Contents:
June 2009
Contents:
The case of Miller v Parkin (HC Auckland, CIV 2008-404-003323, 15 December 2008, Courtney J) was an appeal to the High Court on three matters that arose out of a disputed purchase of shares.
The appellant, Mr Miller, was the owner of SunTec International (New Zealand) Limited ("SunTec"). The respondents had been involved in negotiations with the appellant to purchase 50 per cent of the shares in SunTec, and had signed a heads of agreement and made two payments in connection with the transaction. However, due to an argument with the appellant, they decided not to proceed with the purchase and sought recovery of the two payments.
The first point on appeal was whether there was a binding oral contract. The court held that, despite the heads of agreement having been signed and payments made, there was no reasonable basis for the appellant to believe that the respondents had committed themselves to the transaction, particularly because they did not have finance approved. The first payment of $50,000, paid as a goodwill gesture during the course of negotiations, was therefore refundable to the respondents.
The court then considered whether Mr Miller, as owner of SunTec was unjustly enriched by a second payment, of $100,000, made to the company. The court concluded that despite the payment being made at the direction of Mr Miller, there was no basis to find Mr Miller was personally enriched by the payment, and that an action for its recovery could therefore only lie against SunTec.
The final point was whether estoppel operated to prevent the respondents from denying the existence of an oral contract to purchase the shares. The court accepted that SunTec's business operations had been expanded based on the understanding that the respondents would become involved in the running of SunTec. The court accepted that the stress and negative health effects suffered by Mr Miller when this involvement ceased (and he was left to manage the expanded operations alone) could constitute "detriment" for the purposes of estoppel. However, as only minimal expenditure had been incurred in connection with this expansion, the court held Mr Miller could extricate himself and return to his original plan without undue difficulty. For that reason the defence of estoppel failed.
On 18 June 2009 the Securities Commission released a staff paper that outlines how the Commission proposes to regulate and supervise "financial advisers" under the Financial Advisers Act 2008. Click here to see a copy of the discussion paper.
On 18 June 2009 the Reserve Bank of New Zealand released draft guidelines for non-bank deposit takers in relation to risk management programmes. From 1 September 2009 every non-bank deposit taker will be required to have a risk management programme that must (among other things):
- set out how the non-bank deposit taker will identify and manage credit risk, liquidity risk, market risk and operational risk;
- set out appropriate and auditable documentation and record keeping requirements; and
- describe the steps the non-bank deposit taker will take to ensure that the programme remains current.
The draft guidelines underline that a risk management programme should:
- identify the risks to be managed;
- take into account the extent to which:
- a single transaction may give rise to multiple risks; and
- one type of risk could trigger other types of risk;
- describe processes, systems and procedures to measure (where possible), monitor and control the risks identified;
- be comprehensive enough to capture all material risks to which the deposit taker is exposed;
- describe the roles and responsibilities for positions in the non-bank deposit taker’s organisation that:
- manage risk for the non-bank deposit taker; or
- accept risk for the non-bank deposit taker;
- prescribe information flows between operational staff and senior management;
- provide a system to address any exceptions, or instances of non-compliance observed;
- describe the deposit taker’s contingency plans;
- describe the processes for reviewing risk management systems, policies and procedures on an ongoing basis; and
- be linked to the deposit taker’s capital adequacy policy (including its policy on the amount of capital required.
Click here to see a copy of the draft guidelines.
Draft guidelines to assist application in becoming an approved dispute resolution scheme / proposed reserve dispute resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008
On 23 June the Ministry of Consumer Affairs released two draft documents:
- The first contains draft guidelines to assist schemes applying to become an approved dispute resolution scheme under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 ("Act").
- The second sets out the proposed form and rules of the reserve dispute resolution scheme under the Act.
The Act requires financial service providers ("FSPs") to be registered. In order for FSPs to be registered they are required to be members of a dispute resolution scheme if they provide financial services to the public. The dispute resolution scheme may be either a dispute resolution scheme approved by the Ministry of Consumer Affairs or the reserve scheme.
Approved dispute resolution schemes will typically be industry led and established schemes. The Act’s scheme approval requirements are fairly high level. The draft guidelines found at Draft Guidelines to Assist Schemes applying for Approval under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 discuss in more detail possible approaches a dispute resolution scheme might consider in order to meet the various matters within its control that the Minister of Consumer Affairs will have regard to in making a decision on approval.
However, the Act recognises that not all financial service providers may be able to co-ordinate to form industry schemes and a default scheme is therefore required. The proposed form and rules of the reserve dispute resolution scheme can be found here.
The first reading of the Anti-Money Laundering and Countering the Financing of Terrorism Bill ("AML/CFT Bill") is expected shortly, following the public release of three Cabinet papers and a regulatory impact statement by the Minister of Justice. The Cabinet papers outline the proposed direction of the legislation and broadly follow the draft AML/CFT Bill released by the previous Government in October 2008, with some technical amendments in response to submissions. An included timetable shows a first reading of the AML/CFT Bill was initially anticipated for May 2009. Click here to see the Cabinet papers.
LTCM and other major hedge fund failures - Part II by Germán Rodriguez Páez
Knowing Receipt
Duty to disclose vs customer confidentiality for a contract of guarantee
Issue 6, 2009 of the Journal of International Banking Law and Regulation contains three articles of interest.
The first article is the second part of a two part article entitled LTCM and other major hedge fund failures - Part II, the first part of which was described in the May 2009 Banking Law Update. Click here for the May BLU.
In Part II the author discusses the nature and causes of three of the largest hedge fund failures: Long Term Capital Management, Amaranth Advisors and Bear Stearns. He then considers the lessons to be taken from each of them.
In the author's opinion, the overall concern is that the potential of hedge funds for systemic instability arises from their unregulated nature which allows and encourages funds to build up high leverage. There is apparently a consensus amongst policy formulators that the industry should be self-regulated, rather than be subject to direct governmental regulation. In February 2008 the Hedge Fund Working Group issued papers that the author considers a promising development towards effective self-regulation. The key areas of regulation those papers have identified are:
- disclosure, so that investors and credit providers may assess the risk they take on with hedge funds;
- risk measurement, so that inadequate risk measurement models (such as the "value at risk" model relied on by Long Term Capital Management) are avoided; and
- valuation, which can be difficult where illiquid, structured securities are involved.
The second article is entitled Bell Group: Guidance for "Unconscionability" and "Public Utility" in the Credit Crunch? By Anna Fitzherbert. The article examines the 2008 decision by the Supreme Court of Western Australia The Bell Group Ltd (in liquidation) v Westpac Banking Corp (No.9) [2008] WASC 239, in particular the courts' decision to hold the twenty banks concerned liable for knowing receipt, despite the absence of any trust or trust property.
The Bell Group litigation originated in 1995 when the liquidators of the Group's constituent companies brought claims against all the banks who had been involved in a failed restructuring attempt orchestrated by the Groups' directors. The directors had entered into "stabilising" transactions with the banks, giving security over all of the Groups' worthwhile assets in priority over other creditors. As a result many companies which did not have any previous obligations to the banks, found their assets exposed or prejudiced. Soon after, the banks realised on the securities and the companies were wound up.
Fitzherbert sets out the traditional case law elements that a plaintiff must prove in order to succeed in an equitable claim of knowing receipt:
- a disposal of the plaintiff's assets in breach of trust or fiduciary duty owed to the plaintiff by another (principal wrongdoer);
- the beneficial receipt by a third party of traceable assets (defendant); and
- knowledge by the defendant that the assets received were traceable to a breach of trust or fiduciary duty.
Unconscionability is generally considered to be the rationale behind the action rather than fault or dishonesty.
The court found that the directors had breached their fiduciary duties and that the banks had knowledge of such breaches. However, there was no traceable trust property as such in this case because the directors never acquired any title to the companies' property nor held any trustee relationship with the companies. Instead, the court reformulated the test for knowing receipt and held that if a third party (in this case the banks) receives securities in the course of or as a result of the breach of fiduciary duty and is aware of such a duty and breach, then that third party faces liability for knowing receipt and the court has grounds to impose a "remedial constructive trust". Interestingly, the Supreme Court of New Zealand has adopted the remedial constructive trust in a 2008 case (Regal Casting Ltd v Lightbody [2008] NZSC 87) involving intentional defrauding by alienation of property.
In conclusion, Fitzherbert points out the connection between this extended remedy for knowing receipt and the current global financial situation, which heightens the significance of equitable relief in the context of cases arising from the "credit crunch". She also notes that, at times of financial instability, equity's flexibility to take account of changing commercial practices is important, especially where such instabilities can have profound effects on market participants.
The third article is entitled Disclosure of information by the Bank - protection of the guarantor's rights or a threat to the doctrine of confidentiality by Dr Charles Y C Chew. The article examines the scope of the duty of disclosure with particular regard to a contract of guarantee when balanced with the lender's strict duty to maintain customer confidentiality.
The author considers the extent to which a creditor is under an obligation to disclose relevant information to the surety. As a general rule, the bank is under no obligation to disclose all material facts except where these facts are unusual. The fundamental issue of the scope of the duty to disclose unusual features will centre on the particular transaction and any relevant circumstances. However, the author notes that this inquiry presents some dilemmas for the creditor as there is no clear guidance provided in law as to what will be considered an unusual fact. Because failure to disclose may render the guarantee unenforceable, a creditor must balance the need to disclose with its duty of confidentiality to the debtor.
The author concludes that statutory measures have already gone some way to regulating the banker-customer relationship and providing certainty in the law, and collectively have widened the duty of disclosure. However, notwithstanding further legislative reform, the author suggests that it is still preferable for lenders to obtain the informed consent of borrowers before making any disclosure which might otherwise render the lender liable for a breach of the duty of confidence.
New issues for trustees in the credit crunch
Valuing derivatives: the close-out amount protocol
Balancing interests in administration: contributions from the Courts and the coalface
The Banking Act 2009: A brave new world?
The April 2009 issue of Butterworths Journal of International Banking and Financial Law contains four articles of interest.
The first article is entitled New issues for trustees in the credit crunch by Esther Cavett and Jessica Walker. The article describes the relationship between bond holders and a trustee, focusing on the negotiation of the indemnity given by holders to a trustee in relation to enforcement action, and in particular the decision in Concord Trust v The Law Debenture Trust Corporation plc [2005] UKHL 27 ("Elektrim").
The role of a trustee in a bond issue is to represent and protect the interests of bondholders and provide a single point of contact for dealing with the issuer. On a transaction where security has been granted by the borrower, the trustee will hold that security for the benefit of the bondholders.
On an event of default, a trustee will almost always wait for bondholders' instructions before taking action to accelerate the bond. Issues may arise over whether an event of default has actually occurred and who the correct bondholders are. Moreover, the trustee is normally not required to take any action unless it has been indemnified to its satisfaction in respect of all liabilities and costs it may incur in connection with any enforcement action. However, because discussions in relation to the indemnity may be contentious and time consuming, a trustee may have no choice but to take some action. To do nothing could expose the trustee to claims that the delay has contributed to the bondholders' loss.
In secured deals, the trustee may have the ability to appoint a receiver to manage the secured assets following an event of default and will normally do so given the receivers will be experienced insolvency practitioners used to dealing with enforcement matters.
In Elektrim, a lower court had found that an event of default had occurred. However, before accelerating the bonds the trustee requested an indemnity, not only for the costs of legal action, but also for damages, including consequential loss suffered by the issuing group, for which the trustee might become liable. The House of Lords held that there was no uncertainty as to whether an event of default had occurred because the trustee had already been directed by the lower court. To make the provision of the indemnity a condition to serving the acceleration notice, the trustee had to show that Elektrim had a reasonably arguable cause of action. It was decided that the trustee did not have complete discretion to impose its own indemnity requirements.
The second article entitled Valuing derivatives: the close-out amount protocol by Christopher Whiteley, addresses the International Swaps and Derivatives Association's recent publication of the Close-out Amount Protocol.
The Close-out Amount Protocol ("Protocol") allows parties to update documentation for over-the-counter derivatives transactions to include revised language from the ISDA 2002 Master Agreement ("2002 Agreement") into the 1992 ISDA Master Agreement (Multicurrency- Cross Border) ("1992 Agreement") for valuing claims if an event of default or an early termination event occurs.
The Protocol is a reaction to failures of major derivatives dealers and the difficulty of valuing claims under the 1992 Agreement whereby parties had to elect which of the "Market Quotation" or "Loss" methods was to apply when one party defaulted.
Most parties and commentators prefer Market Quotation on the basis that it appears less subjective. However, there are problems associated with this valuing method. First of all, it may not always be practical to get quotations and even if obtained, they may not give a commercially reasonable result. Secondly, the concept of a replacement transaction is meaningless where the determining party is itself insolvent or close to insolvency.
The definition of "Close-out Amount" in the 2002 Agreement is an amalgamation of Loss and Market Quotation. The determining party has a choice of external data, internal data and models, third party quotations or the actual results of adjusting, terminating or replacing any related hedging transactions. It also applies a set of standards for the determining party when switching between different price sources. These give more discretion to the determining party than the definition of "Settlement Amount" in the 1992 Agreement.
The author considers the addition of the Protocol to be desirable. The alternative is to amend the 2002 Agreement to remove the reasons the 1992 Agreement remains popular and to have the 2002 Agreement adopted more widely.
The third article is entitled Balancing interests in administration: contributions from the courts and the coalface by Dr Sandra Frisby. The article considers two recent cases where individual creditors sought to assert their rights in circumstances where to do so might affect the return for their counterparts. It examines the approach of the court in each case to the inevitable balancing exercise between the rights of certain creditors in administration and the best interest of all creditors.
In Innovate Logistics Ltd v Sunberry Properties Ltd [2008] EWCA CIV 1321, Innovate Logistics Limited ("Innovate") leased premises from Sunberry Properties Limited ("Sunberry"). The lease contained a covenant prohibiting Innovate from assigning the lease or parting with or sharing possession or occupation of the property. Innovate encountered financial difficulties and granted a short term license to Yearsley Holmewood Ltd to occupy the leased premises. Sunberry applied for permission to commence proceedings for breach of the leasehold covenant. The judge at first instance granted leave but the Court of Appeal overturned it on the basis that it would prejudice the achievement of the purpose of administration. The purpose was not just the sale of Innovates business but the completion of its contracts and collection of debts. Weighing the potential loss suffered by Sunberry against that likely to be suffered by all if proceedings resulted in termination meant the balance was in favour of refusing leave.
In Re Lehman Brothers International (Europe) [2008] EWHC 2869 (Ch) a group of investment funds were seeking information from the administrators of Lehman Brothers as to the state of certain securities. The administrator decided that getting the information requested would require substantial resources and would only benefit the claimants. Although it was accepted that a failure to provide information meant the applicants would suffer harm, the administrator was not in breach of obligations imposed on them by statute and was therefore not acting unfairly. An administrator is not required to be at the "beck and call" of each creditor and should get a wide measure of latitude in the way they go about the exercise or their powers.
The fourth is entitled The Banking Act 2009: A brave new world? by Kate Gibbons and Julia Machin. It outlines the provisions of the UK Banking Act 2009 (the "Act"), which came into force on 21 February 2009. The article focuses on Part 1 of the Act which provides the government with three stabilisation options in respect of a UK bank encountering financial difficulties, namely (1) the sale of all or part of the bank's business to a private sector purchaser; (2) transfer of all or part of the business to a company wholly owned by the Bank of England; or (3) taking the bank into temporary public ownership.
Property and share transfers can be used to achieve the stabilisation options. Property transfers allow property, rights or liabilities of a specified bank to be transferred in whole or in part, and share transfers extend to "securities" including shares and stock, debentures and any instrument creating or acknowledging a debt. Both transfer powers allow the overriding of contracts, and contract or legislative provisions purporting to restrict such a transfer are ineffective. A transfer can also take effect free from any encumbrances, and a wide variety of default event provisions which would otherwise be triggered can be disapplied.
When property transfers are made, there is a presumption that 'good' assets will be transferred and 'non-performing' assets left behind. This affects transactions where the commercial rationale is derived from a group of assets and liabilities, and splitting them would destroy the commercial intention of the parties.
In response to these concerns, the Act empowers the Treasury to make orders restricting partial property transfers in cases involving or affecting protected arrangements. For this purpose 'protected arrangements' mean security interests, and set-off and netting arrangements. The authors highlight a number of other provisions that will continue to spark legal debate.
Parts 2 and 3 of the Act create insolvency and administration regimes for banks. The Act also contains other miscellaneous provisions, for example the Financial Services Compensation Scheme.
The recent United Kingdom case of R (on the application of Mercury Tax Group and another) v HM Revenue and Customs Commissioners and others [2008] EWHC 2721 (Admin) warns against the practice of taking signed signature pages from earlier incomplete drafts of documents and attaching them to later versions that have been completed and amended.
The Court rejected the argument that differences between the early signed draft version and the final version were implicitly authorised, and distinguished the practice of "recycling" signature pages to the subsequent alteration of a document that a party had originally signed (which has previously been found to be lawful: Koenigsblatt v Sweet [1923] 2 Ch 314).
The Court held that the transfer of signature pages from an incomplete version of a deed to a later, completed and amended version was not effective, rendering the deed invalid. The Court also expressed concern about the practice of "recycling" signature pages in general, meaning Mercury may have implications for all contracts where signature is regarded as an essential element.
The Court's view was that where the parties regarded signature as an essential element in the effectiveness of a document, the common understanding is that the document should exist as a discrete physical entity (whether in a single version or in a series of counterparts) at the moment of signing. In addition, in order to validly execute a deed, the signature must be witnessed. The Court held this necessarily required the signature and attestation to form part of the same physical document.
Mercury makes it clear that signature pages should never be transferred from one version of a deed to another.While the case was focused on documents taking the form of deeds, Mercury may also impact on signing practices adopted in respect of ordinary contracts and serves as an important reminder to strictly observe execution formalities.
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