Contents:
August 2009
Contents:
The case of UDC Finance Ltd v Down (CA 587/2008[2009] NZCA 192) involved an appeal by UDC Finance Ltd ("UDC") against the High Court's refusal of its application for summary judgment against Carol Margaret Down ("Ms Down") as guarantor of the indebtedness of 123 Metals Ltd (In Liquidation) ("Company").
Ms Down was a director and the sole shareholder of the Company and had successfully resisted UDC's application on the grounds of undue influence from her husband and Mr Moorhead, the Company's accountant and chief executive. UDC's appeal argued that Ms Down had not satisfied the evidential onus upon her to establish that defence.
To have successfully resisted UDC's application, the Court of Appeal noted that Ms Down had to provide an evidential basis for the defence of undue influence, supporting her contentions that (1) there had been undue influence and (2) UDC was on inquiry as to the risk of undue influence.
With regard to the first contention, Ms Down had to show as a matter of fact that she placed trust and confidence in either her husband or Mr Moorhead with respect to her financial affairs. The Court found that an employer's reliance on an employee's recommendation cannot, on its own, constitute undue influence. Further, Ms Down had a commercial relationship with the debtor. Those engaged in business can be regarded as capable of looking after themselves and understanding the risks involved in the giving of guarantees. The rule in Etridge and Hogan affirmed.
Ms Down also provided no evidence from which it could be inferred that UDC was on inquiry as to the existence of undue influence. She had signed an acknowledgement stating she either had independent legal advice prior to executing the documents or that if not, that was her own choice freely made. Further, it was clear that information about the role of her husband in running the Company was kept from UDC. As director, she had the means and duty to take care to ensure that the funds were used for the purposes for which they were borrowed. Instead, she failed to do so and let others run the company.
Hence, the equity of the situation strongly favoured UDC. The evidential threshold had been set too low by the High Court, and the appeal allowed.
In the case of Re Huntleigh Downs Limited and others; ex parte Fisk and Sanson (HC Wellington CIV-2009-485-1498 11 August 2009 Gendall AJ), the High Court exercised its power in section 281 of the Companies Act 1981 ("Act") to allow the applicants to be appointed and act as liquidators of a group of companies. The applicants belonged to a firm that had provided professional services to the company, or that had a continuing business relationship with the company and its secured creditors, in the two years immediately before the announcement of liquidation (see sections 280(1)(ca) and (cb) of the Act).
Following previous cases, Associate Justice Gendall granted the order on the basis that there was no real conflict of interest which would compromise the applicants' ability to carry out their task as liquidators independently, professionally and effectively. The applicants had not been personally involved in the continuing business relationship between the firm and the secured creditors. The professional services that one of the applicants had provided to the companies were considered minimal.
DM Blanchett & Anor as Liquidators of Gentry Residential Limited (in liquidation) v The Roofing Specialists Limited
The High Court's decision in DM Blanchett & Anor as Liquidators of Gentry Residential Limited (in liquidation) v The Roofing Specialists Limited (HCHamilton CIV-2007-419-1691 5 May 2009 Allan J) was the first concerning a liquidator's application to set aside a preferential transaction since the Companies Act 1993 ("Act") was amended in November 2007.
Because all the relevant events occurred prior to 1 November 2007, the Court determined that sections 292 and 296 of the Act remained applicable in their earlier form. This meant the High Court had to consider whether the payments were made "in the ordinary course of business" to determine whether they were voidable transactions.
This also gave rise to a procedural issue because the respondents had not addressed whether the payments were in the "ordinary course of business" in their notice of objection to the liquidator (Section 294(4) of the Act requires the creditor to set out full particulars of its reasons for objecting to the payment being set aside).
The High Court was satisfied that the respondent ought to be permitted to pursue arguments on the issue of whether the transactions were in the "ordinary course of business" because (a) there had been sufficient compliance with s294(4), having regard to the intention of Parliament and the interests of justice, and (b) the omission was not fundamental.
On the question of whether the payments were made "in the ordinary course of business" the High Court found that because the respondents applied significant pressure to obtain the payments (including appointing a debt collecting agent before one of the payments was due) the payments were not made in the ordinary course of business. Accordingly the payments constituted voidable transactions for the purposes of section 292 of the Act and should be set aside.
The respondents applied for relief under section 296 of the Act. Justice Allan rejected this application because there was no evidence that the respondents had altered their position after receipt of the payments, as required by section 296(3)(c) of the Act. The respondents were ordered to repay all amounts received to the liquidator together with interest and costs.
Toyota Finance New Zealand Limited v Christie and Ors (HC AK CIV-2009-404-3797 15 July 2009 Asher J) involved an application for an order maintaining a security interest under s167 of the Personal Property Securities Act 1999 ("PPSA") by Toyota Finance New Zealand Limited ("Toyota").
The first respondent, Christie, was the sole director and operator of Gateway Contracts Limited (In liquidation) ("Gateway"). Toyota provided finance to Gateway to purchase a vehicle, which was guaranteed by Christie. A three-year agreement was signed and near expiry was extended for another three years. Upon the expiry of the extended loan, a third loan agreement was entered into between Toyota and Christie (Gateway no longer being a party to the loan). Toyota registered its security interest in the vehicle under the PPSA under all three finance agreements. Gateway was later placed into liquidation by the second respondents ("the Liquidators”) who asserted that the vehicle was the property of Gateway, not Christie.
The issue was whether Christie owned the vehicle when the third finance agreement was entered into. If Christie had no title in the vehicle, no security interest could be given under the third loan agreement, and Toyota would have no right to maintain its registration. The Liquidators challenged the security interest under s162 of the PPSA on the grounds that no valid security agreement existed between Toyota and Christie in relation to the vehicle.
Under s167 of the PPSA, the registration of Toyota's financing statement could only be maintained if the Courts were satisfied that none of the grounds for making a demand under s162 existed. Asher J compared the maintenance of such a registered security interest to that of an application to sustain a caveat under s145A of the Land Transfer Act 1952 ("LTA") and that the same test should be applied, being:
- the person seeking to maintain the registration has the onus of establishing a sufficient interest; and
- it must be seriously arguable that a security agreement exists between the relevant parties.
Christie swore an affidavit stating that there was a sale of Gateway's interest in the vehicle to him in his personal capacity. Christie had personally made the monthly payments under the third finance agreement. There was no evidence to suggest the transfer of the vehicle was a sham, or was for the express purpose of defeating the interests of the creditors of Gateway.
On the facts above, Asher J concluded it was seriously arguable that there was a security agreement between Christie and Toyota that maintained the security interest. As there was some doubt as to the validity of the security interest, Toyota has been ordered to issue further proceedings so the substantive issue may be determined.
WHK (NZ) Limited v Retail Media Limited (HC Auckland CIV-2009-404-3157 16 July 2009 Asher J)involved a partially successful application by WHK and others for continuation of interim relief orders and for orders to remove and replace a liquidator.
Retail Media Limited ("Retail Media") owed $2.4m to WHK (NZ) Limited ("WHK") and a group of unsecured creditors. On 26 May 2009 WHK filed proceedings to put Retail Media into liquidation. On 5 June 2009, Ekco Nominees Ltd ("Ekco") appointed Mr Gilbert as receiver of Retail Media. On 8 June 2009, the shareholders of Retail Media appointed Messrs Burgess and Young as liquidator.
In the first proceedings (15 June 2009), the High Court granted WHK interim orders restraining the receiver and the liquidators from, among other things, selling or dissipating any undertakings, assets or property of Retail Media.
In the second proceedings (1 July 2009), WHK was joined by the unsecured creditors as plaintiffs, and by the receiver, the liquidators and Ekco as defendants. Four substantive causes of action arose:
1) WHK and the other plaintiffs sought an order removing the liquidators under sections 241AA and 283 of the Companies Act 1993 ("Act").
Section 241AA has had effect from 1 November 2007. If an application has been filed for the liquidation of a company, section 241AA restricts the company from going into voluntary liquidation unless voluntary liquidation occurs within 10 working days after notice of the application is served on the company. The Court determined that it has the power, under section 283 of the Act, to review the appointment of any liquidator within the context of the operation of section 241AA and appoint a new one. However, there are no guidelines as to the basis on which such a power is to be exercised.
The Court suggested that in order to exercise its power to remove a liquidator there would need to be a suspicion, and a factual basis for that suspicion, as to whether the liquidator would carry out its duties, and show the requisite objectivity and independence. The Court concluded that the removal of a liquidator would be a serious event and that the facts in this case were not sufficiently extreme or urgent to warrant such a step, though there was a serious case to be tried.
2) WHK and the other plaintiffs maintained that Ekco did not have the power to appoint a receiver because Ekco was not owed any money by Retail Media.
The Court found no evidence that Ekco advanced any moneys to Retail Media. However, the Court stated that, on the facts, it was difficult to see how Retail Media could have resisted a claim by Ekco that it was owed the money because Retail Media had signed an acknowledgement that it owed money to Ekco. The Court therefore concluded that there was a serious question to be tried as to whether Ekco validly appointed the receiver.
3) WHK submitted that the words "unless the Court orders otherwise" in section 31(1) of the Receiverships Act 1993 gave the Court an unfettered discretion to order a receiver to cease acting.
The receiver argued that only the liquidator can apply under section 31 to prevent a receiver from acting. Asher, J rejected this argument. Section 31 was drafted broadly with the intention that any person with a legitimate interest in the affairs of the company, including unsecured creditors, could make an application to set aside a receiver's appointment. However, Asher, J, declined to make such an order because there was no basis for it; the plaintiffs had not shown that the receiver was not observing his duties under sections 18 and 19 of the Receiverships Act.
4) The plaintiffs sought an order that the receiver comply with his duties. Section 37 of the Receiverships Act gives the Court the power to make such an order and remove the receiver if he or she fails to comply.
Asher J held that there was a serious question to be tried in respect of this matter. This conclusion was based on the previous conduct of the receiver in relation to the liquidation of a company related to Retail Media and his personal conduct.
In Westpac New Zealand Limited v Alan John Clark (SC 67/2008)[2009] NZSC 73), the Supreme Court cleared Alan John Clark, a solicitor, of liability in a mortgage fraud which cost Westpac New Zealand Limited ("Westpac") $180,400.
Title to a residential property in Remuera (the "Property") was registered under the Land Transfer Act 1952 ("Act") in the name of Marie Antoinette Fenech. An imposter pretending to be Ms Fenech persuaded Westpac to agree to make an advance of $180,400, secured by way of mortgage against the Property. The impostor instructed Mr Clark to act on her behalf. Mr Clark undertook to register an "all obligations" mortgage promptly but negligently failed to do so. By the time Mr Clark presented the mortgage for registration, the Registrar had been informed by Westpac of its suspicion that the mortgage was a forgery and had caveated the title to the affected land. Westpac's suspicion turned out to be correct and the unregistered mortgage was a nullity.
Westpac sued Mr Clark, alleging that Mr Clark's failure to register the fraudulent mortgage caused Westpac's loss. Following the rule in Frazer v Walker, Westpac would have obtained an immediately indefeasible title as mortgagee under section 62 of the Act, since neither Westpac nor any of Westpac's agents was a party to the forgery.
The Supreme Court held that a registered mortgage, although indefeasible, secures nothing if the debt in respect of which it charges the land is an obligation derived from a forged and unregistered loan agreement. The Court would not strain to find that a reference in a registered document is apt to encompass an unregistered forged document and so provide the mortgagee with a security for a covenant to pay moneys for which no obligation was ever accepted by the registered proprietor.
In this case, the mortgage instrument incorporated Westpac's memorandum of mortgage ("Memorandum"). The Memorandum referred to loan agreements between the mortgagor and Westpac, in particular the covenant for payment which referred to "your Loan Agreement". The Memorandum stated that the money secured by the mortgage was "all money which you...may owe to Westpac". These references were plainly addressed to the true registered proprietor, Ms Fenech. As the loan agreement was executed by the impostor who was not the "you" spoken of by the mortgage or Memorandum, the impostor's covenant to pay in that agreement was not within the ambit of the registered documents. The covenant to pay in the loan contract was therefore not secured under the mortgage. It followed that Mr Clark's failure to register the mortgage did not cause Westpac any loss and Westpac's appeal was dismissed.
Elias, CJ, advanced two separate propositions that did not need to be considered further. First, Elias posited that because s103(3) of the Act requires that "a mortgage instrument must be executed by the registered proprietor", the forged mortgage was not in registerable form, and the necessary causative elements of a claim in negligence might fail. Secondly, if any loss was suffered as a result of the failure to register a forged mortgage it could be too remote.
The case of Newcastle Building Society v Mill and others [2009] EWHC 740 addressed the issue of whether a clause excluding set-off was effective in respect of instruments of deposit issued by a UK building society and an Icelandic bank to each other.
Newcastle Building Society ("NBS") acquired instruments of deposit issued by a subsidiary of Iceland's Kaupthing Bank ("KSF"). Subsequently, KSF purchased a certificate of deposit from NBS ("NBS CD") in an unrelated transaction. The deed that the NBS CD was issued under provided that all payments "shall be made without set-off, counterclaim or other deduction, save as required by law". The NBS CD was a dematerialised security settled through the CREST system (operated by Euroclear). The rules of CREST provide that any security transferable through its system must be transferable free from "any equity, set-off or counterclaim".
Following the collapse of the Icelandic bank, KSF was placed into administration. NBS applied to the court seeking a declaration that KSF was not entitled to payment under the NBS CD because NBS had a legal right of set-off arising out of KSF's liability under the first transaction.
NBS relied on section 49(2) of the Supreme Court Act 1981 (UK) to argue that set-off is mandatory where there are mutual debts between two parties and one party is insolvent, notwithstanding any agreement to the contrary. Alternatively, NBS argued that only the equitable right of set-off was excluded under the NBS CD.
Although NBS's primary submission had support from an old line of authorities, its correctness had been considered before in Hong Kong and Shanghai Banking Corporation v Kloeckner [1990] 2 QB 514. In that case, Hirst J refused to follow cases dating back to the 18th century and held that a party was entitled to rely on a clause excluding any legal right of set-off. The approach was followed in Coca-Cola Financial Corporation v Finsat International [1998] QB 43.
The Chancellor of the High Court concluded that even if he were not bound by the decision in Coca-Cola, he would have agreed with Hirst J. He held that the right of legal set-off is permissive and an agreement to exclude this legal right should be treated as effective. Furthermore, there was no reason to construe the NBS CD and the CREST system as excluding only the equitable right of set-off. There were sound commercial reasons for reaching this conclusion - it is the essence of the CREST system that bargains are completed immediately. Furthermore, clauses excluding set-offs and counterclaims are agreed for the good reason that neither party's right should depend on the continuing solvency of the other.
On 25 August 2009, the Government announced that it would extend the opt-in Crown Retail Deposit Guarantee Scheme ("Retail Guarantee") to a new expiry date of 31 December 2011, and amend some of the current terms and conditions. On 12 September 2009, the Crown Retail Deposit Guarantee Scheme Act 2009 was passed and provides (among other things) legislative authority for any guarantee payments.
The new Retail Guarantee will commence on 13 October 2010 (being the expiry date of the current Retail Guarantee). The new terms and conditions include:
- Fees paid by participating institutions will be changed to reflect their risk profile (assessed by both credit rating and type or organisation).
- Eligible bank deposits will be covered up to a maximum NZ$500,000 per depositor per institution and eligible non-bank deposits to a maximum NZ$250,000 per depositor per institution. The maximum in the current Retail Guarantee is NZ$1,000,000 per depositor per institution.
- Deposit-taking institutions with a credit rating of BB or higher can apply to participate in the new Retail Guarantee. Institutions with a lower credit rating or no rating will not be eligible despite being included in the current Retail Guarantee.
- Collective investment schemes will not be eligible for the new Retail Guarantee.
For further information about the new Retail Guarantee visit: http://www.treasury.govt.nz/economy/guarantee/retail/retailextension
New regime for statutory supervisors and trustees that supervise debt security issuers and collective investment schemes
On 26 August 2009, the Minister of Commerce, Simon Power, announced that the Government will introduce a new regime for statutory supervisors and trustees that supervise debt security issuers and some collective investment schemes. The proposals for the new regime include:
- removing the automatic right for the six statutorily approved trustee corporations to supervise debt security issuers and some collective investment schemes;
- requiring trustees to be licensed by the Securities Commission;
- strengthening the minimum substantive terms contained in trust deeds and trustees' powers;
- requiring trustees to report to the Securities Commission when debt security issuers may be nearing default on issued securities;
- empowering the Securities Commission to direct trustees to take action against debt security issuers; and
- enhancing enforcement against trustees that fail to comply with their duties.
It is expected that draft legislation in relation to the above will be introduced to Parliament by the end of this year.
On 24 August 2009, the Securities Regulations 2009 ("2009 Regulations") were published. The 2009 Regulations will come into force on 1 October 2009.
Securities offered in a prospectus that is registered on or after 1 October 2009 but before 30 June 2010 will be subject to the 2009 Regulations unless the issuer elects to comply with the Securities Regulations 1983 ("1983 Regulations"). From 1 July 2010 the 1983 Regulations will be revoked, and all prospectuses registered on or after that date must comply with the 2009 Regulations. However, a prospectus subject to the 1983 Regulations before 1 July 2010 may still be used to offer securities after 1 July, and remain subject to the 1983 Regulations as if they had not been revoked.
A number of noteworthy changes from the 1983 Regulations will be introduced by the 2009 Regulations, and a summary from the perspective of debt issuers is set out below.
Prospectuses
Simplified disclosure prospectus
The 2009 Regulations prescribe when a public issuer (ie, an issuer subject to the continuous disclosure requirements of a registered exchange) may offer debt securities to the public via a simplified disclosure prospectus without being required to prepare and register a full prospectus or prepare an investment statement. The simplified prospectus regime was introduced into the Securities Act 1978 by the Securities (Disclosure) Amendment Act 2009 (see the July issue of BLU).
A simplified disclosure prospectus may be used by a public issuer offering securities to the public if:
- Debt securities of the same class as listed securities: the securities offered ("new securities") are of the same class as securities of the issuer that are listed at the time of the offer, the simplified disclosure prospectus only relates to an offer of the new securities, and immediately after allotment, the new securities will be listed (see Regulation 9 of the 2009 Regulations); or
- Debt securities that rank equally with, or in priority to, listed securities: the securities offered ("new securities"), in a liquidation of the issuer, rank equally with, or in priority to one or more debt or equity securities of the issuer that are listed at the time of the offer, and the simplified disclosure prospectus only relates to an offer of the new securities (see Regulations 10 and 11 of the 2009 Regulations). Securities offered in a simplified disclosure prospectus under Regulation 10 do not need to be listed after allotment.
Short form prospectus
The short form prospectus regime has been extended to also apply to offers of units in unit trusts. Further, certain features of the Securities Act (Short Form Prospectus) Exemption Notice 2009 are now included in the 2009 Regulations. For example, in certain circumstances, an issuer may rely on a notice containing the statements specified in section 209(1)(b) of the Companies Act 1993 (being a notice that refers to an annual report that includes the latest financial statements) with necessary modifications as the method of making the issuer's financial statements available.
Full prospectus for debt securities
Schedule 2 of the 2009 Regulations, which prescribes the requirements for a full prospectus for debt securities:
- has been made more flexible to deal with situations where the price or other consideration for the securities is not a fixed amount so that the requirement to specify the price of the securities can be by description of the manner by which the price is fixed;
- prescribes greater disclosure in regards to guarantors (eg, whether there are any contingent liabilities that could materially affect the net tangible assets of a guarantor);
- provides that only restrictions on directors' powers need to be disclosed, not modifications and exceptions;
- provides that the requirements for disclosure of the nature and use of assets of the borrowing group are extended to all principal assets, not just principal fixed assets. Whether or not the assets are subject to obligations in favour of third parties that affect the ability to deal with the assets must also be disclosed;
- requires disclosure of fundamental uncertainties to be stated in an auditor's report, and not only the auditor's qualifications;
- aligns the basis for preparing financial statements with the Financial Reporting Act 1993. This differs from the 1983 Regulations which prescribe the matters that must be contained in the financial statements prepared for a prospectus.
Investment statements
The 2009 Regulations now permit cross-referencing of contact details in investment statements. Schedule 13 (which prescribes the contents of a full prospectus for debt securities, and corresponds to schedule 3D of the 1983 Regulations) provides that the names of directors of the issuer and (if applicable) the manager must also be disclosed in the investment statement. Further, if the investment statement relates to a fixed-term deposit product offered by a registered bank, then the heading "engaging an investment adviser" and the information under that heading must be omitted (cf clause 1(1) of Schedule 3D of the 1983 Regulations).
Advertisements
Part 3 of the Regulations 2009, which prescribes the requirements for advertisement:
- provides that the net assets or total assets and total liabilities of the borrowing group may be stated in an advertisement if these amounts are contained in an interim statement of financial position that is contained in a registered prospectus or attached to a certificate that extends the life of a prospectus under section 37A(1A) of the Securities Act. The 1983 Regulations only permit an advertisement to contain this information if amounts are shown in the most recent audited consolidated statement of financial position of the group;
- permits, in the case of an advertisement containing prospective financial information, the principal assumptions and method of calculation to be contained in the advertisement rather than requiring those matters to be contained in the registered prospectus (cf regulation 15 of the 1983 Regulations);
- enable a director to authorise an agent to sign the certificate required for advertisements on the director's behalf. Certain advertisements containing limited information do not requirement a certificate to be completed, and the 2009 Regulations clarify that these advertisement must only contain the permitted information that is applicable, but no other information (cf regulation 17(3) of the 1983 Regulations).
Restrictions on content of registered prospectuses and advertisements
Part 4 of the 2009 Regulations, which restricts certain content of prospectuses and advertisements:
- provides that a registered prospectus or an advertisement must not state or imply that investment in the securities to which it relates is free from risk. Regulation 20 of the 1983 Regulations simply provides that there can be no statement that the investment is free from risk;
- clarifies that an advertisement must not refer to any tax advantages in holding the securities unless a registered prospectus or, in the case of a registered bank, a disclosure statement that is referred to in the advertisement sets out a full statement of those advantages (cf regulation 21(2) of the 1983 Regulations);
- is less prescriptive than the 1983 Regulations in relation to the information that an issuer may set out in a registered prospectus or advertisement regarding the listing of the securities being offered.
On 25 August 2009, the Securities Act (Crown Wholesale Debt Securities) Exemption Amendment Notice 2009 came into force, and amends the expiry date of the Securities Act (Crown Wholesale Debt Securities) Exemption 2004 ("Principal Notice") from 31 August 2009 to 31 August 2014.
The Crown offers debt securities on a regular basis to wholesale investors, who then sell the securities to the public. Because the securities are originally allotted with a view to be on-sold to the public, the disclosure requirements of the Securities Act 1978 ("Act") apply to the secondary sale, and both the wholesale investor and Crown are deemed "issuers" for the purposes of the Act.
The Securities Regulations 1983 require investment statements to contain prescribed information about the issuer of a security. The Crown prepares the investment statements that are used by the wholesale investors in the secondary sale. However, at the time of preparation, the identity and details of the wholesale investors may be unknown, and the Principal Notice provides an exemption so that an investment statement does not need to contain certain prescribed details of the wholesale investor (being the second issuer) provided the subscriber receives this information before subscription.
On 1 September 2009, the Deposit Takers (Non-trustee Entities Risk Management) Exemption Notice 2009 ("Exemption Notice") came into force.
Section 157M (which also came into force on 1 September) of the Reserve Bank of New Zealand Act 1989 ("Act") requires each non-bank deposit taker ("deposit taker") (being a person that (1) offers debt securities to the public in New Zealand and (2) carries on the business of borrowing or lending money, or providing financial services, or both) to have and comply with a risk management programme ("programme").
Section 157N of the Act requires each deposit taker to provide its risk management programme to its trustee (being a trustee appointed in relation to debt securities offered by the deposit taker). The trustee may require the risk management programme to be amended if it is not satisfied it meets the requirements of the Act.
The Exemption Notice provides that each deposit taker is exempted from section 157N of the Act if the deposit taker:
- is not required by the Securities Act 1978 to have a trustee or a trust deed (eg, the debt securities offered by the deposit taker are to "exempt persons" under the Securities Act 1978); or
- is exempted from the requirements to have a trustee and a trust deed by an exemption granted under the Securities Act 1978.
The Exemption Notice is subject to the deposit taker providing a written statement to the Reserve Bank each year stating that its programme satisfies the requirements of the Act, and that the deposit taker has taken all steps to comply with the programme.
Pitfalls with property claims: Lehman Bros again
Guidance on the execution of documents at 'virtual' signings following the Mercury case
To contract or not to contract?
The first article is entitled Pitfalls with property claims: Lehman Bros again by Sarah Worthington and Ina Mitchkovska. The article examines the obstacles to successful proprietary claims in the event of insolvency, with reference to the insolvency of Lehman Brothers International (Europe) ("LBIE").
In September 2008, PriceWaterhouse Coopers ("PwC") was appointed administrator of LBIE. PwC's first task is to determine which assets comprise LBIE's insolvent estate and which assets must be excluded as legitimately the subject of proprietary claims of others.
The assets most likely to have been held in trust by LBIE, as the property of its clients, are 'Client Money' and 'Client Assets', which are subject to guidelines set down by the UK's Financial Services Authority ("FSA"). Whether the FSA's client money rules apply will depend in large part on the terms of the Prime Brokerage Agreements ("PBA") entered into by LBIE and its clients.
Interpretation of the underlying legal documents when determining whether a proprietary claim in securities exists has been an important feature of recent cases, such as Beconwood Securities Pty Ltd v ANZ Banking Group [2008] FCA 594.
The authors consider the difficulties involved in identifying a client's property given LBIE's size and complexity. The authors conclude the manner in which the LBIE administration is handled will play a vital role in influencing whether fund managers will continue to use UK prime broker services and how PBAs are drafted in the future.
The second article is entitled Guidance on the execution of documents at 'virtual' signings following the Mercury case by Emma Walton. It sets out the practical guidance prepared by a joint working party of the England & Wales Law Society and the City of London Law Society in respect of 'virtual' signings in light of the recent decision in R (on the application of Mercury Tax Group and another) v HMRC [2008] EWHC 2721 ("Mercury"). This case was discussed in the June edition of BLU.
The guidance specifically relates to the comments of Underhill J, in Mercury that a document must exist as a 'discrete physical entity' at the moment of signing and a party must sign an 'actual existing authoritative version of the contractual document'. While these comments were obiter and the joint working party was of the view that the Mercury case should be limited to its particular facts, the guidelines were considered desirable. The leading authority in relation to the execution of documents remains the Court of Appeal decision in Koenigsblatt v Sweet [1923] 2 Ch 314.
The guidelines propose three possible approaches to the execution of documents when conducting a virtual signing or closing:
- Option 1 involves the creation of a single electronic file containing the whole document and the relevant signature page.
- Option 2 relies on attaching, with due authority, a signature page to an identified final document. This option is not recommended for deeds.
Option 3 is suggested where pre-signed signature pages are to be used e.g. parties signing signature pages while documents are still being negotiated. Parties must then confirm that pre-signed signature pages can be attached to the final version. Again, this option is not recommended for deeds.
The third article is entitled To contract or not to contract? by Tom Hibbert and George Hoare. The article examines two recent examples of parties seeking to avoid arrangements which have become commercially unprofitable by claiming that the "agreement" is neither binding nor enforceable or too uncertain to constitute a legally binding contract.
In (1) Maple Leaf Macro Volatility Master Fund (2) Astin Capital Management Limited v Rouvroy and another [2009] EWHC 257 (Comm) the parties negotiated a term sheet, which was signed by the defendants but not another party. The defendants argued that the term sheet was neither binding nor enforceable.
As a general principle of contract formation, an agreement to negotiate is not enforceable. However the Court found that there is no legal obstacle to the parties agreeing to be bound while deferring important matters to be agreed and documented later. The question to ask is how a reasonable person versed in the relevant business would have understood the exchanges between the parties. In this case, on an objective assessment, the term sheet evinced an intention to be contractually bound and was not too uncertain to be workable. The Court also noted that the traditional analysis of contractual formation involving offer and acceptance is not prescriptive. To establish whether acceptance has occurred it may be appropriate to assess the cumulative effect of one party's conduct over a period of time.
In Bear Stearns Bank Plc v Forum Global Equity Ltd [2007] EWHC 1576 (Comm) the parties negotiated the sale of loan notes issued by two Parmalat companies, with the main focus being the sale price, which was agreed by telephone. Legal documents were to be prepared later to document the transaction. A dispute arose as to whether the telephone conversation created a binding contract.
The defendants argued that an agreement to agree is not enforceable and that an agreement is not contractually concluded if it leaves significant matters subject to the future agreement of the parties. The Court disagreed, noting expert evidence that the distressed debt market almost always operated on the basis of oral deals. Explicit words were needed to avoid a binding contract being made at the point at which the price was agreed.
The June 2009 edition of the Journal of International Banking and Financial Law contains the article "Contracting 'as trustee': a trap for the unwary" by Christopher Buckley. The article highlights that when a third party enters into a contract with a trust, that party will be contracting with the trustee, as a trust does not have its own legal personality.
The article examines how this relationship limits the rights that third parties enjoy against trusts, in particular their rights of recourse against the trust fund. Typically a trustee will be entitled to be indemnified from the trust fund for contractual obligations assumed as trustee. Buckley identifies three main situations in which a trustee may not be so entitled:
where liabilities have been improperly incurred by the trustee, i.e. the trustee did not have the power to enter into the particular contract or failed to comply with a required internal protocol;
- if the trustee is indebted to the trust, i.e. there is a claim against the trustee for breach of trust; and
- if the trust assets are insufficient to satisfy the claim.
- As a third party will be unaware that any of these scenarios has arisen, it will be unaware that its credit risk will be the trustee's ability to fulfil the obligation out of its own assets.
The article lists the steps that a trustee can take to avoid personally liability under contracts that he or she enters into as 'trustee', including:
- expressly limiting personal liability under any contract entered into as trustee, to the extent of the indemnity that the trustee is entitled to out of the trust fund;
- trading through a company or companies as separate legal entities; or
- obtaining an indemnity for any liabilities that the trustee may incur.
Buckley concludes that the law in this area needs to be clarified and should balance the position of creditors with the interests of the beneficiaries of the trust. The UK's law commission is to consider reform in this area.
This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com
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