Contents:
February 2009
Contents:
The case of JAHE Pty Ltd v Aquatic Leisure Technologies Pty Ltd [2008] WASC 176 ("JAHE") recently came before the Supreme Court of Western Australia. This case concerned the courts' ability to set aside a statutory demand.
Under section 459J of Australia's Corporations Act 2001 ("Act"), the court has the discretion to set aside a demand where there is either a defect in the demand, the demand would cause substantial injustice, or there is some other reason.
The respondent had issued a statutory demand in respect of various invoices. The applicant's grounds to set aside the statutory demand were based on:
- a genuine dispute as to whether the amount claimed was owing; or
- there was some other reason why the demand ought to be set aside.
The court was satisfied that the errors were a genuine dispute between the parties, and that the errors did not amount to a defect.
The court held that a claim based on "some other reason" for setting aside the demand must differ from a defect in the demand. A minor overstatement of the debt was not done wilfully and was not frivolous or vexatious. It therefore could not support the argument that the demand should be set aside on the grounds of "some other reason".
The court considered the applicant's contention that in making the demand, the respondent's conduct was unconscionable or an abuse of process or gave rise to a substantial injustice. The applicant also argued that the respondent was acting oppressively and unfairly in order to coerce a debtor company to pay a debt that was genuinely disputed. The discretion conferred on the court by the Act is a wide one and allows the court to consider the conduct of the parties. Here, the court held that there was nothing in the application that was oppressive, an abuse of process or otherwise unfair to the applicant. In addition, the discretion allowed the courts to correct the defect in the statutory demand.
Official Assignee v Wilson [2008] 3 NZLR 45
In this case the Court of Appeal considered whether a family trust was void on the basis that it was a sham or alter ego trust.
The claim was brought by the Official Assignee, in the place of the bankrupt settlor of the trust. The court dismissed the claim on the basis that to allow the claim would entitle the bankrupt to seek relief effectively for his own benefit, despite the fact that the benefit might be able to be transferred to his creditors.
After dismissing the appeal the court examined the law on sham trusts and alter ego trusts in New Zealand.
A sham requires an intention to mislead. In relation to a trust this means a lack of certainty of intention to create a trust. This is an objectively assessed criterion. The court considered whether the complicity of the trustee is necessary for the trust to be a sham.
Where a trustee is complicit with the settlor in creating a sham trust, the trustee is effectively agreeing to hold the property on bare trust for the settlor, and as such, the trust is a sham. However, if a trustee is deceived by a settlor, the settlor's intention that the trust operate as a sham would not invalidate the trustee's responsibilities under the trust deed, and therefore the trust could not be held, objectively, to be a sham.
The court noted that where a sham is alleged the court can look behind the appearance of the transaction to ascertain its true nature. Poor administration of a trust by a trustee may amount to breach of trust. By itself this is not evidence of an intention that the trust should operate as a sham.
The Official Assignee had contended that if the trust was not a sham at its inception it was an "emerging sham" in that it had developed into a sham. The court said that in this instance the trust itself would remain valid, and the sham could only ever relate to property transferred into the trust after the sham had emerged.
Alter ego trusts (the trust being merely a facade that the court should ignore) as a cause of action was dismissed by the court, as being only evidence in support of a sham.
Houghton v Saunders (HC Christchurch, CIV 2008-409-000348, 7 October 2008, French J)
The recent case of Houghton v Saunders addressed three issues in the context of alleged misleading or untrue statements in a registered prospectus. First, the Court considered the availability of claims brought against former directors and various parties associated with the share issue. Secondly, the decision explored the scope for representative actions. Finally, the decision looked at the legality of litigation funding arrangements entered into with third party funders.
The prospectus at the centre of the claim related to Feltex Carpet Limited's ("Feltex") 2004 initial public offering and listing. The two named plaintiffs in the case represented, respectively, shareholders who had purchased shares in the IPO ("IPO Plaintiffs") and those that had purchased shares subsequently on the secondary market ("post IPO plaintiffs").
The first part of the judgment deals with interlocutory applications to strike out the plaintiffs' claims. The defendants sought to strike out the negligence claim on the grounds that (i) there was no duty of care owed, and (ii) the plaintiffs' pleadings failed to point to specific untrue or misleading statements within the prospectus. The Court refused as it declined to categorically deny the possibility of a duty of care.
The defendants also sought to strike out the cause of action for breach of fiduciary duty on the basis that any fiduciary duties owed by directors or promoters are owed to the company and not investors. In respect of the IPO plaintiffs, while the Court considered the claim unlikely to succeed as a matter of law, it considered that the possible extension of such a duty ought to be properly explored and tested at a substantive hearing. The Court did accept that no fiduciary obligations extended from the defendants to the post-IPO plaintiffs, and struck out their claim accordingly.
The second part of the judgment considered the order for an "opt-out" representative action under R78 of the High Court Rules obtained by the plaintiffs. The defendants argued that the order did not meet requirements as it lacked the required commonality of interest. The Court accepted the requisite commonality of interest did not exist for post IPO plaintiffs. However, it considered that it was at least arguable in respect of the IPO plaintiffs, and did not revoke the order for that class. The defendants also argued that the order should be "opt-in" rather than "opt-out" and the Court agreed. The proceeding was thus allowed to continue as a representative action, but one limited to the IPO plaintiffs, subject to pleadings being amended to point to specific reliance, and with the opt-out procedure being replaced by an opt-in procedure.
Finally, the Court addressed the defendants' application for a stay of proceedings on the grounds that the litigation funding agreement was champertous. The Court held that it was champertous but that it did not constitute an abuse of process and therefore did not warrant a stay. However, Justice French added that the Court would reserve its right to keep the funding arrangement under review as the proceeding progresses.
Elders New Zealand Limited v PGG Wrightson Limited [2008], NZSC 104
This case explores the consequences of amalgamating two or more companies, specifically whether a transfer or disposition of assets from the separate entity to the combined entity is necessary.
As at 2005 Elders New Zealand Ltd ("Elders") and Wrightson Ltd ("Wrightson") were joint owners of a number of stock saleyards. The rights of Elders in relation to these sale yards were set out in various agreements and in the constitutions of companies owned jointly by Elders and Wrightsons.
One such right was that each co-owner was given a right of pre-emption should the other decide to "transfer, sell, lease, or otherwise dispose of the whole or part of their share".
In 2005 Wrightson and Pyne Gould Guiness Ltd ("PGG") agreed to terms of a merger in which they would become PGG Wrightson Ltd ("PGG Wrightson"). A key aspect of the proposed arrangement was cl 2.1 which stipulated that "PGG Wrightson would succeed to all the property, rights, powers and privileges of Wrightson" and also that "PGG Wrightson will succeed to all the liabilities and obligations of Wrightson ".
Elder's claimed that as a result of the amalgamation Wrightson had made a disposition of the stockyards to PGG Wrightson and that PGG Wrightson acquired property it didn't previously own by way of "transfer or vesting" and that this necessarily triggered Elders' pre-emptive rights.
The Supreme Court disagreed and held that "amalgamation" was to be given the same meaning in both Part 13 and 15 of the Act; that the amalgamated company (PGG Wrightson) should stand in the same position as the amalgamating companies (PGG and Wrightson) in respect of their rights and obligations. If "amalgamation" in Part 15 was to be given its meaning prior to the Companies Act 1993 it would be inconsistent with the underlying purpose of reform. Added to this is the fact that amalgamation has been used consistently throughout the Act with no attempt to redefine the term depending on where it is found. In such a situation there is no assignment or disposition of rights or property to the amalgamated company because in law it is the same entity and no pre-emption rights arise.
The Supreme Court's decision ensures consistency with prior decisions such as Carter Holt Harvey v McKernan [1998] 3 NZLR 403, where a guarantor's liability continued to be enforceable by the parent even though it was expressly agreed that the guarantee was to cease upon transfer of the company.
The Commissioner of Inland Revenue v Northshore Taverns Ltd (in liq) (2008) 23 NZTC 22,074
Northshore Taverns Ltd ("NTL") acquired finance from Westpac Banking Corporation ("Westpac"), and granted a security interest in all of its personal property to Westpac. The debt to Westpac was repaid but the security documents were not discharged. NTL was then placed in liquidation. Subsequently, the liquidators learnt that Sure Developments Limited ("SDL") had provided some of the funds for the repayment of the debt. SDL, unaware that it had a right of subrogation to Westpac's security, filed a claim as an unsecured creditor for the money owed to it by NTL. The liquidators acted throughout as if there were no secured creditors.
NTL's EFTPOS sales had been credited to the bank account of Thirty Times Two Limited ("TTTL"). TTTL's solicitors paid this money, held in their trust account on behalf of TTTL ("the fund"), to the liquidators upon demand. The liquidators considered that the fund constituted an "account receivable" under the PPSA and the Companies Act.
SDL contended that having paid $300,000 to Westpac (as a guarantor of NTL) it was entitled to be subrogated to Westpac's general security agreement, and to claim the fund under that security. The Court agreed that SDL was entitled to be subrogated and should thus be treated as a secured creditor of NTL.
However, the Court also found that if the fund was an account receivable, SDL's security was subordinate to any preferential creditors by virtue of cl 9(b) of Schedule 7 to the Companies Act. The claims of the Inland Revenue Department and the liquidators' claim for costs and expenses incurred were preferential claims.
The Court then reasoned that the fund did not constitute an account receivable, but was a secured interest under Westpac's security agreement. If, as argued by the liquidator, the repayment of a monetary obligation constituted an account receivable, the amount of an insolvent company's assets to be removed from the security interests of secured creditors for distribution to preferential creditors would substantially increase. Therefore, the Court felt that widening the definition of account receivable was not justified.
With regard to SDL being treated as a secured creditor, the Court applied the authority contained in Re Winefield [1885] NZLR 394 to the effect that a creditor is not bound by his election as to whether or not his claim is as a secured or unsecured creditor, if his original proof was filed as a result of mistake. On this basis, the Court felt it appropriate that SDL should be granted leave to claim as a secured creditor.
Lastly, the Court held that the liquidator's costs up until the date that they became aware of SDL's position should be met out of the fund before SDL's claims were met, either because of an estoppel defence available to the liquidators or as a condition applicable to the granting of leave to SDL to change its election to that of a secured creditor.
On 21 January 2009 the New Zealand Securities Commission and the Australian Securities and Investments Commission released an updated joint guide for New Zealand and Australian issuers offering securities or interests in managed or collective investment schemes in both countries under the trans-Tasman mutual recognition of securities offerings regime. Issuers based in New Zealand and Australia wishing to offer in the other country must file the offer documentation with the relevant regulator in the other country. The requirements for Australian issuers wishing to offer securities in New Zealand are contained in Part 5 of the Securities Act 1978 and the Securities (Mutual Recognition of Securities Offerings - Australia) Regulations 2008, and for New Zealand issuers wishing to offer securities in Australia in Chapter 8 of the Corporations Act 2001 and the Corporations Amendment Regulations 2008 (No. 2).
A copy of the guide can be found at http://www.seccom.govt.nz/downloads/nz-aus-joint-securities.pdf.
On 18 February 2009 the Securities Disclosure and Financial Advisers Amendment Bill ("Amendment Bill") was introduced to Parliament.
The Amendment Bill proposes to amend the Securities Act 1978 by introducing a new simplified disclosure prospectus that may be used by listed issuers of designated debt or equity securities. The objective of the simplified disclosure prospectus is to allow a listed issuer to produce one disclosure document (instead of producing both a full prospectus and an investment statement) which would reference any relevant material already released under the issuer's continuous disclosure obligations, and include any additional information material to the offer.
The Amendment Bill also proposes to improve the workability of the provisions relating to non-public offers and to exempt persons by:
- providing that an offer of securities only to persons who have within the previous 12 months subscribed (in a single transaction) for identical securities issued by the same issuer and have paid a minimum subscription price of $500,000 is not an offer to the public;
- providing that exempt offers may be made to eligible persons (ie wealthy and/or experienced investors) and to persons deemed not to be members of the public (ie persons listed in section 3(2));
- clarifying that an eligible person (for the purposes of an exempt offer) may include the trustees of a trust if the trust satisfies the requirements of section 5(2CD).
The Amendment Bill also proposes to make a number of minor amendments to the Financial Advisers Act 2008.
Acceptance "under reserve" in credit transactions
The law of agency and its application to relationships between banks
The crunch: the fate of libor and market disruption clauses
The December 2008 issue of the Journal of Banking and Finance Law and Practice contains three articles of interest.
The first article is entitled Acceptance "under reserve" in credit transactions by Alan L Tyree. The article addresses the law surrounding payments advanced "under reserve" by a confirming bank to a beneficiary in respect of a documentary credit.
An issuing or confirming bank is obliged to pay a documentary credit if the documents presented conform strictly to the terms of the credit. When faced with the presentation of documents that the bank believes to be non-conforming, the bank may refuse payment, advance payment if the beneficiary agrees to indemnify it for any loss arising as a result of the documentary discrepancies or it may make a payment "under reserve." In this last scenario, the bank advances payment, but "reserves" certain discrepancies. It then forwards the documents to the issuing bank with the hope that the issuing bank will accept the presentation as complying or obtain a waiver from the credit applicant with respect to the discrepancies.
Although common, the danger of such a procedure for the confirming bank is that the recovery of the funds may prove difficult in the event that the issuing bank does not accept the documents or is unable to obtain the waiver from the applicant.
The meaning of the phrase "under reserve" was considered in Banque de L'Indochine et de Suez SA v JH Rayner (Mincing Lane) Ltd [1983] QB 711as the phrase was not defined in the 1974 revision of the Uniform Customs and Practice for Documentary Credits (the UCP) nor has it been defined since. It was held to mean that a confirming bank could recover from a beneficiary if the issuing bank refused to pay against the documents, either on its own initiative or under instruction from the applicant. This arguably leaves the beneficiary in an unenviable position.
The 2007 revision of the UCP, the UCP600, provides further options for a bank that decides that the documents are non-complying but does not expressly deal with problem of recovering money paid "under reserve". The author suggests the documentation should make clear that rejection for any reason by the issuing bank causes the advanced funds to be immediately due and payable.
The second article is entitled The law of agency and its application to relationships between banks by Jane Muir. The article discusses the recent decision of the Supreme Court of Western Australia in The Bell Group Ltd (In Liq) v Westpac Banking Corp (No 9) ("Bell") which examined whether or not the relationship between members of banking syndicates, or groups of banks, dealing with common borrowers may be characterised as one of agency, and, if so, the scope of an agent's duties and the extent to which its knowledge may be imputed to another bank.
The case concerned a refinancing of the Bell Group's borrowings with a group of Australian banks and a syndicate of foreign banks, with the effect that debts to certain banks were to be paid in priority to the claims of other creditors. The court held that in undertaking the refinancing, the group's directors, knowing that the companies were either "nearly insolvent or of doubtful solvency", acted in breach of their fiduciary duties. The plaintiffs argued that the banks were liable for the directors' breach of fiduciary duty, and that with that knowledge they entered into the re-financing documents. As such it was claimed the banks should be liable to account to the liquidators.
The claims turned on what each bank knew. The plaintiffs maintained that Westpac and Lloyds Bank were agents for, respectively, the Australian and foreign banks. It was alleged that both "agents" undertook obligations to coordinate the sharing of information relevant to the proposed refinancing and that such information could therefore be imputed to all banks on the basis of the agency relationships.
The court identified the critical element of any agency relationship as being the purported agent's ability to affect the principal's legal relations with third parties. While the term "agent" is commonly used in collaborative financing arrangements, whether an "agent bank" is in fact an agent, and owes fiduciary duties, will depend on the terms of the agreement between the parties. The ability to receive and communicate information on behalf of another is insufficient, in itself, to constitute a power to affect legal relations with third parties. In Bell, the role of the "agent banks" was purely administrative. The court also found that there was no other, broader legal relationship to support the agency claim. Each bank was required to form its own conclusions as to the borrowing group's financial position and to contribute separately to the re-financing.
The author concludes that the findings are an important reminder that contractual provisions are highly relevant to whether an agency relationship exists and, if it does, to the scope of the agent's duties and the level of knowledge which may be imputed thereby to the principal. The framing of responsibilities of the agent bank in a syndicated agreement is critical when deciding whether the agent's state of mind may be attributed to another bank.
The third article is entitled The crunch: the fate of LIBOR and market disruption clauses by Diccon Loxton. It examines concerns raised by the current financial crisis regarding the availability, suitability and accuracy of published base rates such as the London Interbank Offered Rate ("LIBOR") and the operation of market disruption clauses.
Market disruption clauses are used in syndicated loan agreements where the interest rate is priced over a published rate such as LIBOR and deal with two situations:
- where the specified rate is unable to be determined by screen services and reference banks are not quoting rates (rate unavailability); and
- where the base rate can be determined but the rate determined does not represent the banks' cost of funds (cost mismatch).
The standard Asia Pacific Loan Market Association (APLMA) market disruption clause provides that if there is a "market disruption event", each individual bank prices its participation in the loan at a margin over its individual cost of funds from a source it reasonably selects. There is a "market disruption event" if:
- the specified rate (eg LIBOR) cannot be determined; or
- banks representing more than a threshold percentage of participations in the loans (usually 30-50%) notify the agent that the cost to them of matching funds exceeds the specified rate.
Once the clause is invoked it applies to all banks in the syndicate.
Because of the recent focus on LIBOR and whether it truly represents banks' cost of funds, there has been much discussion of the role, and drafting, of the market disruption clause.
Suggestions include changing the panel of quoting banks or calculation method, making the clause easier to invoke, and addressing confidentiality concerns of banks when disclosing rates. The APLMA is reviewing its standard clause to address these concerns.
On January 19 2009, the Basel Committee on Banking Supervision announced enhancements to the Basel II capital framework. The Committee has issued a package of consultative documents to strengthen the Basel II capital framework.
Basel II provides a comprehensive set of tools for banks and their supervisors to capture and assess an increasing and complex set of risks, and incentives for such institutions to improve their governance, risk management, and the measurement and aggregation of firm-wide risks. The recent financial market crisis revealed certain weaknesses in Basel II. As a result, Basel II was reviewed by the Committee, who have developed a series of proposed enhancements to strengthen the framework. The proposed changes to capital requirements range from trading book exposures, complex securitisations in the banking book, and exposures to off-balance sheet vehicles.
"Revisions to the Basel II market risk framework" and "Guidelines for computing capital for incremental risk in the trading book" (together, the "trading book proposals") set out the Committee's proposed enhancements to the regulatory capital treatment for trading book exposures. "Revisions to the Basel II market risk framework" proposes changes to the standardised measurement method, the internal models approach, the supervisory review process, and the disclosure requirements for market risk. It also suggests that the treatment for illiquid positions be changed. "Guidelines for computing capital for incremental risk in the trading book" details the principles and scope of the incremental risk charge (IRC), discusses the validation of such models, specifies the ways in which the results of banks' internal risk measurement models can be used as the foundation for an IRC, defines the frequency of IRC calculation, and seeks the industry's feedback on applying the banking book treatment to positions in the trading book.
The final consultative document is entitled "Proposed enhancements to the Basel II framework". This paper covers the Committee's proposals to strengthen all three pillars of Basel II - the minimum capital requirements, the supervisory review process, and market discipline.
The Committee aims to have all these proposals in place by the end of 2010. The proposals are open for comment until 13 March 2009 in the case of the trading book proposals, or 17 April 2009 for the pillar proposals.
The December 2008/January 2009 issue of KangaNews featured an article by Laurence Davison entitled Diversity and uncertainty in New Zealand. This article highlights recent trends in New Zealand's financial markets. Despite the continuing financial crisis, debt issuance in New Zealand has fared relatively well. In 2007, the decline in local bond deals was offset by investment in Kauri bonds. 2008 saw the decline in demand for international supranational, sovereign and agency ("SSA") paper but the re-emergence of local deals.
The concern of New Zealand's debt fund managers has not been the diversity of issuance but the continued interest of local retail investors in fixed income, despite widening spreads. Fund managers have been left in a difficult situation: either pay a retail price that is tighter than international equivalents, concentrate their investments in institutionally focused transactions, or hold cash.
There are also positive effects of a strong retail bid however. Issuers have been able to borrow in public capital markets that would otherwise have been closed to them and one commentator noted that retail demand should be viewed as a support for the market in stressed conditions rather than as a threat to managers.
The article then summarises the rapid development of the SSA Kauri market in the second half of 2007, after the Reserve Bank of New Zealand began accepting those bonds in its repo facility.
Short selling and securities lending in the midst of falling and volatile markets
Subordination of shareholder claims in Australia: a comparison with the United Kingdom post-sons of Gwalia
The January 2009 issue of the Journal of International Banking Law and Regulation contains two articles of interest.
The first article is entitled Short selling and securities lending in the midst of falling and volatile markets by Paul Ali. This article discusses recent efforts by regulators in the United States (US), United Kingdom (UK) and Australia to limit short selling, in response to volatility in world financial markets. Ali also considers the recent Australian case of Beconwood Securities Pty Ltd v ANZ Banking Group Limited [2008] F.C.A. 594 as it related to securities lending.
Short selling involves selling shares in the hope of subsequently buying them back at a cheaper price. The positive contributions of short selling to price discovery and market liquidity have been discounted by regulators faced with falling markets, increases in price volatility and the erosion of investor confidence. Following the credit crisis and downturn in the financial markets, regulators in Australia, the UK and the US turned their attention to both naked (sale of shares to which the seller does not have title) and covered (sale of shares that have been "borrowed" under a securities loan) short selling.
The UK has traditionally left short selling unregulated, subject only to the rules of the London Stock Exchange. However on 18 September 2008 the UK Financial Services Authority introduced a temporary ban on both naked and covered short selling of shares in 32 financial sector companies. This ban is to run until 16 January 2010. In addition, every person holding, at the start of this ban, a short position relating to 0.25 per cent or more of the issued stock of any company must disclose that position to the market daily.
The US Securities Exchange Commission's (SEC) Regulation SHO already required, prior to the financial crisis, brokers to ensure that if, at the time of a sale order being placed, the seller had not borrowed or arranged to borrow the shares to be sold, the broker must have "reasonable grounds to believe that the shares can be borrowed" before executing the trade. The SEC banned all naked and covered short selling on 799 financial sector companies from 19 September to 17 October 2008. The SEC also introduced a penalty for brokers who fail to settle short sales, effectively barring them from using the "reasonable grounds" test, which runs until 31 July 2009.
In Australia, the circumstances in which short sales may be effected have been framed as exceptions to the requirement in the Australian companies legislation that a seller of shares must have, or reasonably believe that it has, at the time of sale, a "presently exercisable and unconditional right to vest" those shares in the buyer. One such exception is the approval of sufficiently liquid shares by the Australian Securities Exchange (ASX) as the subject of a naked short sale. The ASX, on 19 September 2008, removed all shares from this list, effectively banning naked short sales.
By entering into a securities loan for the purpose of borrowing shares, a short seller can still effect a covered short sale in Australia. Whether a securities loan gives an unencumbered title to the borrower or whether the transfer is by mortgage or charge, therefore leaving an equity of redemption with the lender, was considered in the recent Australian case of Beconwood Securities Pty Ltd v ANZ Banking Group Ltd [2008] F.C.A 594. The Court found that the securities loan gave rise to a sale of the borrowed shares and not a mortgage. Ali criticises the Court's reliance on the fact that the plaintiffs were unable, under the terms of the securities loan, to force redemption of the actual shares loaned, arguing that more weight should be given to the economic, rather than legal substance of the loan. Ali concludes by noting that even when a measure of what is seen as normality returns to world financial markets, it is likely that recently introduced regulation on short selling will not be lifted entirely.
The second article is entitled Subordination of shareholder claims in Australia: A comparison with the United Kingdom post-Sons of Gwalia by Keith Kendall. The article addresses the implications of the Sons of Gwalia case, compares Australian law with that of the UK, and argues that the decision in Sons of Gwalia may not be as surprising as many commentators claim.
In Part I, Kendall analyses the reaction to Sons of Gwalia. Contrary to longstanding practice, the case allowed certain shareholders to rank alongside unsecured creditors in a liquidation. This created substantial concern regarding corporate Australia's ongoing ability to source unsecured debt financing, particularly from the overseas market.
Part II outlines the law in Australia. Section 563A of the Corporations Act 2001 requires a line to be drawn between a shareholder claiming in the capacity of a member and a shareholder claiming in another capacity, with the latter taking priority. In Sons of Gwalia, the majority preferred an approach based on the statutory construction of this section over any policy considerations, and found for the shareholder.
In Part III, Kendall examines the position in the UK. Soden v British & Commonwealth Holdings Plc (In Administration) [1998] AC 298 had a similar fact pattern to that in Sons of Gwalia. It was held in Soden that subordination is the price that members pay for limited liability under the statutory contract created by s 14(1) of the Companies Act 1985. As such, the principle underlying s 74(2)(f) of the Insolvency Act 1986 was not that members come last, but that the rights of members, as members, come last. As in Sons of Gwalia, the court found for the shareholder.
Part IV compares the two jurisdictions and comments on the direction of Australian law. Kendall notes that it is overly simplistic to view Sons of Gwalia as aligning UK and Australian law. Whereas the starting point for the analysis in Sons of Gwalia is the statutory wording, in Soden it is the statutory contract. And while s 563A displayed no particular policy intent, other jurisdictions' statutes explicitly encapsulate policy. All that can really be said is that both jurisdictions favour non-subordination for claims lodged by members otherwise than in their capacity as members, where the shareholding has been obtained on the secondary market.
Kendall points out that the UK has had this legal position for a decade, and two years have passed since Sons of Gwalia, both without calamity. Moreover, Sons of Gwalia may not have changed anything - there are many examples where members of a company may claim against the company otherwise than in their capacity as members. And finally, the issue of subordination only arises in the event of corporate failure. Consequently, even if commentators are correct that Sons of Gwalia will affect the cost of debt financing, this effect is likely to be minimal given the low rate of corporate failure among publicly listed companies in Australia.
Selling complex financial products to sophisticated clients: JP Morgan Chase v Springwell
Irish Government guarantees
Cross-border insolvency: centre of main interests
The February 2009 issue of the Journal of International Banking Law and Regulation features three articles of interest.
The first article is entitled Selling complex financial products to sophisticated clients: JP Morgan Chase v Springwell by Christa Band. This article identifies and examines obligations that a bank owes to clients and/or those to whom it sells products. It also examines how a bank's liability can be excluded or restricted and what limitations there may be on the bank's freedom in this regard. The case of JP Morgan Chase Group v Springwell Navigation Corporation [2008] required the Court to consider many aspects of the relationship between a bank (here, "Chase") and a (sophisticated) investor client ("Springwell").
Springwell's claim resulted from the Russian financial crisis of 1998, as it had invested heavily in emerging markets stocks. Its portfolio with Chase totalled US$700 million, most of which was lost. Springwell put its claims in a variety of different ways, all of which were unsuccessful.
Arguing misrepresentation, Springwell had to show dishonesty or that the defendant had no reasonable foundation for the view expressed, neither of which they could establish. This was largely due to the limitation of liability in the relevant provisions of the contractual documentation between Chase and Springwell. Springwell was contractually precluded from bringing a claim in misrepresentation.
Springwell also argued that Chase owed a duty of care in respect of investment advice, independent from that of the contractual obligations and limitations. Although unsuccessful on the facts, the possibility that such a duty of care may arise in similar situations is acknowledged by the author. However this seems unlikely. If a purchaser of investments wants advice in relation to their portfolio, they should contract, and pay, for that advice. The fact that Springwell was a "highly sophisticated investor" also pointed against the existence of a duty of care.
In addition, Springwell argued a fiduciary relationship existed between the parties, based on the principle from Interfoto Picture Library Ltd v Stiletto Visual Programmes Ltd. It was argued that because Chase did not draw the exclusion provisions in the contract expressly to Springwell's attention, Chase should not be able to rely on them. However the Court distinguished Interfoto because of the contractual nature of Springwell.
Three other arguments failed: a unilateral mistake by Springwell as to the nature and effect of the relevant provisions, coupled with Chase's unconscionable behaviour; estoppels; and the effect of the Unfair Contract Terms Act 1977.
The second article is entitled Guaranteed credit institutions and deposits in Ireland by Dr Max Barrett. This article looks at the legislative framework for the guarantee scheme set up by the Irish government.
The Credit Institutions (Financial Support) Act 2008 ("Act") empowers Ireland's Minister for Finance to provide financial support in respect of the borrowings, liabilities and obligations of any credit institution which the Minister may specify by order.
The Act also substitutes the Minister for the Irish Competition Authority where a merger or acquisition involves a credit institution and the Minister, after such consultation with the Irish Central Bank and the Irish Financial Regulator as is necessary, is of the opinion that the proposed merger or acquisition is necessary to maintain the stability of the financial system in Ireland and there would be a serious threat to the stability of that system if that merger or acquisition did not proceed.
Pursuant to section 6 of the Act, the Credit Institutions (Financial Support) Scheme was set up in October 2008. The article considers the method of joining the Scheme, the benefits received, the coverage of obligations, costs incurred by covered institutions, the treatment of Irish subsidiaries of institutions authorised outside Ireland and the claims which may be made.
The European Communities (Deposit Guarantee Schemes) Regulations 1995 also provides for compensation to be paid to customers of a financial institution operating in Ireland in the event of such a financial institution being unable to repay deposits. The article discusses "top-ups", whereby a credit institution authorised in another EU member state with a branch in Ireland is allowed to maintain a "top-up" contribution into the Irish deposit scheme to ensure their customers enjoy the same level of protection the same customers would enjoy with Irish-authorised credit institutions.
The article concludes by saying that it remains to be seen whether increased compensation will be sufficient to allay any difficulties confronting credit institutions in Ireland. The possibility remains that the Irish government may inject capital into certain credit institutions.
The third article is entitled COMI: The sun around which cross-border insolvency proceedings revolve: Part 1 by Simona Di Sano. This article discusses the legal issues arising from cross-border insolvency proceedings and legislative responses by the EU and the US. The analysis is focused on the interpretation of the term "centre of main interests" ("COMI") in each jurisdiction.
EC Insolvency Regulation 1346/2000 governing cross-border insolvency proceedings attempted to harmonise the private and procedural international laws among the European Union's member states.
The debtor's COMI is the pivot around which the whole structure of the EC Insolvency Regulation is based. Firstly, the Regulation only applies if the debtor's COMI is located within the territory of a contracting member state (Denmark alone has not contracted). Secondly, the court of the member state where the COMI is located has exclusive jurisdiction to open main insolvency proceedings. Thirdly, the law of the member state where the main or secondary insolvency proceeding has been opened governs such proceeding.
The EC Insolvency Regulation does not define COMI, though some guidance is set out in recital 13. The author suggests that the Community legislator's intention was for national judges to determine COMI on a case-by-case basis in the light of universal, European (not national) criteria and that this position is authoritatively confirmed by the European Court of Justice's decision dated 2 May 2006 in the Eurofood IFSC Ltd case. The author considers it desirable for national courts of first instance to start deferring questions on COMI to the ECJ in order to create a uniform application of the EC Insolvency Regulation. However, the author identifies a gap in the EC Insolvency Regulations created by a lack of provisions ruling the insolvency of a corporate group and posits that this demands the intervention of the community legislator rather than the ECJ.
The article then moves onto to discuss and analyse the US approach to cross-border insolvency proceedings. The US legal framework, set out in chapter 15 of the US Bankruptcy Code, is also based on the Model Law on Cross-border Insolvency. Chapter 15 is designed to streamline the recognition process of non-US insolvency proceedings and make it as simple, fast and inexpensive as possible. Chapter 15 does not define COMI, but presumes it is where the registered office is located.
Issue 16, 2008 of the Insolvency Law Journal contains the article Where is a corporation's '"centre of main interests"' in international insolvency? by Judith Wade. This article addresses the trend internationally for co-operation between jurisdictions in the administration of insolvencies. The author discusses the two most important instruments formulated to facilitate such co-operation, the United Nations Commission on International Trade Law Model Law on Cross Border Insolvency ("Model Law") and Europe's Insolvency Regulation.
The increasing incidence of cross-border insolvencies reflects the global expansion of trade and investment. However, only a limited number of countries have a legislative framework for dealing with cross-border insolvency. The author believes this frequently results in inadequate and inharmonious legal approaches which are not conducive to fair and efficient administration of cross-border insolvencies.
The Model Law has been available since 1997 for countries to adopt into their domestic legislation. Central to the Model Law is that, apart from permitting the opening of local insolvency proceedings, where an administration incorporates both local and foreign elements, countries should co-operate to facilitate a "main administration" in the jurisdiction where the company's "centre of main interests" is located. Due to the advantages accorded to a "main administration", the meaning of the "centre of main interests" is of crucial importance.
Australia became part of the co-operative regime when the Cross-Border Insolvency Act 2008 came into force in 2008. The Act, adhering to the Model Law, does not define COMI. A prima facie presumption exists that a company's COMI is located in the jurisdiction of the registered office. Australian courts will be expected to make use of international precedents in determining a company's COMI. The author considers this problematic, pointing out that the United Nations itself has recognised that jurisprudence on this point remains unsettled. The article examines and explains the meaning of COMI, particularly in light of decisions made in the United States under Chapter 15, the United States enactment of the Model Law.
In conclusion the author suggests that, as in the United States and the European Union, courts should, when interpreting COMI, accord predominance to the location of the headquarters of the foreign company and, where the directors and executives operate from different jurisdictions, the jurisdiction from where directors and executives administer the company's overall interests.
The ISDA Master Agreement and CSA: close-out weaknesses exposed in the banking crisis and suggestions for change
The January issue of the Butterworths Journal of International Banking and Financial Law contains the article The ISDA Master Agreement and CSA: close-out weaknesses exposed in the banking crisis and suggestions for change by Edmund Parker and Aaron McGarry. In the first part of the article the authors use the Lehman Brothers collapse and the Icelandic bank defaults to highlight risks within the 1992 and 2002 ISDA Master Agreements. The authors address each of the risks by suggesting a number of strategies to minimise exposure to counterparties. In the second part of the article the authors point to some major weaknesses in credit support annexes ("CSAs") and provide some comments.
According to the authors the main issues with the 1992 and 2002 ISDA Master Agreements are: (i) parties transacting where they only have a "deemed" Master Agreement (ie on the basis they will enter into a Master Agreement in the future), (ii) harsh termination notice provisions, (iii) weaknesses in the market quotation mechanisms, and (iv) a lack of agreed level of detail in calculation statements.
Dealing with each of the problems in turn, the authors propose: (i) ISDA develop a protocol to provide certainty where parties trade with "deemed" Master Agreements, (ii) parties use the 2002 Master Agreement wording surrounding termination notices, (iii) reform to the pricing discovery process following a default, and (iv) ISDA develop a template calculation statement.
The authors then set out the principal weaknesses in CSAs. These are: (i) confusion surrounding the differences in the English and New York forms, (ii) re-hypothecation risk, (iii) daylight risk (being the risk of a movement in mark to market exposure accompanied by a default, prior to the return of the collateral), and (iv) quality of collateral risk. The authors suggest that a lack of understanding of these weaknesses, particularly in relation to rights in transferred collateral has exacerbated problems in the recent wave of market defaults.
In conclusion the authors suggest that all parties to ISDA arrangements should conduct a full audit of all live Master Agreements and CSAs to ascertain any risks inherent in the documentation. Given the time constraints following a default event they also recommend preparing template forms of notices and calculation statements.
This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com
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