Contents:
March 2008
Contents:
Re Chequer Packaging Limited (In Receivership): Stiassny V The North Shore City Council (Hc Auckland, Civ 2007-404-002047, 29 November 2007, Harrison J)
The issue in this recent case of Chequer Packaging Limited (in receivership) v the North Shore City Council was whether the North Shore City Council had a proprietary interest in part of the proceeds of the sale of rubbish bags by Chequer Packaging Limited.
Under a contract between the Council and CPL, CPL would manufacture and distribute rubbish bags to retailers on behalf of the Council. CPL would receive payments from the retailers it supplied with bags and would in turn pay the Council that amount per bag less two cents.
There were two issues: 1) whether a proprietary interest was created, which could only arise in this case if the Council and CPL were in the relationship of principal/agent whereby the latter assumed a duty to account to the former for the fees it received from retailers; and 2) if so, whether this proprietary interest was a security interest for the purposes of the Personal Property Securities Act 1999 ("PPSA"). If a security interest existed, it would have been subordinate to the registered security interest of ANZ.
As to the existence of the agency relationship, Harrison J thought the key test was whether the contract provided that CPL received the retailers' money on terms obliging it to keep a separate account for the Council's entitlement, or whether it was entitled to mix the fees and hand over an equivalent sum of money in accordance with the Council's invoices. If the former, a principal/agent relationship would be established; if the latter, a creditor/debtor. The contract contained an undertaking by CPL to sell the bags "on behalf of" the Council, but it also contained a clause stating that nothing in the contract created a partnership or an agency unless there was express provision of such a relationship.
Harrison J found neither clause determinative and preferred to look at the entire relationship between CPL and the Council as set out by the contract and the agreed invoicing arrangements. Taking this approach, the judge found that there were truly two distinct legal relationships, each with its own rights of recovery: the first between CPL and the retailers of the bags, and the second between CPL and the Council. Accordingly, CPL assumed full transaction risk and could not be said to be acting as agent for the Council, but rather for its own benefit as principal.
Although it then became unnecessary to consider the security interest question given that no proprietary interest was found, Harrison J, in obiter, expressed the view that the Council's interest, had it been found to be proprietary, would constitute a security interest for the purposes of the PPSA against which a financing statement could be registered. The basis for this finding was that the purpose of the PPSA, commercial certainty, was best served by taking the approach the common law would have taken to such a situation: the equitable proprietary interest (created by CPL as agent holding the fees on trust for the Council) would be subordinate to a security interest created for value without the knowledge of the prior creation of the equitable interest.
On 4 March 2008 the government announced that it intends to amend the Income Tax Act 2004 to provide that taxpayers can no longer offset petroleum mining expenditure incurred through a foreign branch operation against petroleum mining income from New Zealand operations. It is expected that the changes will be included in the next taxation bill introduced to Parliament. For more information see www.taxpolicy.ird.govt.nz.
The Overseas Investment Amendment Regulations 2008 ("Regulations") were promulgated on 3 March 2008. The effect of the Regulations is that now, when considering whether or not to give consent to an application for overseas investment in sensitive land, the relevant Minister must consider "whether the overseas investment will, or is likely to, assist New Zealand to maintain New Zealand control of strategically important infrastructure on sensitive land", in addition to the criteria already listed in the Overseas Investment Act 2005.
On 11 March 2008 Parliament passed legislation that introduces the limited partnership as a new corporate entity. The Limited Partnerships Bill, which was introduced in August 2007, was split into two separate bills - the Limited Partnerships Bill and the Taxation (Limited Partnerships) Bill - at Committee stage, and it was these two bills that Parliament passed.
The new legislation establishes the limited partnership as a new legal entity and sets out the tax treatment of such entities. Limited partnerships will be treated in essentially the same manner as general partnerships for tax purposes, that is, the limited partnership will not be taxed as a separate entity. For general law purposes however a limited partnership is a separate legal entity.
The Securities Markets (Investment Advisers and Brokers) Amendment Regulations 2008 ("Regulations") were promulgated on 25 February 2008, with effect from 29 February. The Regulations contain an exemption from the investment adviser and broker disclosure regime in Part 4 of the Securities Markets Act 1988 for advice given in respect of term life insurance policies.
The Securities Commission announced on 29 February 2008 that it had completed Cycle 6 of its Financial Reporting Surveillance Programme. The Programme involves the Commission reviewing the financial reports of selected issuers who have recently adopted New Zealand IFRS. The Commission has reported that most issuers' compliance with New Zealand IFRS is good, although there were a number of issues that prompted the Commission to write to the issuer concerned. A copy of the Commission's report is available from www.sec-com.govt.nz.
The January 2008 issue of the Australian Banking and Finance Law Bulletin contains two articles of interest.
The first article is entitled AFD v DCA: a conclusion by Andrew Galvin and Clara Nguyen. The article discusses the recent case of Australian Finance Direct Ltd v Director of Consumer Affairs Victoria [2007] HCA 57.
In that case, Australia Finance Direct ("AFD") lent money to people at a lower interest rate than usual and to those who did not meet standard lending criteria. The money was lent to enable borrowers to attend investment education courses run by the National Investment Institute Pty Ltd ("NII"). The loan agreement provided that the amount of the course fees ($15,340) would be paid by ADF to NII. AFD had an arrangement with NII whereby it benefited from a holdback amount in the accounting of the proceeds, ranging from 10 - 40%. The holdback was to compensate AFD for the unusual lending terms agreed to.
The legal issue in the case was whether AFD breached s 15(B) of the Consumer Credit Code (Aus) by failing to disclose in the credit contract the persons, bodies or agents (including the credit provider) to whom the amount of credit was to be paid and the amounts payable to each of them.
The High Court of Australia found that the statement in the credit contract, to the effect that $15,340 would be paid by AFD to NII, was factually incorrect. Depending on the percentage of the holdback, upon the settlement of each loan, the amount actually paid to NII could range from $13,806 to $7,670. This was held to breach s 15(B).
The High Court held that the holdback amount was an amount of credit that AFD disbursed for itself, and that this fact should have been disclosed. This was so as AFD insisted upon obtaining the benefit of the holdback (in accordance with the arrangement made with NII), so in essence, the holdback was imposed upon the borrower in the same way an establishment fee is imposed. The Code defines credit fees and charges as fees and charges payable in connection with a credit contract or mortgage and goes on to list those things which it does not include (ie interest charges). For this reason, the court said that it should have been disclosed as a credit fee or charge, in accordance with s 15(G) of the Code.
Under New Zealand's Credit Contracts and Consumer Finance Act 2003, the definition of 'credit fees' is very similar. Therefore it is possible that the New Zealand courts may take the decision in this case into account if the matter were to arise.
The second is an article entitled National regulation of finance brokers by Graeme Howatson.
In November 2007, the National Finance Broking Bill ("NFBB") was released for public comment in New South Wales. The NFBB is intended to be a model that can be adopted by all Australian states and territories.
The NFBB provides protections for consumers and small businesses by introducing a new regulatory scheme for finance brokers. Proposed measures under the NFBB include:
- requiring that brokers obtain a licence. The requirements for a licence include membership of an approved dispute resolution scheme, insurance cover under an approved policy, holding the prescribed qualifications and being a fit and proper person;
- imposing obligations on brokers' conduct. This includes providing a copy of the finance broking agreement the broker and consumer have entered into, and written notices of the brokers' details, and of the prescribed information described in the NFBB, including a declaration of any interests or relationships that may influence the advice given. The broker also has to ascertain the consumer's credit requirements and ability to repay the credit sought before putting forward any credit proposal; and
- regulating a broker's ability to demand, receive and accept any fees, charges and commissions.
The Journey Towards Effective Insider Trading Regulation In New Zealand
Inducement And Material Non-Disclosure In Insurance Law
The December 2007 issue of the New Zealand Business Law Quarterly contains two articles of interest.
The first article is entitled The journey towards effective insider trading regulation in New Zealand by Jane Diplock and Louise Longdin.
The focus of the article is the Securities Markets Amendment Act 2006 (SMAA). The SMAA introduced many changes to the law regarding insider trading in New Zealand and came into force on 29 February 2008. Both the key legal changes and policy basis of the SMAA are discussed.
The SMAA introduces several key changes to the existing legal position. The most significant change is the introduction of criminal sanctions for knowingly breaching the new insider trading provisions. Insider trading is now punishable by a term of imprisonment for a maximum of five years. The Securities Commission also retains the power to bring actions. These two provisions are expected to act as a greater deterrent to insider trading and bring New Zealand into line with many foreign jurisdictions.
The SMAA has also widened who can now be classed as an "insider" for the purpose of the Act, removing the need for a specific relationship with the public issuer. The new focus is on the actual or constructive knowledge of the possession of "material information" not generally available to the market. Pragmatically, as information must be material, this wider class of "insiders" is limited by the requirement that information be capable of influencing investment decisions. There is also a series of affirmative defences introduced which those alleged of insider trading may now prove to escape liability.
The above changes reflect a fundamental shift in the New Zealand approach to insider trading. There is a clear focus on market integrity and ensuring investor confidence, in contrast with the old fiduciary based system. Further, the new provisions are modelled on the Australian legal position, a step deliberately taken with the Closer Economic Relations Trade Agreement in mind. The authors consider this to be a positive step forward in discouraging insider trading.
The second article, Inducement and material non-disclosure in insurance law by Michael Lenihan, discusses the requirement for an insurer to show inducement, as well as materiality, to avoid a contract of insurance for material non-disclosure. This was added as a requirement by the House of Lords in Pan Atlantic Insurance Co Ltd v Pine Top Insurance Co Ltd [1995] AC 501.
In New Zealand this issue was not seriously considered until the Court of Appeal case of QBE Insurance (International) Limited v Jaggar [2007] 2 NZLR 336. In Jaggar the insured party had a public liability policy with QBE Insurance (International) ("QBE") in relation to its marina. Boats moored within the breakwater of the marina were damaged after a storm, one of which was the Jaggar's boat. QBE sought to set aside their client's insurance policy due to a failure to disclose that the breakwater had not been approved by outside engineers.
Oddly, in the opinion of the author, QBE accepted that the Court should apply Pine Top, meaning QBE had to prove both materiality of the non-disclosure and inducement. The Court found that there was no presumption of inducement, yet inducement could be inferred from the facts. To prove inducement an insurer must show that the non-disclosure was an effective cause of the entry into the contract (however not necessarily the sole cause). QBE's appeal was dismissed due to a lack of evidence as to inducement.
Following this case, it is now a requirement for insurers to prove inducement as well as materiality in order to avoid insurance contracts for non-disclosure. The New Zealand legal position on the issue is now closer to England's and also closer to the law regarding misrepresentation in the Contractual Remedies Act 1979.
The February 2008 issue of the Company and Securities Law Journal contains an article entitled Regulating financial assistance: An obsolete regime by Kate Wellington. This article examines the evolution of Australia's financial assistance legislation and the inability of the current provisions to realise the protective goals they were designed to achieve. The author concludes that in the face of an enhanced legislative regime of directors' duties, the financial assistance provisions of the Corporations Act 2001 (Cth) (the "Act") have become not only ineffective but obsolete.
The Australian financial assistance provisions were implemented with the goal of protecting creditors and minority shareholders in the situation where financial assistance is provided to a third party in order for them to purchase company shares. When the third party provides little or no consideration for the financial benefit, the transaction diminishes the company's net asset value, causing detriment to the company's shareholders and, in some cases, its creditors.
Wellington considers that s 260A of the Act nevertheless may allow this to happen. Under s 260A, materially prejudicial financial assistance can proceed with shareholder approval, by vote, including by those shareholders who may have an interest in the transaction.
Additionally, she argues that Pt 2J.3 is superfluous as it imposes liability on parties which enter into financial assistance transactions where the transaction is materially prejudicial. A materially prejudicial transaction is, however, not in the best interests of the company and therefore adequately protected against by statutory directors duties.
Finally, Wellington believes that the Act needs to be changed in its application to unforeseeable prejudice in financial assistance. Currently liability is imposed regardless of foreseeability but the author contends the test should be one of forseeability to the reasonable person.
Cross-Border Insolvency Bill 2007
Insolvency Law Reform In Asia And Emerging Global Insolvency Norms
Insolvent Trading: Goatlands Limited (In Liq) V Borrell
Part 5.3a: The Impact Of The Changes To The Australian Corporate Rescue Regime
The December 2007 issue of the Insolvency Law Journal contains four articles of interest.
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The first article is entitled Cross-border Insolvency Bill 2007: The UNCITRAL Model Law enters the parliamentary stage yet Australia still awaits the final Act by Rosalind Mason.
The Cross-Border Insolvency Bill 2007 ("Bill") represented the final stage in the Australian corporate insolvency law reform package. However it lapsed upon the proroguing of Parliament. Following the federal election it has been reintroduced and with bipartisan support is likely to be passed. This article examines the issues addressed by the Bill and compares the Australian reform to other jurisdictions. It also provides a comprehensive chapter-by-chapter analysis of the proposed Model Law.
The proposed reform is based on the Model Law on Cross-border Insolvency, which was drafted by United Nations Commission on International Trade Law ("UNCITRAL") in 1997. The Model Law is broadly intended to provide greater certainty in proceedings, fairer and more efficient administration, better protection of assets and to facilitate the rescuing of financially troubled businesses. In addition to these broad objectives three specific areas for reform were identified. Each is dealt with in separate chapters of the proposed Model Law and is set out below:
- to ensure there is no discrimination between foreign and domestic creditors in Australian insolvency proceedings;
- in a foreign insolvency proceeding involving Australian assets, to provide the foreign administrator with direct access to Australian courts; and
- to provide fairer outcomes protecting the rights of debtors and creditors where there are both foreign and local insolvency proceedings running concurrently.
The author notes some uncertainties that will remain following implementation of the reform package. As the Bill is not based on the principle of reciprocity it will not present any further assistance to an Australian court or administrator in a foreign jurisdiction in relation to issues arising in a local insolvency. Also, the Model Law does not address the choice of law principles, which may differ between jurisdictions. Despite the potential for a number of continuing uncertainties it is the author's view that the proposed reforms will advance cooperation and coordination in Australian cross-border insolvencies and allow Australian courts to participate in the development of an international jurisprudence on dealing with these cases.
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The second article is entitled Insolvency law reform in Asia and emerging global insolvency norms by Professor Roman Tomasic.
The article provides a brief overview of some major developments that have occurred over the last decade and their influence on new insolvency laws. These developments are likely to facilitate a more uniform approach and language in dealing with corporate insolvency matters.
The reason for globalisation of insolvency law reform is, in part, a reflection of the importance of insolvency law as a feature of a well developed market-based economy and also a reflection of the work of professional bodies, such as INSOL International and the International Bar Association, along with the influence of multilateral bodies such as the Asian Development Bank, the International Monetary Fund, the World Bank, the Organisation for Economic Cooperation and Development and the United Nations Commission on International Trade Law.
However, the principal catalyst for action in this area of law reform over the last ten years has been to prevent similar unfortunate consequences to those that occurred during the 1997 Asian financial crisis. Richer countries such as Australia and Japan have played a major role in seeking to stimulate the reform effort throughout Asia, however it will be necessary to provide further support to insolvency professionals and to regulatory infrastructure to ensure that this experiment in global law-making is successful in the longer term.
Global insolvency law standards such as the UNCITRAL Legislative Guide provide a useful benchmark against which to evaluate national progress in insolvency law-making in East Asia and beyond. It will also allow assessment of the degree to which international law-making efforts can produce a truly global body of insolvency laws and practices.
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The third article is entitled Insolvent trading: Goatlands Ltd (in liq) v Borrell by Lynne Taylor.
The article examines the case of Goatlands Limited v Borrell (2007) NZTC 21,107, which considers directors' duties under the Companies Act 1993; in particular, the duty to avoid reckless trading (s 135) and the duty in relation to the incurring of company obligations (s 136).
The defendants in Goatlands were goat farmers and amateur property developers who needed a new location for their farming operation. They located such a property and entered into an unconditional agreement for the sale and purchase in May 2001, with settlement to take place in May 2002. Goatlands Limited was incorporated to hold title to the new property and immediate possession was taken under a lease agreement.
The defendants caused Goatlands Limited to apply for a GST refund ($111,509) of the purchase price of the property from Inland Revenue. The company incurred a contingent liability to repay this sum to Inland Revenue should it not complete the property purchase.
The defendants were aware that they would have to sell one of their subdivided blocks to finance the balance price of the new farm property. Ultimately, however, the necessary sale did not occur and settlement of the new property did not take place. Goatlands Limited became liable to repay the GST refund but was unable to do so. Accordingly, Inland Revenue alleged the defendants were in breach of ss 135 and 136 of the Companies Act.
Section 135 of the Companies Act prohibits a director of a company from agreeing to, or allowing, the business of the company being carried out in a manner likely to cause or create a substantial risk of serious loss to the company's creditors.
Justice Lang held that the assessed risk of the transaction failing was in the region of 25%. This was held to be illegitimate and that the practice was also outside orthodox commercial behaviour. The Judge held that it was a real and significant risk that the company would not be able to meet its obligation as there was no plan "B" should one of the larger blocks not sell.
Section 136 provides that a director must not agree to a company incurring an obligation unless the director believes at that time on reasonable grounds that the company will be able to perform the obligation when it is required to do so. The test found in s 136 has both a subjective element and objective element. The subjective element is that the director must believe that the company will be able to perform its obligation. The objective element is that this belief must be formed and held on reasonable grounds.
Justice Lang concluded that the defendants met neither the subjective nor objective thresholds as to belief. His Honour accepted that the defendants believed that the company had a reasonable likelihood of completing the sale and purchase and therefore not needing to repay the GST refund but that belief did not meet the statutory threshold which requires a belief that the company "will" perform the obligation incurred when and if required to do so.
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The fourth article by Dr Colin Anderson and Dr David Morrison is entitled Part 5.3A: the impact of the changes to the Australian corporate rescue regime.
The article begins by identifying the key design principles underlying the Australian voluntary administration regime. It then examines the broad themes that have emerged in the legislation since its enactment 15 years ago (encompassing a review of the original intention and the background to the implementation of the legislation) before dealing with the subsequent amendments that followed the review of the existing provisions. The article finishes by drawing conclusions about the potential future direction of the voluntary administration procedure.
The February 2008 issue of the Companies and Securities Law Journal 2008 contains an article by Ronald Koo entitled Hedge funds: A survey of investment strategies and performance.
The United States Securities and Exchange Commission describes a hedge fund as a private and unregistered investment vehicle that trades in securities and other assets such as property or derivatives. In light of the increasing popularity of hedge funds, Koo examines why hedge funds are becoming popular investment vehicles and concludes that their allure can be attributed mainly to two factors: their commonly touted claims of extraordinary returns relative to mutual funds or traditional asset classes (equity, property and fixed assets) and their wholly unfettered ability to exploit any investment strategy or asset (for example, funds are able to use leverage in their transactions and engage in short-selling).
In exploring these two idiosyncrasies, Koo provides an overview of the structures of hedge funds, emphasising corporate, operational and legal aspects. Secondly, Koo examines three broad categories of hedge fund investment strategies - directional (speculating on the direction and movement of the relevant market), event driven (seeking to exploit extraordinary or re-defining events that occur in a company) and relative value (seeking to exploit relative pricing discrepancies between related securities). Finally, the results on the performance of these strategies are presented alongside commentary on overall performance trends over the last decade or so.
An interesting aspect of this article is that it does not merely add to the mass of United States-based literature - rather, Koo endeavours to discuss hedge funds in an Australian context. In doing so, he notes that a vital feature of the Australian regime is that hedge funds are able to access the "retail investor" market without compromising their investment strategy.
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