforcement authorities.  The explanatory note to the Bill states that the amendments dealing with cross-border data transfer will substantially reduce the likelihood of New Zealand being used as an intermediary for the avoidance of other States' privacy laws. 

The amendments aim to ensure that personal data originating overseas and sent to New Zealand is subject to privacy protection under New Zealand law.

The Bill's transfer prohibition notice mechanism aims to ensure that foreign personal data cannot be sent, via New Zealand, to jurisdictions without adequate privacy protection.  New Zealand companies would then be able to assure trade partners that New Zealand law will ensure their privacy is protected.

The Bill also:

• removes the current requirement that an information privacy request can only be made by a New Zealand citizen, permanent resident or person in New Zealand at the time the request is made;
• enables the Privacy Commissioner to authorise a public sector agency to impose a reasonable charge for making personal information available to overseas foreign nationals; and
• provides for the referral of cross-border complaints to the appropriate overseas privacy enforcement authority where the complainant is within the jurisdiction of that authority.

The first reading of the Bill has not yet been held.

On 7 July 2008 Cabinet agreed to amend the Securities Markets (Disclosure of Relevant Interests by Directors and Officers) Regulations 2003 to reduce compliance costs associated with a relatively wide definition of "officer" and introduce some operational improvements to the Regulations.

On 31 July 2008 the Ministry of Economic Development released a consultation draft of the proposed amendment regulations.
Under the Securities Markets Act 1988, directors and officers of public issuers (issuers whose securities are listed on a registered exchange) are required to disclose to the public relevant interests and dealings in securities of the public issuer and any related body corporate. The disclosed information is used to assist in the monitoring of possible insider trading activities and market manipulation.  It also is designed to encourage transparency and good corporate governance in securities dealings. The disclosure regime has been in operation since 2004 and the industry interpreted the requirements to apply to a significant number of employees thereby increasing compliance costs.

The proposed amendment regulations will reduce the number of people included in the definition of "officer" to people who are within two tiers of direct reporting to the Board of Directors. This amendment would target the legislation at the area where the insider trading risk is perceived to be the most acute.  The recent amendments to the Securities markets Act 1988 (including changes to the insider trading regime and the introduction of new market manipulation laws) have also reduced the need for the disclosure regime in its current form.

For operational efficiency, and to align the disclosure mechanics with the Substantial Security Holder disclosure obligations, several minor improvements and simplifications to the current disclosure regime are also proposed, e.g. the redesign of the disclosure form.  This will provide greater uniformity across the sector further reducing compliance costs associated with the disclosure obligations.

The May 2008 issue of the Australian Banking and Finance Law Bulletin contains four articles of interest.

The June 2008 issue of the Australian Banking and Finance Law Bulletin contains two articles of interest.

The first article is entitled Personal property securities reform - draft Bill issued for consultation by Katrina Morgan. 
On 18 May 2008 Australian Attorney-General the Hon Robert McClelland MP released the Personal Property Securities Bill 2008.  The Bill is designed to overhaul Australia's disparate Commonwealth, state and territory laws relating to the perfection of security interests over personal property and establish a single national register, currently known as the "PPS Register".  As a result the Bill will extend the scope of security interests existing under Australian law and introduce a new priorities and enforcement regime.

The draft legislation, derived as it is from New Zealand's Personal Property Securities Act 1999, adopts concepts familiar in New Zealand such as "security interest", "attachment", "perfection" and "PMSI".

The online PPS register will make it possible to register a security interest before an agreement for that security interest is entered into.  Priority of security interests will date from registration.  If two interests are perfected, other than by control, the first in time will have priority.  Where two security interests are both perfected by control the first to take control will have priority.  For unperfected security interests, the first interest to attach will have priority.  Purchase Money Security Interests, or PMSIs will confer a "super-priority".

There will be a 24 month transitional period during which security interests which are not migrated to the new system will retain their existing priority.  Following this period the existing priorities will continue unless there is an insolvency or bankruptcy.  Thus the 24 month period will need to lapse before the PPS Register will become a reliable record of existing security interests.

The second article is entitled Proposed national consumer credit regulation and unfair contract terms legislation recommended by Alison Deitz which provides a summary on the:

• Final Productivity Commission Inquiry Report - Review of Australia's Policy Framework ("PCIR") which recommended a national uniform consumer law for Australia and that unfair contract terms legislation be introduced as part of that recommendation; and
• Department of the Treasury Green Paper - Financial Services and Credit Reform ("Green Paper") which proposed a new Australian national regime aimed at improving, simplifying and standardising financial services and credit regulation.

PCIR
The PCIR was released in response to the Australian Government's request to the Productivity Commission ("PC") to undertake an inquiry into Australia's consumer policy framework and administration.  The PC recommended a new generic law, based on the consumer protection provisions of the current Trade Practices Act 1974 (Cth), to:

• apply uniformly in all jurisdictions of Australia; and
• apply to all consumer transactions, including financial services.

The Australian Securities and Investments Commission (ASIC) would be the primary regulator for financial services, including consumer credit and finance broking.

It has been recommended that responsibility for the regulation of credit providers and finance brokers (currently state/territory based) be transferred to the Australian Government.
The new credit regime should:

• cover all consumer credit products and finance broking services;
• use the current Uniform Consumer Credit Code (UCCC) as a template for national legislation, to be separate from the financial services regulatory regime, with appropriate modifications; and
• include a national licensing system for finance brokers, and a licensing or registration system for credit providers, with an approved dispute resolution service.

The PCIR also recommended that unfair contract terms regulation be incorporated in the new national uniform consumer law in relation to standard form, non-negotiated contracts such as standard consumer credit contracts and finance broking contracts.

A term would be "unfair" when, contrary to the requirements of good faith, it causes a significant imbalance in the parties' rights and obligations.  This would be similar to current Victorian state and United Kingdom legislation.

Green Paper
The Green Paper outlines a way forward for the Commonwealth and the states to transfer the remaining financial services regulation from the state level.  Under the plan, financial services, including mortgages, mortgage brokers, margin lending, non-bank lending and trustee companies, will be regulated by the federal government.

Issue 8, 2008 of the Journal of International Banking Law and Regulation contains an article entitled Financial markets and the biggest banks: lessons to be learned by Michael McKee.

The article describes and examines the recent disruptions and losses suffered in the financial markets during the period from June to December 2007 due to concentrated exposure to securitisation of US sub-prime mortgages.  It also contains a description and analysis of an article published on 6 March 2008 by the Senior Supervisors' Group of various supervisory authorities* entitled "Observations on Risk Management Practices during the Recent Market Turbulence" ("SSG article"). 

The SSG article found that the super-senior tranches of collateralised debt obligations ("CDOs") had proven much less safe than firms had anticipated and once liquidity in the securitisation market dried up in August 2007 those tranches could not be on-sold.  Firms which had created structured investment vehicles ("SIVs") as conduits for off-balance sheet securitisations had not sufficiently assessed the risk that the liabilities might have to be taken back onto their balance sheet, whether because of a legal obligation or reputational risk.  As firms consolidated the liabilities of the SIVs their own liquidity shrank.

Not all firms had suffered to the same degree.  According to the SSG article, the firms that had performed better during this period tended to view their exposures and risk on a firm-wide basis.   Internally, management in these firms shared quantitative and qualitative information more effectively across business segments and communicated more effectively at senior management level.  Senior managers had applied their own experience and judgement rather than relying purely on risk models and systems.  This allowed them to better align the activity of their treasury teams and manage their overall positions.

The SSG article highlighted four practices that improved firms' performance:

1. a strong partnership between senior executives and risk managers;
2. the application of independent and vigorous valuation practices rather than placing undue reliance on credit ratings;
3. the effective management of funding liquidity and the alignment of treasury teams with firm-wide risk processes and data; and
4. risk systems that drew from a variety of sources and a range of underlying assumptions.

Treasurers who kept in close touch with, and understood different business lines, better understood the contingent liquidity risk of products.  This helped them price risk internally and externally in such a way as to incentivise more prudent risk taking by business managers.

A risk that was ignored by firms was the increased tendency to omit material adverse change (or MAC) clauses from contractual documentation for syndicated lending.  The lack of MAC clauses limited the scope for firms to reduce their exposure to particular transactions.

The Financial Stability Forum** drew on the SSG article in the formulation of its Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience ("FSF Report").  This report is also discussed in the article.  The FSF Report proposed action in five areas to strengthen the global financial system:

• Strengthened prudential oversight of capital, liquidity and risk management.
• Enhancing transparency and valuation.
• Changes in the role and use of credit ratings.
• Strengthening the authorities' responsiveness to risks.
• Robust arrangements for dealing with stress in the financial system.

The article concludes by making a number of predictions of the regulatory implications of the market turmoil.  The predictions include:

• An acceleration of closer global cooperation between regulators.
• Increased focus on prudential regulation and liquidity.
• Less emphasis on prescriptive rules and more emphasis on monitoring and supervision of financial institutions.
• Re-weighting of capital requirements will make securitisation less attractive and financial institutions will hold more assets on balance sheet, dampening the availability of credit and economic growth.
• Increased focus on the quality of personnel within risk management and senior executive roles.

 

* The French Commission Bancaire, the German BaFin, the Swiss, EBK, the UK's FSA and the following U.S authorities: Federal Reserve Bank of New York, Board of Governors of the Federal Reserve System, the OCC and the SEC.

** The Financial Stability Forum, comprising treasuries, central banks, and supervisors in important financial centres, as well as certain international financial institutions, was convened in April 1999 to promote international financial stability through information exchange and international co-operation in financial supervision and surveillance.  It makes recommendations to the G7 industrial countries.

The May 2008 issue of Butterworths Journal of International Banking and Financial Law contains the article The difference a year makes in regulation by Joanna Gray.  The article asks where to now for risk-based financial regulation in the current economic climate.

The author notes that just over a year ago, in March 2007, the UK and its main financial sector regulator, the Financial Services Authority ("FSA"), were being praised, particularly in comparison to the more onerous requirements of its US counterparts.  Since then, turmoil in international finance markets and the collapse of Northern Rock plc ("Northern Rock") have caused the FSA and its methods to come under greater scrutiny.

The FSA, along with the Bank of England and Treasury, has taken a risk- and principles-based approach to regulation of the financial sector with the central aim of minimising risk.  Reports into the events leading to the run on Northern Rock have been critical of the FSA's supervision and queried the FSA regulatory framework.  The FSA has admitted a lack of intensity and rigour in its supervision of Northern Rock but maintains that it is the operation and not the nature of the process that was flawed - that the drying up of the interbank wholesale market leading to Northern Rock's problems was not a foreseeable risk; that it was an unforeseeable 'unknown' that materialised.  The FSA remains committed to keeping risk as the organising principle at the very heart of its supervisory processes.  The author describes this commitment as 'striking' and believes that for it to be justified, there needs to be greater acknowledgement that such uncertainties and unknowns will continue to exist and not be covered.

The June 2008 issue of Kanganews contains a short article entitled RBNZ repo changes are positive, triple-As say.  The article described the positive reaction of New Zealand's two largest supranational Kauri bond issuers, European Investment Bank and Nordic Investment Bank, to the Reserve Bank of New Zealand's announcement that it is to abandon limits on the amount of paper from Supranational, Sovereign and Agency ("SSA") issuers that it will accept for the purposes of repurchase transactions. 

The RBNZ has also announced that it will, for the first time, accept domestic bank, local authority and state-owned enterprise paper rated AA- or above and triple-A rated New Zealand dollar Residential Mortgage Backed Securities (or RMBS).  Both European Investment Bank and Nordic Investment Bank are of the view that the wider range of available securities will not significantly decrease demand for bonds issued by SSAs because investors will differentiate between SSAs and other issuers, especially given the recent financial crisis.  The banks also take comfort from their experience in the Kangaroo market in which similar changes to repo eligibility criteria were made in September 2007 with no negative impact on the banks' trading levels or their targeted funding volumes.

The RBNZ insists that its latest changes are not permanent and will be reviewed after 12 months.  Bank of New Zealand has expressed the view that the RBNZ will not want to include securities issued by banks it regulates for any longer than it has to, due to the conflict with its position as a regulatory and overseer.  BNZ expects that the list of things that will remain eligible is quite short and will consist of government, SSA Kauri and all triple-A and double-A rated municipal issues.

Until recently, all "vanilla" Kauri bonds had been issued only into the wholesale market.  This changed with the International Bank for Reconstruction and Development (World Bank)'s retail medium term note offer which launched on 18 June and closed on 11 July 2008.

To make a retail offering in New Zealand an issuer must usually file a prospectus, a procedure which most offshore borrowers regard as too time-consuming and expensive to make issuance worthwhile. 

The World Bank's retail offer was facilitated by exemptions obtained from the Securities and Financial Reporting Acts.  The Securities Act (World Bank) Exemption Notice 2007 permitted the World Bank to offer debt securities under its global debt issuance facility to New Zealand retail investors under an investment statement, but without a prospectus or New Zealand trustee (that is, it is substantively similar to the exemption for registered banks).  The conditions for the exemption included that the World Bank would make available to New Zealand investors its most recent prospectus for its global programme and the most recent Information Statement that it prepares annually in accordance with its charter. 

The policy reasons underlying the exemption included the very high credit quality of the World Bank (which has maintained a AAA rating continuously since 1959), the fact that New Zealand is a member of the organisation, and the high quality of the information that the World Bank regularly publishes about its operations and financial condition.

The World Bank also obtained an exemption from the requirements of the Financial Reporting Act on the condition that it submit audited annual financial statements in accordance with US GAAP.

The June 2008 issue of the Company and Securities Law Journal contains the article Shareholder litigation after Sons of Gwalia Ltd v Margaretic by Elizabeth Boros which examines the decision of the High Court of Australia in Sons of Gwalia Ltd v Margaretic (2007) 81 ALJR 525; [2007] HCA 1 and its implications for shareholder litigation. 

Mr Margaretic bought shares in Sons of Gwalia Ltd on the market.  Eleven days later, administrators were appointed to the company, and the value of the shares was nil.  Mr Margaretic claimed that the company had breached its continuous disclosure obligations, and therefore that it had engaged in misleading or deceptive conduct.  Mr Margaretic claimed damages equal to the amount of his loss. 

The central issue in the case was where Mr Margaretic's claim ranked in the administration.  This was governed by s 563A of the Corporations Act 2001 (Cth), which had been incorporated into the deed of company arrangement.  Section 563A provides that payment of a debt owed by a company to a person in the person's capacity as a member of the company, whether by way of dividends, profits or otherwise, is to be postponed until all debts owed to, or claims made by, persons otherwise than as members of the company have been satisfied.  Therefore, the question before the court was whether the damages claimed would be owed to Mr Margaretic in his capacity as a member.  If this was the case, Mr Margaretic's claim would rank behind the claims of other unsecured creditors.  If this was not the case, then his claim would rank equally with other unsecured creditors. 

Priority was critical given the company's financial position.  It was only if Mr Margaretic's claim ranked with those of other unsecured creditors that there was a chance he would receive any damages.  Given that there were other shareholders who could make the same claim as Mr Margaretic, the decision would also have major ramifications for the unsecured creditors.

At all levels of decision, including by a six-to-one majority in the High Court, it was held that Mr Margaretic's claim was not brought in his capacity as a member and that his claim therefore ranked equally with those with other unsecured creditors.

Underlying the decision is the consideration that the continuous disclosure requirements are designed not just for members but for the investing public generally.  Boros suggests that the effect of the High Court's decision is that claims based on misrepresentation and investor and consumer protection provisions by subscribing and transferee shareholders are to be treated in the same way.

An additional factor supporting this conclusion was that Mr Margaretic's claim was not founded on rights obtained or obligations incurred by virtue of his membership as a shareholder.  The High Court also considered that, as the need to protect investors often arises only in the event of insolvency, the protection would be illusory if claims arising under that protection were subordinated to the claims of ordinary creditors.

The July 2008 issue of the New Zealand Law Journal contains the article Receivers' liability in urgent relief applications by Matt Sumpter.  The author uses the context of an application for an interim injunction by a newly appointed receiver (which requires the applicant to give the usual undertakings as to damages) to examine personal liability and the operation of indemnities and priority of payments under the Receiverships Act 1993 and contract (specifically the security agreement and/or the specific instrument under which the receiver is appointed).

The article notes that if the subject company has sufficient realisable assets, ensuring receivers are not (in fact) personally liable to make payment under the undertaking is most beneficial as it allows defendants to rely on the undertaking should they prevail at trial; it enables receivers to exercise commercial judgement without fear of losing the family home; and security holders can be sure all is being done to realise as many cents in the dollar as possible.

This is practically achieved (in statute) by the operation of section 30(2) of the Receiverships Act and (in contract) by specific provision in the security agreement and/or the appointment instrument, which generally provides that any payment made under the undertaking may (on this point the author recognises contention) constitute 'expenses' of the receiver and as such be payable from the receivership assets in priority to preferred and secured creditors (including the appointing creditor).

The author suggests that everyone unhappily embroiled in disputes involving insolvent companies would benefit from clear direction that moneys secured from receivers' enforcement action can be applied first, inter alia, in payment or retention of all liabilities incurred and payments made by or on behalf of the receiver as a result of any enforcement action against the charged assets taken in the company's name.  And further the onus is on the lawyers drafting these provisions to make that clear direction.

On 31 July the Securities Industry and Financial Markets Association ("SIFMA") Credit Rating Agency Task Force ("Task Force") issued 12 recommendations for credit rating agency reform. 
The Task Force was formed to examine key issues relating to credit ratings and credit rating agencies.  It is comprised of 37 members from the financial services industry across the US, Europe and Asia. 

To determine priority areas of focus, the Task Force first identified the credit rating related causal variables that played a significant role in triggering the credit crisis of the past year.  Sixteen key issues were identified and ranked in order of importance.  The recommendations address those issues that topped the list, including transparency, model quality and surveillance.

The recommendations include enhancing disclosure of rating methodologies, due diligence information, surveillance procedures, credit rating agency performance and fees.  The recommendations also encourage a more harmonized and convergent global regulatory framework and independent risk analyses by investors.  The Task Force also identified the need for industry members, globally, to provide expert input and advice on issues related to credit ratings to regulators, lawmakers and other market participants. To this end, the Task Force recommends the creation of a global, independent industry Credit Ratings Advisory Board, under the auspices of SIFMA, to provide expert in put and advice on issues relating to credit ratings.

The Task Force believes that if the recommendations are followed, it will enhance investors' ability to better understand the credit rating agency inputs and methodology which will allow investors to incorporate ratings appropriately in their own internal risk assessments.

The United Kingdom's financial sector regulator, the Financial Services Authority ("FSA") has released Feedback Statement 08/5 ("FS08/5"), covering the responses received to Discussion Paper 07/6: Definition of Capital ("DP07/6"), released last year. 

DP07/6 set out the FSA's preliminary thinking on defining and measuring of capital for the purposes of meeting minimum capital requirements - Pillar 1 of the Basel II capital adequacy framework.  The paper reiterated FSA's commitment to moving towards more principles-based regulation but also covered the FSA's interpretation of going and gone concern capital, appropriate limits, reserves and deductions and finally how these regulations are applicable to building societies, partnerships and limited liability partnerships.  This is with a view towards possible amendments to the European Union's capital requirements directive regarding hybrid capital instruments and also the Basel Committee's review of capital. 

Key points raised included:

1. The categorisation of capital according to its purpose as going or gone concern capital (though the definition of "going concern" needed improvement) was broadly supported.
2. Enhanced loss absorbency features for hybrid instruments were not supported and respondents stressed they did not want to affect the relative ranking of hybrids and ordinary shares.
3. It was suggested the FSA should focus preventing cash outflows in periods of financial stress and that cancellation of coupons and suspension of redemption should be the primary mechanisms for achieving this.
4. Most respondents would be supportive of greater recognition of both contingent capital securities and dated instruments. However, it was acknowledged these would need to be subject to robust safeguards to ensure they could be called upon if needed.
5. There was a general consensus that current tier 1 and 2 capital categories do not entirely fit with the going and gone concern approach and the FSA has acknowledged it will need to investigate this further.
6. There was widespread support for minimum core capital limits and a change to the current approach on limits that would eliminate the negative gearing effects that can result from incurring unexpected losses.
7. Deductions were highlighted as an area in need of review, mainly in relation to the treatment of investments in subsidiaries and qualifying holdings.

The industry recognised that building societies, partnerships and limited liability partnerships should be subject to the same principles for capital as banks but that allowances needed to be made for the differences in corporate structure, access to different fundraising methods and risk profiles.

Freshfields Bruckhaus Deringer LLP reports that the Committee of European Banking Supervisors (CEBS) has published a paper entitled Range of practices on some Basel II implementation issues which has specific cross-border relevance.

In the past year CEBS has been involved in collecting and analysing Basel II implementation issues which cross-border banking groups and their supervisors believe to be the most challenging from a cross-border perspective.  CEBS's paper looks into the most important issues analysed so far.  For some of the issues mentioned, a concrete answer is given, whereas for other issues a catalogue of pragmatic approaches is provided.

The approaches identified in this paper are real-life examples of specific applications of the European Capital Requirement Directive and CEBS guidelines to the banking groups represented in the sample of banks taking part in the work of CEBS in relation to operational networking.  As a result, they are not intended to be generalised solutions nor to be read by institutions as a limitation on the identification of approaches which may be better suited to their specific needs.

This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com

The transmission/publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance to any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact:

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