December 2008

Contents:

 

CASES Clawing back transactions under the Companies Act 1993 Application for high court opinion under the Securities Act 1978 Material prejudice against subscribers of shares Claims on performance bonds The availability of set-off Grounds for liquidation Assessing defences to a statutory demand LEGISLATION The Securities Act (New Zealand deposit guarantee scheme) exemption notice The Reserve Bank announced further liquidity measures

SNIPPETS The receiver, "equitable execution" and foreign and future debts The impact of credit derivatives on corporate debt restructuring "shareholder creditors": further risk for directors of corporate trustees? The business of banking Risk in a climate of distrust: know your counterparty

The recent case of Vance v Bradbury (HC Wellington, CIV 2008-485-1237, 31 October 2008, Associate Judge Gendall) addressed the issue of a liquidator's ability to claw back the disposition of company property for inadequate consideration to a relative of a director under s298 of the Companies Act 1993 (the "Act'), and the standard of proof required for the liquidator to obtain a summary judgment.

Touchtec Equipment Marketing Limited ("Touchtec") was part of a group of companies run by Anderson. Anderson used these companies to invest money advanced by other people, one of whom was his mother ("Bradbury").  The liquidator of Touchtec ("Vance") sought to recover two payments of $20,000 made by Touchtec to Bradbury pursuant to s298 of the Act and applied for summary judgment.

Section 298 gives a liquidator the power to recover property where, during the three year period preceding the application for liquidation, the company disposed of property for inadequate or excessive consideration to a person who, at the time of the disposition, had control of the company, or a relative of such person.

Vance needed to show, to the standard required in an application for summary judgment, that:

• the payments were "property";
• Touchtec disposed of the payments to Bradbury;
• the distribution occurred within the "specified period";
• Bradbury was a relative of Anderson;
• Anderson "had control of" Touchtec at the time; and
• the value of the two payments exceeded the value of any consideration received by Touchtec.

The main issue was whether Touchtec "disposed of" the two payments. Bradbury argued that the two payments were not a disposition, but instead payment from Touchtec of money owed to Anderson, who in turn owed money to Bradbury. Bradbury also argued that s298 should be interpreted to only apply where the controller of the company benefits from the disposition. 

The Court held there was no arguable case that Touchtec did not dispose of the property. The defendant had cited Re An Ying International Finance in support of the proposition that the Court needs to be satisfied that there is no doubt as to who is making the payment. However, the Court held that An Ying was merely authority for the proposition that "it is a matter of fact in each case whether the payment in question is a payment by the company" as there was no factual evidence that there had been anything other than a disposition of company property, the Court found in favour of Vance. Further, the Court held that it would be inappropriate to incorporate a condition into s298 of the Act that the controller must benefit from the disposition.

Securities Commission v Contributory Mortgage Investments Ltd (HC Wellington, CIV 2008-485-792,19 November 2008, Dobson J)

The Securities Commission ("Commission") recently applied to the High Court for an opinion on questions of law for the first time under section 69O of the Securities Act 1978 ("Act").  The application related to whether certain expenses could be deducted by a contributory mortgage broker and its nominee in priority to the contributing investors. 

The Commission had been investigating the conduct of business by Contributory Mortgage Investments Limited ("CMI") and Contributory Mortgagees Nominees Limited ("CMN") since 2006 when they exercised powers under the Securities Act (Contributory Mortgage) Regulations 1988 (the "Regulations") to remove CMI as the broker with respect to two mortgages (the "Otahuna Mortgages").  The Commission wished to obtain the opinion of the Court on a list of issues, using the Otahuna Mortgages as an example, before determining whether further action was necessary. 

CMI had raised funds from contributors and arranged and administered mortgage advancements, with the funds being advanced through CMN.  When the mortgagors defaulted, CMI and CMN appointed receivers to operate the business, with the view it would be sold, resulting in a shortfall to the contributors.  At issue were expenditures claimed by CMI in priority to the contributors.  The Commission's view was that CMI and CMN had no legal authority to deduct these expenditures.

Dobson J, who was limited by the uncertain factual background, gave the following responses to the Commission's questions on the expenditures:

• There was no provision in the investment authority empowering CMI to obtain any payment derived from the proceeds of sale in priority to the contributors. 

• CMN and CMI were entitled to retain monies they received from the mortgagor as reimbursement of interest paid on behalf of the mortgagor but this did not extend to proceeds of sale.

• Any liabilities for unpaid collection fees could not be deducted from monies received by CMN as these fees, although owed to CMI, were unsecured.

• The appointment of a receiver was to be executed in accordance with the mortgage terms, which stated that any receivership was to be conducted at the expense of the mortgagor.  CMI and CMN thus had no power to deduct costs and losses incurred from the proceeds of sale.  The same applied for business expenses and operating costs, where the company had taken possession of the secured property.

• Any indemnification of CMI and CMN for costs of improvements to a property in anticipation of sale was limited to the minimum necessary to effect sale.  Any further investment was done at the risk of CMI and CMN.

A final question concerned the relationship between CMN, CMI and the contributors with the Commission querying if CMN was required to act on behalf of the contributors.  The Court found that CMN was a trustee and owed duties to the contributors as beneficiaries of the trust.  CMN could not allow its own interests to conflict with those duties.  Because CMN and CMI had common personnel CMI could be deemed to be on notice of unlawful payments contrary to the interests of contributors, making CMI a party to any breach of trust and potentially liable as well. 

Henderson Global Funds v Securities Commission (HC Wellington, CIV 2006-485-1376, 31 October 2008, Clifford J)

The applicants, Henderson Global Funds and Henderson UK and Europe Funds ("Funds") applied to the Court for relief under the Securities Act 1978 ("Act") from their liabilities as regards void shares held by 16 investors ("Objectors"). 

The shares were marketed in New Zealand through AMP Capital Investors (New Zealand) Limited ("AMP") in reliance on the Securities Act (Great Britain Collective Investment Schemes) Exemption Notices 1999 and 2004 ("Exemption Notices").  The Exemption Notices allowed shares to be offered to the public in New Zealand without registering a prospectus at the Companies Office.  The conditions to the Exemption Notices included that the prospectus prepared in the United Kingdom be filed with the Companies Office in New Zealand and that a key features document or an investment statement be made available to investors before they subscribed for the shares.

At various times the Fund failed to comply with the conditions of the Exemption Notices.  As a result some of the shares allotted to investors were void. The Funds were therefore liable to repay subscriptions together with interest as soon as practicable.

Sections 37AA to 37AL and sections 37B to 37G of the Act ("Relief Provisions") were enacted in 2004 to provide issuers with relief, in certain circumstances, from the liability to repay otherwise void securities. The Funds had been granted relief in respect of most of the shares because the investors in question did not object.

The grant of relief is mandatory under the Relief Provisions where the subscriber has been notified and not objected and, if the subscriber has objected, where the contravention of the relevant exemption notice is not materially prejudicial.

The grant of relief is discretionary under the Relief Provisions where the Court considers it "just and equitable" to do so having regard to all the circumstances relating to the allotment.

The Objectors' variously argued that they would not have invested in a company that could not maintain its regulatory filings, that not all the disclosure documents were available and that the early closure of the internet based service used to invest in the Funds forced the investors to realise their losses.  The first two arguments were rejected on the basis that the failure to comply would not have materially prejudiced the Objectors' decision to invest.  For non-compliance to be materially prejudicial there must be a causal nexus between the loss suffered and the failure to comply.  The third argument was rejected on a contractual basis as AMP was entitled to discontinue the internet service.

The Objectors' final argument was that they had never received the investment statement, as required by the Exemption Notice.  AMP asserted that there was no doubt that all relevant disclosure had been made to investors and that the compliance failures were technical only and accordingly that it was just and equitable for the Court to excercise it's discretion to grant relief.  Furthermore, section 37A of the Act created a separate regime whereby an investor could give notice at any time within the prescribed period if the allotment was voidable for failure to provide an investment statement.  The prescribed period of one year from allotment had expired. 

However, Justice Clifford found that, as the Relief Provisions direct the Court to give consideration to the circumstances which exist at the time of the allotments, the expiration of the prescribed period was not determinative.  AMP was unable to satisfy the Court as to whether the Objectors had received an investment statement before subscribing.  The Court held that "just and equitable" was to be construed by reference to the overall purpose of the Act.  It was not sufficient that the Objectors or their investment adviser had ticked a box to indicate they had received an investment statement.  AMP retained responsibility for compliance with the overall scheme of the Act as regards disclosure.  Accordingly Justice Clifford refused to exercise the Court's discretion to grant relief. 

Clough Engineering Ltd v Oil & Natural Gas Corp Ltd; (2008) 249 ALR 458

Clough Engineering Ltd ("Clough") had claimed interlocutory injunctive relief to restrain Oil and Natural Gas Corporation Ltd ("ONGC") from calling upon, and three Australian banks from paying under, performance guarantees issued by the banks.  The claim had failed and Clough appealed the decision.

Clough and ONGC had entered into a contract for Clough to develop oil and gas fields off the coast of India and construct associated onshore facilities.  Clough contracted to provide a performance bank guarantee which ONGC had the right to invoke "…in the event of the Contractor failing to honour any of the commitments entered into under this contract".  A dispute arose between Clough and ONGC and the contract was terminated by ONGC. On the same day the contract was terminated, ONGC made demands upon the banks under the guarantees. Clough obtained an interim injunction restraining ONGC.

The two principal issues that arose on appeal were whether ONGC was entitled to make a demand under the contract and the performance guarantees and, if so, whether a demand under the guarantees was "unconscionable" for the purposes of s 51AA of the Trade Practices Act 1974 (Cth) ("TPA").

The Court recognised that commercially, performance guarantees are equivalent to cash.  To introduce qualifications on these guarantees "…would be to deprive them of the quality which gives them commercial currency" (from Wood Hall Ltd).  Three exceptions to this principle of non-interference however, were identified: fraud, unconscionability and where the parties have contracted otherwise.

The importance of these guarantees led the Court to hold that "…clear words will be required to support a construction which inhibits a beneficiary from calling on a performance guarantee where a breach is alleged in good faith, ie, non-fraudulently." 

Clough had argued that a breach of the contract alleged in good faith was insufficient; an actual breach was required.  The Court disagreed, finding that the contract operated to allocate risk despite the existence of a dispute.  The Court also found that, given their commercial purpose, calling on the guarantees was not "unconscionable" under s 51AA of the TPA.

This case illustrates the recognition given by the courts to the position of performance bank guarantees in commerce.  The courts have pragmatically given effect to the commercial understanding that such guarantees are as good as cash.  There are very limited grounds of escape from a guarantee, and a court will not read a qualification into a guarantee without "clear words".

McCullough v Base Control Limited (In Liquidation) (HC Auckland, CIV 2008-404-3375, 24 November 2008, Allan J)

This case addressed the proper construction and application of section 310 of the Companies Act 1993 ("Act") as between a lender, a borrower and a guarantor.

The McCulloughs were shareholders, and Mrs McCullough was a director, of Base Control Limited ("Base Control").  Base Control entered into loan and overdraft facility agreements ("Facilities") with ASB Bank Limited ("ASB").  The McCulloughs personally guaranteed the Facilities and gave a mortgage over their residence.

The McCulloughs then formed a partnership to engage in a separate business venture.  To help establish this new business, the McCulloughs borrowed funds, as shareholders, from Base Control which Base Control had borrowed from ASB under the Facilities.  There was some uncertainty surrounding the accounting treatment given to these transfers of money in the accounts of Base Control and whether the substance of the transactions under NZIAS was in fact a loan from ASB to the McCulloughs.  However the Court concluded that Base Control remained indebted to ASB as this was a matter of law and not a matter of good accounting practice.

The McCulloughs subsequently placed Base Control in voluntary liquidation and personally repaid the Facilities to ASB.  The liquidators of Base Control attempted to recover the outstanding balance in the company's shareholder account arguing that the McCulloughs owed this money to the company and that the Facilities remained a liability of Base Control to ASB.

The McCulloughs contended that they were entitled to set-off any liability they might have to Base Control under the shareholder account against their right to prove in the liquidation for the repayment by Base Control to them of the Facilities they had repaid to ASB as guarantors.  If set-off was available then the McCulloughs' obligation to Base Control would be extinguished because the amount they paid to ASB exceeded that obligation.

The three obstacles to the McCulloughs establishing set-off under section 310 of the Act were addressed as follows:

• There had to have been mutuality of obligations between the McCulloughs and Base Control.  A long line of authority has established that set-off can only be claimed where the claimant is acting in the same capacity in respect of both transactions.  This appeared unlikely in this case given that the McCulloughs had granted the guarantee to ASB in their capacity as trustees.  However, the Court held it was necessary to go beyond the status of the McCulloughs as trustees and inquire as to the nature and extent of the obligations assumed.  Particular attention was placed on the unlimited personal liability assumed by the McCulloughs.  The Court held there was significant mutuality.
• The liquidators argued that there was no debt due by Base Control to the McCulloughs as at the date of liquidation.  However, Allan J held that the contingent liability of the McCulloughs to satisfy, as guarantors, the liability of Base Control under the Facilities was sufficient and that this contingent liability was in existence at the date of liquidation. Upon payment to ASB, this claim became quantifiable. There was therefore no barrier to the McCulloughs' claim for set-off and they had not become subrogated to the rights of ASB until after the date of liquidation.
• Allowing set-off potentially prefers the McCulloughs over other unsecured creditors. Whether this constituted a voidable preference was undecided at first instance. However, Allan J rejected the argument of the liquidators that sections 310(2) and (3) be construed in such a way as to protect the body of unsecured creditors and suggested that the better course would be to leave the issue for determination at trial in the usual way.

Accordingly, Allan J found that the McCulloughs were entitled to invoke section 310 of the Act and allowed the appeal.  

Darby Maritime Ltd v Sensation Yachts Ltd (HC Auckland, CIV 2008-404-1097, 2 September 2008, Associate Judge Hole)

This case dealt with an application by Darby Maritime Ltd ("Darby") for the liquidation of Sensation Yachts Ltd ("Sensation") for failure and inability to pay its debts.

Darby and Sensation had entered into a vessel construction agreement on 29 March 2002. Darby filed numerous warranty claims under the agreement, which remained unpaid.

Section 241(4)(a) of the Companies Act 1993 (the "Act") gives the Court authority to appoint a liquidator if satisfied that the company is unable to pay its debts.  While Sensation did not satisfy the meaning of "inability to pay debts" in section 287 of the Act, section 288(2) of the Act allows "proof by other means that a company is unable to pay its debts".  Darby's application relied on the non-payment by Sensation under the warranty claims and eight unrelated applications recently made for the liquidation of Sensation.

Sensation claimed Darby had inflated the warranty claims by having more work done than was necessary. Therefore the amount due was disputed and should instead go to arbitration under the construction agreement.

Furthermore, Sensation argued that the proceedings constituted an abuse of process.  Darby's action was in reality a "debt collection" exercise.  The appropriate course of action was for Darby to issue a statutory demand or apply for summary judgment, not make an application for liquidation.

In Automatic Parking Coupons Ltd v Time Ticket International Ltd (10 PRNZ 600) it was held that such a "debt collection" exercise might constitute unfair commercial pressure and be an abuse of process.  But in this instance the Court held that there was good reason for Darby's approach in joining the liquidation proceedings because of Sensation's history and the deteriorating prospect of Darby being paid.

However the Court rejected the liquidation application, finding that the disputed warranty claims did not require payment until the correct amount had been established.

AMC Construction Ltd v Frews Contracting Ltd (Court of Appeal, CA 145/2008, 25 September 2008, Glazebrook, Fogarty, MacKenzie JJ)

This was an appeal against a decision by the High Court to dismiss an application to set aside a statutory demand.

AMC Construction Ltd ("AMC") entered into a contract with Frews Contracting Ltd ("Frews") whereby Frews was to carry out excavation work.  Following non-payment by AMC, Frews filed a statutory demand for $190,000.  AMC applied to have the order set aside in the High Court under each of the grounds contained in section 290(4) of the Act: (a) there was a substantial dispute whether the debt was owing or due; (b) AMC had a counterclaim or set-off; and (c) other grounds on which the demand ought to be set aside, namely that AMC was solvent.

In dismissing the application, the High Court found that, in relation to subsections 4(a) and (b), AMC was required to show a fairly arguable case for saying the debt was not due; that it was not sufficient to merely assert the existence of a cross-claim; and that AMC must be able to point to evidence to show that it has a real basis for its application, and that it is bona fide arguable.  It was also incumbent upon AMC to satisfy the Court as to its solvency for the purposes of subsection 4(c).

AMC appealed on several grounds, including that the correct test as to solvency is not whether the company is solvent but whether the company is arguably solvent.

The first question the Court addressed was whether solvency of a company can constitute "other grounds" under subsection 4(c).  The solvency of a company was relevant in assessing the merits of a claim under subsections 4(a) and (b).  Solvency was often a factor in determining whether there was a bona fide dispute or whether the refusal to pay was merely a reflection of insolvency. In these cases solvency is relevant not as a separate ground under subsection 4(c) but as a relevant consideration under subsection 4(a) and (b). 

Following the decision in Medisys Limited v Getinge Castle Limited (HC AK M1426 IM00 25 January 2001) the Court of Appeal held that the solvency of a company might constitute a stand-alone ground for setting aside a statutory demand under subsection 4(c).  However such cases were expected to be extremely rare.

If there is no dispute under subsections 4(a) or (b) it would be difficult to imagine circumstances in which a company should be able to avoid paying a debt merely by proving that it was able to pay the debt.  If the debt is not paid and an application for liquidation then filed under section 287(1) of the Act, the company would have the opportunity to rebut the statutory presumption, that a company unable to meet a demand is unable to pay its debts, at that stage.

Further, MacKenzie J reasoned that in rare cases where solvency did form a separate ground the test was whether the company is in fact solvent, not "arguably solvent".  This was in line with the wording of section 290(4)(c) requiring the court to be satisfied a statutory demand "ought to be set aside".  The appeal was dismissed.

The Securities Act (New Zealand Deposit Guarantee Scheme) Exemption Notice 2008, as amended by the Securities Act (New Zealand Deposit Guarantee Scheme) Exemption Amendment Notice 2008, exempts issuers party to the Crown guarantee (see the November BLU for further information about the Crown's deposit guarantee scheme) from certain provisions of the Securities Act 1978 and the Securities Regulations 1983 in order to facilitate the operation of the scheme.

The conditions of the exemptions require issuers to advise investors about their coverage under the scheme.  The exemptions are designed to encourage prompt, simple and standardised disclosure to investors.  

On 12 December the Reserve Bank of New Zealand announced further liquidity measures, similar to actions taken by other central banks in the wake of the global financial market turmoil, to support the New Zealand debt markets and financial system liquidity. 

The new measures, most of which took effect on 17 December, include:

• Extension of the range of securities eligible for acceptance in the Reserve Bank's domestic liquidity operations to include:
• Securities guaranteed by the New Zealand government;
• Highly rated NZ corporate securities, denominated in NZD, with a long term credit rating of BBB- or better;
• Highly rated NZ corporate securities, denominated in NZD, with a
• short term credit rating of A2, F2, P2 or better; and  
• NZD Asset Backed Securities rated AAA, A1+, F1+ or P1.
• The current graduated 'haircut' regime will apply for all securities eligible for domestic liquidity operations.
• All issues will be approved on a case-by-case basis.

Deputy Governor of the Reserve Bank Grant Spencer noted that these liquidity measures do not mean the Reserve Bank will be lending direct to the corporate sector.  However, corporate debt will become more liquid and therefore a more attractive investment prospect for banks and portfolio managers.

The first article is entitled The receiver, "equitable execution" and foreign and future debts by Lee Aitken.  The remedy of "equitable execution" allows a court to appoint a receiver over intangible assets and for the receiver to then call in the assets of the debtor and pay them out to the creditor. As noted by Cotton, LJ, in Re Shephard; Atkins v Shephard (1889), use of the term is perhaps confusing as it "is not execution but equitable relief, which is granted on the ground that there is no remedy by execution at law".

Aitken considers equitable execution in light of the recent United Kingdom case of Masri v Consolidated Contractors International UK Ltd (No 2) [2008] EWCA Civ 303 ("Masri") and its implications for the operation of equitable execution in relation to both foreign and future debts.

The litigation between Masri and Consolidated Contractors International UK Ltd stemmed from a valuable foreign oil concession, the subject of a joint venture. When the joint venture partners fell out one party sued the other and was held entitled to receive certain royalties payable overseas and into the future.

The first question was to what extent a judgment creditor may obtain execution by way of the appointment of a receiver with respect to debts situated abroad?

The appointment of a receiver over foreign assets would interfere with the sovereignty of the jurisdiction in which the assets were located.  Prior English authority had concluded that simply because a person has a presence within the jurisdiction it does not necessarily follow that there is no "territorial limit" to matters which a court may properly adjudicate or orders it may impose.  Personal jurisdiction was distinguished from subject matter jurisdiction.

In Masri the court confirmed this basic proposition but on the facts felt able to appoint a receiver over foreign property.  Such an appointment did not have any proprietary effect since it did not vest the property in the receiver, nor create an equitable charge.  Payment to a receiver would be good discharge.  Any questions as to the effectiveness of such discharge would depend on the applicable law of the contract.  Also, the operation of a "Babanaft proviso" - prescribing limitations on the reach and operation of a transnational order - meant that the judgment debtor was not in fear of being held in contempt of court.

The second question was to what extent may such a receiver be appointed over a debt only payable at a future time?

The answer to this had apparently been settled for over a century: under The Judicature Act 1873 a receiver could not be appointed over future debts.  However after an extensive review of case law pre-dating the Judicature Act the court concluded that nowhere was there a rule that a receiver cannot be appointed in respect of future debts or future income.

This decision leads to a wider question of jurisprudence: to what extent, when considering the powers at equity conferred on it by the Judicature Act, is a modern court constrained by decisions predating that Act?  The answer appears to be that a lack of precise authority prior to the Judicature Act does not operate as a bar to relief being granted in the future.  Thus the path has been cleared for the English courts to remedy new and novel fact situations using equitable execution.

The second article is entitled The impact of credit derivatives on corporate debt restructuring by Jeremy Green. This article describes the nature, application and documentation of the most common credit derivative, the Credit Default Swap (CDS), explains the approach to corporate restructuring of financially troubled debtors and addresses the concerns raised over the impact of CDSs on this restructuring.

A CDS will commonly be used by a bank or other financial institution lending money to a company in order to hedge against the risk of reduced recovery of that loan. The four main concerns addressed in this article relate to incentives present on such a lender who has purchased a CDS to act in a way which is detrimental to a troubled debtor's pursuit of corporate debt restructuring:

• First, a bank which has purchased a CDS in respect of a distressed borrower has a higher incentive to exercise that CDS to recover its loss and consequently less incentive to participate in (and incur its share of the costs of) a negotiated restructuring of the borrower's debts.
• Secondly, if a bank does participate in a negotiated restructuring of a borrower's debts, its behaviour and motivations may be shaped by its protection under the CDS. The author suggests that this will depend upon the extent of the cover under the CDS, the method of settlement and the specified credit events necessary to activate the CDS.
• Thirdly, the ability of the bank to physically transfer the debt following a credit event introduces uncertainty as to the number and identity of the possible creditors of the distressed borrower, further hindering restructuring negotiations.
• Further to this, the substituted creditors may also be inexperienced in corporate debt restructuring, and in addition may possess motivations which conflict with the main goal of rehabilitation of the distressed debtor.

The author lastly considers possible methods by which to redress this conflict: enhanced disclosure requirements upon creditors who enter into CDSs, or an alternative mechanism to restructuring. The author considers however that the most likely outcome is, at least for the foreseeable future, for these uncertainties to remain unaddressed.

The third article is entitled "Shareholder creditors": Further risk for directors of corporate trustees? by Dr Sheelagh McCracken.  The article addresses one possible consequence of the Sons of Gwalia case: the opening up of claims against directors of corporate trustees under s197 of the Corporations Act 2001 (Cth).  Sons of Gwalia reorganised shareholders as creditors in respect of a claim for misleading corporate conduct.  In Part 1, McCracken analyses the kinds of claims that may potentially be brought against directors of corporate trustees under s197, and whether shareholders with claims for misleading corporate conduct may be eligible to bring an action under it.  Section 197 imposes personal liability on a director of a corporation which acts (or purports to act) as trustee, if the liability is incurred in breach of trust while the company is acting as such.   A shareholder with a claim for misleading corporate conduct is recognised as a creditor to whom such liability is owed.

Part 2 examines whether directors will be personally liable to the shareholder creditor under s197.  If the claim for corporate misconduct is a liability, the director of a corporate trustee may be held personally liable if three criteria are met.  First, the director must have been a director at the time the liability was incurred.  Second, the company must have incurred the liability as a trustee and must be unable to discharge it.  Third, the trustee must have lost a right of indemnity through: breach of trust; action beyond its powers as trustee; or restriction or exclusion in the trust of the right of indemnity, and is therefore not entitled to be fully indemnified.  Section 197 expressly refers to a loss of indemnity through a breach of trust, which is fact-dependent and a question of degree. 

Finally, McCracken explores whether the goal of creditor protection set by s197 remains appropriate as a matter of policy, especially where the creditors may fall into a new category of "shareholder creditors".  Shareholder creditors are able not only to bring an action under s197, but also to succeed against those directors on the basis that the company lost its right of indemnity through a breach of trust caused by misleading corporate conduct.  The personal liability that is imposed on the directors of the trustee corporation under s197 is potentially extensive.  The goal of s197 is creditor protection.  This leaves sophisticated creditors - which likely includes shareholder creditors - in an advantageous position.  McCracken concludes that while creditors once needed protection against directors' actions, directors may now need protection against creditors' actions.

The fourth article is entitled The business of banking by Alan L Tyree.  Section 8 of the Banking Act 1959 (Cth) prohibits a corporation from carrying on "any banking business" in Australia unless certain conditions are met. The article focuses on the development of the definition of "banking business" and the uncertainty of the word "any" in section 8. 

The definition of "banking business" in the Banking Act is based on the decision of Issacs J in the Australian case of Commissioners of the State Savings Bank of Victoria v Permewan Wright & Co Ltd (1914) 19 CLR 457.  Issacs J defined the business of banking as the acceptance of deposits and the lending of money so collected.  Over time this definition proved inadequate.  For example, it did not refer to the operation of payment mechanisms or the handling of cheques.  The statutory definition has been extended, both in the Banking Act and through regulations. In addition, section 11 of the Banking Act authorises the Australian Prudential Regulation Authority ("APRA") to determine that certain provisions of the Act do not apply to certain institutions.

The author discusses the ambiguity of the phrase "any banking business" in section 8.  Is a business carrying on banking business if it accepts deposits but does not make loans, or vice versa? 

In Re Bottomgate Industrial Co-op Society (1891) 65 LT (NS) 712 it was held that it was not necessary to show that every part of the business of banking was carried on.  Under this wide interpretation, it was sufficient to show that one part of the business of banking was carried on.  In contrast in Australian Independent Distributors Ltd v Winter (1964) 112 CLR 443 the Court held that where the society in question had received money from its members and had a limited power to make loans to its members it was not carrying on the business of banking.  None of the society's money had been lent.

This issue was addressed indirectly in the recent case of Australian Prudential Regulation Authority v Siminton (No 6) [2007] FCA 1608. Siminton purported to establish a bank called "Terra Nova Cache" which accepted deposits from members and made one loan, to a member.  When APRA sought an injunction against Terra Nova Cache, Siminton attempted, but failed, to rely on the Winter defence.  

Tracey J dismissed Winter as a possible defence on the basis that, in Winter, the society in question had not loaned members' funds to anybody.  This decision has been criticised because the grounds in Winter have been described as being that the society's power was limited to lending money to its members.  On that basis Siminton would succeed because Terra Nova Cache only proposed to make loans to members.  The author contends that the important point to note is that Tracey J clearly determined that Siminton was engaging, or intended to engage, in conduct which satisfied both limbs of the Issacs J test. 

Siminton appealed to the Full Court (Siminton v Australian Prudential Regulation Authority [2008] FCAFC 88) which held that the single loan made was sufficient to establish that Terra Nova Cache had engaged in banking business.  APRA invited the Full Court to limit Winter to its facts.  The Full Court declined on the basis that this was not necessary in view of the loan made by Terra Nova Cache.

The article concludes that there would seem to be little support in Australia for the wide interpretation of "any banking business".  It is not at all clear that "any" serves a purpose.  The author suggests it may be there to catch foreign banks who wish to do just a part of their banking business in Australia.

The October 2008 issue of the Australian Banking and Finance Law Bulletin contains the article Risk in a climate of distrust: know your counterparty by Miles David.  The article considers how the recent emergence of counterparty risk has led to distrust in the inter-bank lending and credit derivative markets. 

Counterparty risk is the risk to each party to a contract that the counterparty will not fulfil its contractual obligations.  Counterparty failure is of regulatory as well as commercial concern.  As large financial institutions are counterparty to many others, the knock-on effects of their failure pose a systemic, non-diversifiable risk.  In a global financial system based on market participants being able and willing to cover their positions, counterparty risk has emerged as a major problem.  Counterparty risk was instrumental in the downfall of such institutions as Bear Stearns, AIG and Merrill Lynch, and is responsible for the current level of distrust between lenders and borrowers.

The author, by reference to various measures, observes a sharp and unforgiving decline in confidence in the inter-bank lending and credit derivative markets.  The Australian government response has been, in a bold and unprecedented move, to guarantee all money that Australian banks borrow internationally.  While it is expected that the benefits of this plan will be minimal due to the severity of the international financial crisis and the limited role of the Australian banks, the author expresses hope that the plan can inject some much-needed liquidity into the Australian banking system.    

The extent of the impact of the current financial crisis is emphasised, attributed in large part to the globalisation of markets and the interdependence between major banks.  The author considers that faith in the inter-bank market may take some time to be restored. 

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:

Prue Flacks or Guy Lethbridge | WELLINGTON	John Powell, Ross Pennington or Geoff Busch | AUCKLAND
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