Contents:
June 2008
Contents:
Commerce Commission v Avanti Finance Ltd (DC, Auckland, CRI-2007-004-010204, 10 June 2008, A E Kiernan J).
Avanti Finance Limited (“Avanti”) is a finance company that offers loans to consumers for purposes such as funding the purchase of motor vehicles, debt consolidation, and second mortgages. A number of Avanti’s customers have impaired credit histories and find it difficult to borrow from banks.
The Commerce Commission brought charges against Avanti in respect of the early prepayment provisions in 50 of Avanti’s loans. Under the terms of the loans, if customers chose to repay their loans in full early, Avanti would charge them an additional fee calculated according to a formula. Section 51 of the Credit Contracts and Consumer Finance Act 2003 (“CCCFA”) allows creditors to charge customers an amount upon full prepayment that includes a reasonable estimate of the creditor’s loss following the prepayment, provided that such a charge is authorised by the contract. In this case, the Commerce Commission argued that the amount Avanti was charging in 50 contracts that were repaid early was not a reasonable estimate of Avanti’s loss.
Section 54 of the CCCFA provides that a creditor may use the formula set out in regulations made under the CCCFA to calculate a reasonable estimate of its loss following full prepayment. Alternatively, a creditor may use another “appropriate” procedure (provided that the procedure is set out in the contract). However, if the creditor uses the formula set out in the regulations, section 54 deems the resulting amount to be “a reasonable estimate of the creditor’s loss”, providing a safe harbour for creditors in court proceedings.
In this case, Avanti used a formula for calculating its loss that was different from the safe harbour formula in the regulations. The Commerce Commission argued (1) that the formula did not arrive at a reasonable estimate of Avanti’s loss and (2) that Avanti’s description of the prepayment fee calculation in its contracts was misleading and in breach of the Fair Trading Act 1986.
Avanti argued that, taking its business structure into account, using the formula set out in the regulations would not give a reasonable estimate of its loss following full prepayment. The formula in the regulations is based on the assumption that when a loan is repaid early, the creditor's loss is the difference in between the interest rate on the loan and the interest rate that the creditor could re-lend the money at. Accordingly, if market interest rates have increased between the time the borrower takes out the loan and the time it repays it, the formula in the regulations will result in a deemed nil loss to the lender.
Avanti argued that the assumption that the formula in the regulations was based on was not true of its particular case. Avanti's evidence was that it did not lend at capacity, ie at any given moment it had spare funds that it could lend to a new borrower. Its ability to make new loans did not depend on existing loans being repaid. Accordingly, for Avanti there was no link between a loan being repaid and it making a new loan. For Avanti, therefore, the loss resulting from full prepayment was effectively the sum of all outstanding interest payments on the loan, less any reduction in Avanti's own cost of funds resulting from it paying back a comparable amount of money. The actual formula adopted by Avanti did not in fact seek to recover this full amount, but rather linked the amount recovered to Avanti's own cost of funds.
The District Court agreed with Avanti and found that the formula it used to calculate its estimated loss was reasonable. Furthermore, the court found that Avanti's description of its prepayment fee calculation was not misleading in terms of the Fair Trading Act.
The Commerce Commission has indicated that it will appeal the decision.
The recent case of Khan as trustee for The Khan Family Trust v Hadid; Hadid v Khan as trustee for The Khan Family Trust (No 2) [2008] NSWSC 119 addresses when the fraud exception to the doctrine of indefeasibility of title will apply.
In the case Abdallah Hadid ("Hadid") agreed to guarantee a short term loan of $30,000 to be taken by a business associate, Anna Maria Palumbo, a travel agent for Overseas Travel ("OT"). Instead, a two month loan of $130,000 was taken out in the name of Hadid and his wife, their signatures forged and the money, less fees, paid directly to OT. The loan was supplied by The Khan Family Trust ("Khan"), acting through a mortgage manager, Response Finance Pty Ltd ("Response"), and the terms of the loan stated that security was to be by caveat over Hadid's home with a mortgage to be registered only if the loan went into default. When the loan was made the caveat was registered, and a second ranking mortgage was registered after the first month.
There was no suggestion that Khan or Response was involved in the forgery. When the loan was not repaid, Khan and Response moved to enforce the mortgage over Hadid's house. Hadid disputed the validity of the mortgage.
Rothman J examined the fraud exception to indefeasibility, referring to the Privy Council decision in Assets Co Ltd v Mere Roihi [1905] AC 176:
"… the fraud which must be proved in order to invalidate the title of a registered purchaser for value,… must be brought home to the person whose registered title is impeached or to his agents. Fraud by persons from whom he claims does not affect him unless knowledge of it is brought home to him or his agents."
The question here was whether Khan's agents (being Response, and the solicitor for Khan and Response, Manuel Theos ("Theos")) had sufficient knowledge of the fraud being committed against Hadid.
His Honour found that while the lodging of the caveat was not affected by the forgery, the registration of the mortgage was, and Kahn's mortgage was therefore defeasable. The reasoning for this was that at the time of settlement of the loan and registration of the caveat, while there were some unusual aspects in the dealings with John Hancock (ostensibly Hadid's lawyer but presumably working in concert with OT), there were not enough to affect Khan's interest. However, by the time of the registration of the mortgage, Theos and Response (and through their agency, Khan) knew that Hadid was disputing the loan and that there was further inconsistent documentation from Hancock about the purpose and background to the loan. Furthermore, Theos and Response were now in possession of several documents purportedly signed by Hadid but with significantly different signatures. In addition, His Honour found that the registration of the mortgage was a breach of contract as there was still another day to go before the loan was in default.
While the mortgage was defeated, Khan was able to claim against John Hancock and Lorenzo Flammia (the solicitor who allegedly witnessed Hadid's signing of the documents) under the Fair Trading Act 1987 (NSW).
The case of Instant Funding Limited v Greenwich Property Holdings Ltd (HC, Auckland, CIV 2007-404-6806, 20 December 2007, Venning J) is an example of what can defer the priority of a registered mortgagee as against a caveat holder in the context of a mortgagee sale.
Instant Funding ("IFL") made an advance to Monice Properties Limited to facilitate the purchase of a property in September 2005. The loan was secured by a mortgage over the property registered in September 2005. In June 2006, Monice agreed to sell the property to Greenwich. To protect its interest, Greenwich registered a caveat against the property's title in September 2006. Greenwich also spent money obtaining resource consent and entered into possession. Settlement occurred on 31 March 2007.
On 2 July 2007, Monice was placed in receivership, constituting a default under the mortgage. Monice also failed to pay the interest and rates due during July 2007. IFL contemplated assigning its mortgage to Vector Finance Limited, a company associated with Greenwich. However, at the request of the receivers of Monice it decided not to. IFL instead exercised its powers as mortgagee and sold the property by tender on 2 October 2007. Settlement was due the day after this judgment was delivered.
IFL asked Greenwich to remove its caveat to facilitate the settlement. Greenwich refused. IFL therefore sought an order to remove the caveat. The issue was whether Greenwich's interest had been affected by the mortgagee sale.
The court recognised that Monice had the right to sell the property to any party, subject to IFL's rights as mortgagee. Those rights could, however, be displaced by IFL's consent. The court found that IFL did not consent to the sale to Greenwich. Neither Monice nor Greenwich approached IFL to seek formal consent to the sale.
Greenwich argued that Monice, through its receivers, intended to defeat Greenwich's interest in the property and that IFL knew of this intention and had acted to assist the receivers. Greenwich submitted that IFL's knowledge (of the sale to Greenwich being subject to resource consent) and conduct in using its rights as mortgagee gave it an intention to defeat Greenwich's position and constituted fraud for the purposes of the Land Transfer Act 1952 ("LTA"). The court held that the fact that IFL became aware of Greenwich's agreement, and even that Greenwich had spent money pursuing a resource consent, was in itself insufficient to establish fraud under the LTA.
IFL was entitled to exercise its rights as mortgagee even with the knowledge of Greenwich's interests, save for any legal consequences of its dealings with the Monice receivers. However, Venning J said it was arguable that IFL had acted in a way to defeat Greenwich's rights under its long-term sale and purchase agreement. That was sufficiently dishonest for the purposes of the LTA to defeat the mortgagee's priority.
In the end, Greenwich's caveat survived the application subject to the conditions that Greenwich had to provide an undertaking as to damages and had to pursue substantive proceedings to enforce its claim "with diligence".
What can be taken from this case is that the courts are cautious to find fraud under the LTA. However, a party with an interest in land may find judicial support for their position if they are deprived of that interest by another party who knew of that interest.
On 13 June 2008 the New Zealand and Australian governments jointly announced that the Mutual Recognition of Securities Offerings ("MRSO") agreement between the countries was now in force. Regulations have recently been promulgated in both countries (3 June 2008 in New Zealand and 30 May 2008 in Australia) to bring the new regime into force.
The regime allows the same offering documentation to be used in both New Zealand and Australia when securities are offered in both those countries. Securities that may be offered in both countries pursuant to the new regime are equity securities, debt securities, interests in collective investment schemes and any interest in or option to acquire any of those securities.
Issuers based in New Zealand and Australia wishing to offer in the other country under the MRSO regime 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 set out in the Securities (Mutual Recognition of Securities Offerings - Australia) Regulations 2008 and for New Zealand issuers wishing to offer securities in Australia in the Corporations Amendment Regulations 2008 (No. 2).
Press releases and guidance on how to apply the new rules can be found at www.sec-com.govt.nz.
The Minister for Social Development, Ruth Dyson, announced on 18 June 2008 that the government was planning to enact a code of practice for reverse mortgages. The Minister did not consider that there were any current problems in the area of reverse mortgages, but said that the area was one that might be abused in the future.
The March 2008 issue of the Australian Banking and Finance Law Bulletin contains two articles of interest.
- The first article is entitled What's new in 2008? by Graeme Howatson. The article contains a summary of the following recent and upcoming Australian regulatory developments:
The Financial Services Working Group
On 5 February 2008, the federal government announced the formation of the Financial Services Working Group which is made up of officers from the Treasury, the Australian Securities Investments Commission ("ASIC") and the Department of Finance and Deregulation. Included in the Working Group's future tasks is the proposal to make recommendations to reduce the length and complexity of financial services disclosure statements.
Superannuation
On 14 February 2008, the Minister for Superannuation announced the commencement of consultation with industry organisations and practitioners regarding practices in self managed superannuation funds with particular concern being expressed in relation to the marketing strategies used in relation to such funds. A Superannuation Advisory Group was also established to provide an ongoing means of direct consultation with the superannuation industry in general.
Corporate governance
On 19 February 2008, in the keynote address to the ASIC Summer School, the Secretary to the Treasury noted that there are concerns in Australia relating to the present corporate governance regime in the sense that it is causing directors to be overly cautious in their decision making. The Secretary also noted that there is an emerging trend for legislation to impose personal liability on company officers for corporate fault and that it was the federal government's view that the use of such provisions should be minimised. The Secretary announced that the Treasury is examining these issues with a view to improve and clarify the corporate governance regime.
The federal government has also announced that the Corporations Act 2001 (Cth) will be amended so that persons who are disqualified from managing companies in New Zealand will automatically be disqualified in Australia.
Personal property securities reform
On 6 March 2008, the Attorney-General said that a draft Personal Property Securities Bill will be released sometime soon for public consultation. The draft Bill follows on from a series of discussion papers released last year.
Australian Prudential Regulation Authority ("APRA")
On 13 February 2008, the Financial Sector Legislation Amendment (Review of Prudential Decisions) Bill 2008 was introduced into federal Parliament. The main provisions of the Bill include:- The removal of APRA's power to disqualify a person from being or acting as a responsible person for an APRA regulated entity on the grounds that they are not a fit and proper person and vesting this power in the Federal Court; and
- A general power for APRA to give directions to a body corporate, some of which may be reviewed by the Administrative Appeals Tribunal, replacing specific direction powers found under the Banking Act 1959 (Cth), the Insurance Act 1973 (Cth), and the Life Insurance Act 1995 (Cth).
- The second article is entitled Reverse mortgages - some regulatory issues and developments by Dr Janine Pascoe of Monash University. A reverse mortgage (referred to as a lifetime mortgage in the UK) is a loan typically marketed to seniors that is used to release the equity in a property either as one lump sum or multiple payments. The mortgagor's obligation to repay the interest and principal of the loan is deferred until the mortgagor dies, the home is sold or the owner leaves (eg into aged care); hence the attraction to retirees on limited incomes. However, the disadvantage to the mortgagor is that interest is usually set at one or two percentage points above the prevailing standard variable home mortgage rate, and is capitalised during the term of the loan, with a corresponding decrease in the borrower's equity.
The article discusses the following topics relating to the rapidly growing area of reverse mortgages:
- issues of procedural and substantive unfairness to mortgagees, such as inadequate disclosure, heavy-handed tactics by mortgagees, and incomprehensible documents;
- the adequacy of the practices of reverse mortgage credit provides, and intermediaries in abating the unfairness described above;
- important terms in reverse mortgage documents;
- the current Australian regulative and legislative framework governing reverse mortgages;
- industry self-regulation; and
- recent Australian developments affecting reverse mortgage lending, such as the Uniform Consumer Credit Code reforms, proposed national uniform regulation of finance brokers, proposed unfair contract terms legislation, and the 2007 changes to the SEQUAL (Senior Australians Equity Release Association of Lenders) Code of Conduct.
Issue 5, 2008 of the Journal of International Banking Law and Regulation contains two articles of interest.
- The first article is entitled Koo Golden East Mongolia v Bank of Nova Scotia (based on the case of the same name) by Jonathan Lawrence.
This discusses the role and powers of central banks and the relationship they have with their own bankers. Koo Golden East Mongolia ("Koo") was a Mongolian gold mining company. Under the law of Mongolia, only the central bank, Mongolbank, has the right to hold gold deposits. Koo deposited gold with Mongolbank. Mongolbank then placed the gold offshore with the Bank of Nova Scotia ("BNS"). The purpose of this exercise was to increase the country's currency reserves. Koo sought a "Norwich Pharmacal" relief (a disclosure order) against BNS so it could determine who refined the gold, what happened to the gold, and what had happened to the proceeds. Two of the three grounds on which BNS challenged the claim were state immunity and the criteria for granting a "Norwich Pharmacal" not being satisfied.
State immunity relates to the protections given to a state from being sued in the courts of other jurisdictions. Of relevance was the State Immunity Act 1978 (UK), which provides that a state is immune from proceedings, except where (inter alia) proceedings relate to a commercial transaction entered into by the state. The Act also provides that a separate entity is immune from the jurisdiction of the United Kingdom courts if the proceedings relate to anything done by it in the exercise of sovereign authority, and furthermore that the property of a state's central bank shall not be treated as in use for a commercial purpose. It was held that BNS was an agent for Mongolbank, therefore to grant relief would breach the principle of state immunity.
In relation to the order itself, there are several types of circumstances in which a claimant may seek such relief, one of which involves the identification of wrongdoers in order to enable the claimant to initiate proceedings against them. The Court of Appeal concluded that, in principle, Koo would be entitled to the "Norwich Pharmacal" order. However the court's discretion should be used to refuse such relief where, for example, the order would result in a breach of confidence as between the bank and its customer, particularly where the customer is a central bank. Other factors weighing in favour of the refusal to grant relief were that the principle dispute was one between Koo and the Mongolbank, therefore the dispute could be resolved in Mongolia.
The article illustrates the fact that dealings between state banks and their own bankers in the United Kingdom cannot be investigated by third parties to circumvent the state immunity enjoyed under United Kingdom law, and also the availability of "Norwich Pharmacal" orders under English law.
- The second article is entitled Legal aspects of climate change in Europe: Is the European Union Emissions Trading Scheme greater than the sum of the parts, by Christel Bourbon-Seclet.
This article discusses the legal framework of the European Union's proposed remedy to the problem of greenhouse gases ("GHG").
The author identifies the Kyoto Protocol signed in 1997 as the leading "market mechanism" system for dealing with GHG. The author believes the Kyoto Protocol has been the main impetus for the creation of an international market in pollution instruments. In Europe both Member States and the European Union as a whole are parties to the Kyoto Protocol. Member states aim to reduce their GHG emissions by 8% jointly by 2012.
To achieve this reduction the European Union designed the European Union Emission Trading Scheme ("EU ETS"). The EU ETS scheme aims to achieve these reductions in a cost effective manner with the involvement of the private sector, eventually extending the scheme beyond GHG. Actors in the private sector can earn and be apportioned credits in the scheme for their role in GHG production/reduction. This scheme created the "world's first international market in CO2 emission allowances and the biggest emissions market of any kind". The EU ETS aims for a 20% reduction in GHG emissions by 2020, which could be the base for a global trading system.
The legal basis for the EU ETS is in many source documents such as the Kyoto Protocol, European Union directives and international climate change treaties. The Kyoto Protocol specifically allows trading of international carbon credit allowances. The most recent EU ETS development reforming the scheme has been through an European Union directive with an implementation date of 2013 (directives are seen as soft-law in the European Union as they require member nations to develop their own legislation to achieve the directives' purposes).
The current directive requirement on individual member countries to legislate individually has and will continue to create uncertainty in the scheme and affect its performance. Each member state may introduce different methods or rules to achieve the result. As the market is described as a "policy driven market, a unique combination of trading in commodities, government securities and taxes", the author identifies the need for certainty and security of the market as the key. Ideas such how credits are distributed/awarded, traded, packaged and monitored, enforcement issues, duration, fluidity of the market, whether credits are globally transferrable, the link with other schemes and competition issues need to be synthesised for the scheme to succeed.
Currently the most recent directive offers some guidance on the system and the various issues identified above and how the scheme will operate. Although there is much praise in the article regarding the scheme and its objectives, until "hard law" is passed in the European Union and beyond harmonising all aspects of the EU ETS and other emission schemes, the author believes the system will not achieve its true potential to help efficiently reduce GHG.
Cesr's Second Report to the European Commission on the compliance of credit rating agencies with the IOSCO Code
In May 2008, the Committee of European Securities Regulators ("CESR") published its report entitled CESR's Second Report to the European Commission on the compliance of credit rating agencies with the IOSCO Code: The role of credit rating agencies in structured finance.
Section III of the report contains an analysis of the rating process regarding structured finance instruments. This section was included following an additional request from the European Commission for CESR to review several aspects of the rating process regarding structured financial instruments. In order to carry out its review, CESR released a consultation paper for responses from market participants.
Section III begins by discussing the role of credit rating agencies ("CRAs") in structured finance and why this has become an issue for review. The report notes that there has been a recent proliferation of the issuance of structured finance products and explains how the rating of such products now forms an increasingly significant part of CRAs' revenues and incomes. It is explained that due to the complexity of structured finance products and the rising interest of larger categories of investors, the market has come to rely heavily on credit ratings.
The rating of structured finance transactions distinguishes itself from the rating of traditional instruments by the greater flexibility to adapt the features of the transaction in order to achieve the rating level desired for each tranche of the structure. As opposed to traditional ratings, the rating of a structured finance transaction is a target, not the outcome of the rating process. Therefore, CRAs have taken a more important and involved part in a deal's structuring process.
CRAs' role in structured finance issuance has been a source of debate for some time. However, the recent United States subprime mortgage crisis brought the concerns regarding the role of CRAs in structured finance ratings and the need for a thorough analysis of their involvement in the current turmoil to the forefront of the international regulatory agenda. The report highlights several areas of concern including:
- the fact that CRAs are paid fees by issuers and not by investors and CRAs analysts are taking part in fees negotiation;
- conflicts of interest arising through client dependency and lack of separation of the credit rating business from any other business undertaken by CRAs;
- the increasing complexity of structured products and the heavy reliance on ratings by investors as a source of information, including for purposes for which ratings were not designed (ratings being indicators of default risk only – as opposed to opining on price or liquidity characteristics);
- the fact that the market has seemed to disregard the limitations of ratings in gauging the risk of structured finance products and have lost sight of core risk management principles; and
- the efficiency of CRAs methodologies, their rating surveillance procedures and their ability to act to changes in the markets.
The report then goes on to analyse the main aspects relating to the role of CRAs in structured finance, taking into account the responses received from market participants to its consultation paper. The CESR then makes various recommendations in respect of these areas of concern. These recommendations include:
- highlighting the need for CRAs to take appropriate action on an ongoing basis to ensure that they communicate clearly regarding the characteristics and limitations of the ratings of structured finance products;
- providing further information on critical model assumptions and providing information in a standardised, publicly available format;
- urging CRAs to effectively resource themselves to ensure that their ratings are, and remain, of a sufficient quality and that their monitoring remains effective and that rating action is taken in a timely manner;
- acknowledging that a clearer international consensus is needed over the acceptable interaction between CRAs and issuers; and
- stressing the need for CRAs to be transparent in the disclosure of the fees they receive from issuers.
The report also includes, in section V, CESR's proposals to enhance the integrity and quality of the rating process.
The May 2008 issue of the New Zealand Law Journal contains the article Responsible investment disclosures for KiwiSaver schemes by Victoria Stace.
The article considers the implications of the new section 205A of the KiwiSaver Act 2006, which came into force on 1 April 2008. This new section requires that the investment statement for a KiwiSaver scheme or complying superannuation fund must contain one of two statements in relation to the scheme's responsible investment policy. The first option is a statement that responsible investment is taken into account by the trustees of the scheme in determining their investment policies and procedures and the second option is a statement saying this is not a consideration. The article considers the possibility that recognises that, because KiwiSaver schemes and complying funds are trusts, the trustees may be in breach of their fundamental duties owed to the beneficiaries of the trust when making these statements.
The case of Cowan v Scargill [1984] 2 All ER 750 established the above principle. A Mineworkers Pension Scheme policy involved prohibiting investments in industries competing with coal and prohibiting further investments overseas. The court found the trustees were in breach of their fiduciary duties owed to the beneficiaries of the trust because the trustee has a duty to secure the best financial interests of the trust within the law in accordance with the trust purposes.
Freshfields Bruckhaus Deringer recently produced a report for the United Nations on the issues surrounding responsible investment by institutional investors. Their report suggested Cowan was no longer good law as they found there was a link between responsible investment considerations and financial returns. The term "best interests" should be interpreted to include non-financial interests. Freshfields was of the opinion that some investments may be assumed to be offensive to the average beneficiary and as a result can legally be excluded from the portfolio.
This area of law is inconclusive and trustees should seek legal advice on such matters. The article suggests several other options that trustees may adopt in order to avoid any breach of their fiduciary duties. They may offer a responsible investment fund choice to members where the scheme has an investment choice facility. Alternatively, trustees may decide to discuss with the companies they invest in ways in which they may improve their behaviour.
The author sees the purpose of section 205A of the KiwiSaver Act as two-fold. It encourages responsible investment and promotes disclosure to its investors. However, according to Stace, it is the requirement to make a blanket statement one way or the other that puts trustees in a difficult position. Both statements could potentially expose trustees to actions of breach of trust. Stace suggests several ways in which trustees could go about complying with the section, but she recognises that a trustee should turn his mind to the issue and seek expert legal advice.
The March 2008 issue of the New Zealand Business Law Quarterly contains the article The new Order of the Phoenix by Trish Keeper.
New sections 386A to F of the Companies Act 1993 recently came into force to restrict phoenix company abuse in New Zealand. The term "phoenix company" is used to describe some uses of the corporate form where the controllers of a company facing insolvency transfer any remaining assets to a new company. This leaves no assets for the creditors of the now insolvent entity.
Section 386A prescribes that a director must not, within a certain period of time of being a director of a failed company, be a director of a new (phoenix) company that has a name the same as or similar to that of the failed company, unless that director has been granted leave by the court. The five elements of the offence are:
- the defendant was a director of the old (failed) company and is either a director or manages the new (phoenix) company; and
- the old company was placed in insolvent liquidation; and
- the time limits specified in the section are satisfied; and
- the name of the new company, if not identical, is sufficiently similar to a pre-liquidation name of the old company as to suggest an association with that company; and
- none of the three statutory exceptions applies, and the court has not given leave for the director to be involved with the new company.
Section 386A does not require proof of wrongdoing, any intent to defraud, or even some degree of culpability for the collapse of the failed company. The offence prohibits a director of a failed company from involvement in the phoenix company when certain conditions, such as time limits and similar names, are present. A defence of absence of fault may be available if defendants are able to show that reasonable steps were taken to comply with one of the three statutory exceptions (issuing a successor company notice, receiving temporary leave of the Court and existing non-dormant phoenix company), or that they mistakenly believed they complied with the exceptions. A defendant who acted in ignorance of the restriction would have no defence.
Conviction of section 386A(1) is an offence. The penalty is set out in section 373(4), which specifies that on conviction a defendant is liable to imprisonment for a term not exceeding 5 years or to a fine not exceeding $200,000. Further, section 386C(1) provides that a person who contravenes section 386A(1)(a) or (b) is personally liable for all the relevant debts of the phoenix company. Liability does not, however, extend to debts of the original failed company. Under section 386C only those persons who contravene section 386A by being a director of the phoenix company or by directly or indirectly being concerned in or taking part in the promotion, formation, or management of such company are potentially liable.
The new offence contained in section 386A of the Act is considered by Keeper to satisfy the need for certainty. However, she argues that the provision cannot be considered fair and states that bona fide directors may contravene the section without showing an intention to defraud, while other directors can set up phoenix companies that operate under a dissimilar name without incurring liability, unless it can be shown they intended to defraud a creditor or creditors. Keeper further states that while the creditors of the phoenix company may be able to recover personally from an offending director, there is no protection for the creditors of the original failing company, who will continue to have to rely on the other remedies available under the Companies Act or the common law.
The May 2008 issue 9 of the Australian Corporate News contains the article Judicial cooperation in cross border insolvencies by John Morgan and Christopher Prestwich of Allens Arthur Robinson, Sydney. The article addresses a recent English House of Lords decision to accede to a letter request from the Supreme Court of New South Wales and order that assets held by the Australian HIH group of companies in England should be remitted to Australia for distribution in accordance with Australian law. The decision represents the adoption of a universalist approach to cross-border insolvencies by the House of Lords and is likely to be very influential in future cross-border issues in common law countries that have similar "letter of request" legislation.
The House of Lords relied on specific legislation to decide unanimously that it had the power to remit assets to Australia (being a statutorily designated country) notwithstanding differences in the schemes for distribution in the two countries. The House of Lords remained divided however on the power to remit those assets under common law.
In exercising its discretion to remit the assets to Australia, the House of Lords took into account the expectations of creditors as a whole in dealing with an Australian company under Australian law and noted that (given that Australian law did not offend English public policy or principles of justice) the fact that the countries have slightly different categories of preferential creditors (with respect to insurance and re-insurance creditors) is not a bar to an order for remittance.
Australia has similar legislative provisions to those relied on by the English court, so the decision is likely to be influential in the event an Australian court receives a letter of request from a prescribed country or receives an application from foreign liquidators seeking assistance.
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