May 2008

Contents:

 

CASES Re St Stephens Developments Limited; Hoole And Pitfield In Their Capacity As Receivers And Managers Of Hillcrest Services Limited (In Rec) v Darby Office Of Fair Trading v Abbey National Plc And Others [2008] EWHC 875 (Comm) Dollars & Sense Finance Limited v Nathan [2008] NZSC 20 Js Brooksbank & Co (Australasia) Limited v Exftx Limited (2008) 8 NZBLC 102,113 LEGISLATION Securities Act (Externally Managed Kiwisaver Schemes And Superannuation Schemes) Exemption Notice 2008 Coordination Of Regulation Across Government Reserve Bank Takes Steps To Manage Liquidity Risk United States – New Zealand DTA To Be Reviewed

SNIPPETS Timely Payment But No Settlement: A Necessary Requirement Of Notification? The Beneficiary's Bank In Documentary Credit Transactions "Collateral" In The Context Of Derivatives Transactions How Not To Write A Cheque Rights Of Guarantors: Subrogation Not Always Available - Bofinger v Rekley Pty Ltd [2007] Nswsc 1138 Documentary Credits: The Autonomy Principle And The Fraud Exception The German Co-Determination System: A Model For Introducing Social Responsibility Requirements Into Australian Law? (Part 1) Use Of International Reporting Standards By Foreign And Us Issuers

The issue in the recent High Court case of Re St Stephens Developments Limited; Hoole and Pitfield in their capacity as receivers and managers of Hillcrest Services Ltd (in rec) v Darby and Ors (HC Auckland, CIV-2006-404-5235, 18 December 2007, Lang J) was whether a secured creditor had valid security over the accounts receivable of a debtor through a debtor's inter-company relations.

In March and April of 2004 Capital + Merchant Finance Limited ("CMFL") provided a revolving credit facility to Hillcrest Finance Limited ("Hillcrest"). Security was taken through a general security agreement ("GSA"), granting CMFL a first ranking charge over all of Hillcrest's right, title, and interests (legal and equitable) in all present and after acquired property. Hillcrest provided loan finance in close association with Barry's Car Sales Limited ("Barry's"), a motor vehicle dealer. A Mr. Darby was the sole director of both Hillcrest and Barry's.

In May 2005 CMFL agreed to extend the facility to enable Hillcrest to purchase a book of receivables from a third party.  Unfortunately, those receivables were initially assigned to Barry's, rather than to Hillcrest, although CMFL believed that they were subsequently assigned to Hillcrest (as the purpose of the additional financing was to enable Hillcrest to purchase the receivables).  Hillcrest fell into arrears in payments under its facility agreement in 2006, and CMFL had it placed in receivership.  The receivers sought to collect the receivables that CMFL believed belonged to Hillcrest and were therefore covered by the GSA.

Mr Darby argued that most of the receivables had not been assigned to Hillcrest and were therefore not subject to the GSA because Hillcrest had not paid Barry's for them.  Pursuant to the terms of an agreement that Mr Darby argued existed between the two companies, the receivables were not to be assigned to Hillcrest before Barry's had received payment for them. Accordingly, whether the receivables were covered by the GSA and therefore could be accessed by Hillcrest's receivers depended on two questions:

On the first issue, the court was unable to find any evidence of an agreement between Hillcrest and Barry’s that the receivables would be assigned to Hillcrest only once Hillcrest had paid for them.  The court considered that Mr Darby’s argument that there was such an agreement was motivated by a desire to move some of Hillcrest’s assets beyond the reach of the receivers by claiming that the receivables were not in fact Hillcrest’s at all.

The court then considered the second issue of whether Mr Darby had effected an equitable assignment of the receivables by his conduct.  The court examined the elements required for an equitable assignment of a debt and concluded that they were present in this case.  The elements for an equitable assignment of a debt are:

Accordingly, the court found for the receivers and the receivers therefore had access to the receivables.

This is a High Court (of England and Wales) ruling on the fairness of bank charges in the United Kingdom.  The dispute's beginnings are generally credited to Stephen Hore, an English law student, who requested a refund of charges by his bank, Abbey National, arguing that under the Unfair Terms in the Consumer Contracts Regulations 1999 ("Regulations"), all penalty charges had to truly reflect the cost of administering them, and that any charges higher than administrative costs are illegal.  The Office of Fair Trading ("OFT") began an investigation which resulted in this proceeding.  The defence of Abbey National was joined by Barclays Bank, Clydesdale Bank, HBOS, HSBC Bank, Lloyds TSB Bank, Nationwide Building Society and the Royal Bank of Scotland Group who together engaged 9 Queen's Counsels and 15 other barristers.

The relief sought

The charges in question were those made by banks to customers with personal current accounts when the customer requests or instructs the bank to make a payment for which they do not hold the necessary funds in the account and that is not covered by a facility arrangement with the customer.  Among the four types of charge considered was an "unpaid item charge" levied when the customer gives a payment instruction that the bank declines to honour because the customer does not have sufficient funds in his account.

The OFT sought a decision establishing whether these charges fall within the ambit of the Regulations or whether they are excluded from an assessment of fairness under the Regulations.  The banks, wishing to use the case to clarify the situation with respect to their many customers, raised other issues to be ruled on, including whether or not the charges included penalties and so to that extent were unenforceable at common law.  The ruling was not to address whether the charges were unfair.

The Ruling

In deciding whether a term is an "unfair term" and thus whether it is within the ambit of the legislation, section 6(2) of the Regulations reads:

Justice Andrew Smith found that the terms used by the banks for personal current accounts were in plain intelligible language, except in certain specific and relatively minor aspects. 

The judge rejected the banks' argument that section 6(2)(b) of the Regulations applies to the charges because they are part of the price customers pay for a package or bundle of services they supply to their current account customers.  The charges were not the price or remuneration for those services in any natural meaning of the phrase, and would not be so recognised by the typical customer, and they were not generally so presented by the bank in their terms or other documentation.  The banks' alternative argument was that section 6(2) applied because the charges were prices for specific services.  This was rejected by the judge for similar reasons, and based on the fact that the charges are made under a contract under which the customer does not usually have to pay when payments are made upon his instructions (ie when his account is in credit).  Consequently, the charges fell within the ambit of the Regulations and their fairness could be challenged. 

As to whether the charges were unenforceable, being common law penalties, the judge cited the test rule that in order to be penal, a provision must provide for payment upon a breach of a contract.  None of the provisions in question meant that the customer was under a contractual commitment such that the charges could have been a penalty for breach of the commitment, and so unenforceable.

Where to from here?

The Financial Services Authority currently has in place a waiver which prevents thousands of claims from consumers against their banks from proceeding pending the outcome of this test case.  This has not been lifted.  The banks have a right of appeal, but have not yet announced whether they will use it.  At any rate, this case was the just the first half: another case is scheduled to begin in late May 2008 that will determine what levels of charges are fair.  

The recent Supreme Court case of Dollars & Sense Finance Limited v Nathan [2008] NZSC 20 related to Dollars & Sense Finance Limited ("D & S") attempting to exercise its power of sale pursuant to its registered mortgage over Mrs Nathan's property.  Mrs Nathan sought to prevent D & S from doing so by relying on the fraud exception to the indefeasibility provisions contained in sections 62 and 63(1)(c) of the Land Transfer Act 1952.  Mrs Nathan claimed that D & S's title as mortgagee was not indefeasible under that Act, as it was acquired through her son Rodney (who used Mrs Nathan's house as security for a loan from D & S) forging her signature on the memorandum of mortgage during the course of an agency for D & S. 

The primary legal issues addressed by the court were whether Rodney acted as an agent of D & S in obtaining Mrs Nathan's signature and whether the forgery was committed within the scope of this agency.  It was accepted that if Rodney was agent of D & S, Rodney's fraud could be imputed to D & S and the certificate of title would be defeasable.

In determining whether Rodney acted as an agent of D & S, the court questioned whether D & S, or its solicitor (as an agent of D & S), entrusted Rodney with the function of representing it in its transactions with Mrs Nathan, so that the service performed by Rodney consisted of standing in the place of D & S whereby he no longer acted in an independent capacity.

The court agreed with findings of the courts before it that Rodney acted as an agent of D & S as he was entrusted with the task of obtaining Mrs Nathan's signature on their behalf.  The court placed emphasis on the factual findings that all relevant documentation had been sent to Mrs Nathan through Rodney and that it had been left to Rodney to obtain Nathan's signature.

In addition, the court dismissed the argument that D & S's solicitor, as agent of D & S, had no power to create a sub-agency and questioned the validity of the rule in Royal Bank of Scotland plc v Etridge that it is never possible for a borrower to act as an agent.  The court stated that this conclusion fails to appreciate the realities of a case like the present.    

Secondly, the court addressed whether Rodney's forgery of Mrs Nathan's signature was done within the scope of the agency.  The legal test applied by the court was whether there was a sufficiently close connection between the task for which Rodney was engaged, and his unlawful action of forging Mrs Nathan's signature, so that the wrong can be seen as a materialisation of the risk inherent in the task.  The court found that the forgery was within the scope of Rodney's agency as it took place in obtaining a registrable mortgage, which was the very thing that Rodney was asked to do as agent of D & S.  

The court held that making a principal liable for an undetected fraud of its agent in relation to a document which has been innocently registered by the principal was not contrary to the policy of the Torrens system.

Consequently, D & S did not have an indefeasible title to the mortgage and the mortgage was removed from the register.

The issue in this recent case of JS Brooksbank & Co (Australasia) Limited v EXFTX Ltd (in rec & liq) formerly known as Feltex Carpets Limited & Ors was whether a reservation of title clause created a security interest.  The case highlights the need to register security interests.

JS Brooksbank & Co (Australasia) Limited ("Brooksbank") supplied wool to Feltex Carpets Limited, a carpet manufacturer ("Feltex").  ANZ National Bank Limited ("ANZ") had a security interest in all Feltex's present and after-acquired personal property.  The security interest was registered on the Personal Properties Securities Register pursuant to the Personal Properties Securities Act 1999 ("PPSA"). 

Feltex and Brooksbank had a supply contract under which Brooksbank was to issue invoices to Feltex for wool Feltex ordered.  Brooksbank was to notify Feltex when cleared funds were received and ownership was to pass and delivery was to be made on notification of receipt of cleared funds. 

In August 2006, Feltex ordered wool from Brooksbank for use at its Kakariki scour.  Feltex instructed ANZ to pay the invoices for the wool.  However, cleared funds were not paid into Brooksbank's account.  Unaware of this, an employee at Feltex faxed requests seeking release of the wool and one group of brokers released the wool for delivery to Feltex.

Feltex personnel realised that wool had been received without being paid for.  The wool was set aside and not scoured.  Feltex then went into receivership.  Brooksbank subsequently brought a claim against Feltex in the High Court for damages for conversion of its property.

The High Court held that Brooksbank failed in its claim.  There was no conversion by Feltex because Brookbank's agents voluntarily delivered wool to Feltex's carriers.  A voluntary delivery of goods did not constitute conversion. 

The arrangement under the supply contract was a security interest within the terms of the PPSA.  Because the security interest created by the supply contract was a sale by consignment or a sale under an agreement to sell subject to retention of title, attachment of the security interest occurred when Feltex obtained possession of the wool. 

When the wool was released into the possession of Feltex it became after-acquired property covered by ANZ's security interest which was registered under the PPSA.  ANZ had priority over the unperfected security interest of Brooksbank.

The court noted that if Brooksbank had perfected its security interest by registration then its security interest would have amounted to a purchase money security interest.  If Brooksbank had registered the security interest within 10 days of Feltex obtaining the collateral it could have obtained priority over ANZ's security interest.

The Securities Commission promulgated the Securities Act (Externally Managed KiwiSaver Schemes and Superannuation Schemes) Exemption Notice 2008 on 6 May 2008.  The Notice exempts trustees of KiwiSaver schemes (which in most cases will be trustee corporations) from the requirement that their directors sign Regulation 17 certificates in respect of advertisements.  The Notice effectively allows directors of trustee corporations who are trustees of KiwiSaver schemes to delegate the responsibility of signing Regulation 17 certificates to appropriate individuals within the trustee corporation.

On 19 May 2008 the government announced that it planned to introduce a system for more coordinated and structured regulation.  The Treasury is to have strategic oversight of the regulatory quality system, while the Ministry of Economic Development is to focus on regulations that might inhibit economic growth.  One of the major structural changes is that the Regulatory Impact Analysis Unit of the Ministry of Economic Development will become a unit within the Treasury.

On 7 May 2008 the Reserve Bank announced new measures to ensure that there is sufficient liquidity in the banking system.  Other central banks have also taken similar steps recently, in response to recent financial market turbulence.  The new measures include:

The new measures come into effect on 3 June 2008.

The Minister of Finance announced on 2 May 2008 that the double tax agreement between the United States and New Zealand will be updated following negotiations planned to take place in June 2008.  The updates will likely be technical changes, following changes in international practice in double tax treaties since the United States – New Zealand double tax agreement was first entered into.

The March 2008 issue of the New Zealand Business Law Quarterly contains the article Timely payment but no settlement: A necessary requirement of notification? by D W McLauchlan.

The article considers the recent decision of the Supreme Court in Larsen v Rick Dees Limited [2007] 3 NZLR 577 and analyses the court's reasoning. The court ruled that a vendor had a right of cancellation in a contract for the sale of real estate where, although the purchaser paid the amount required to complete the purchase before the stipulated time for settlement, notification of the payment was not made until a few minutes later. The author questions the basis for this conclusion and argues that the contrary conclusion could easily have been justified.

The Supreme Court allowed the vendor's appeal by a 4:1 majority. The principal judgment was given by Blanchard J.  Tipping J gave a separate but concurring judgment and Elias CJ dissented. Blanchard J concluded that even though the payment obligation had been met by the deposit of cleared funds into the trust account of the vendor's solicitor, they had still not done enough. This conclusion was based on the grounds that the imparting of knowledge to a vendor was an essential feature of the settlement in this particular contract or of any similar contract that is silent about the mode of settlement.  Although this resulted in a harsh result for the purchaser, it was felt that as time was of the essence there should be no flexibility where settlement requires payment of cleared funds of which the vendor is aware. The author disagrees with the views of the majority of the Supreme Court and considers that there should have been no additional requirement of notification to the vendor for settlement to be effective.

Elias CJ dissented on the grounds that the purchaser had fulfilled its sole settlement obligation to pay the required amount by the required time. Her Honour rejected the view that the commercial reality required the implication of a requirement of notification into the settlement obligation.

The author concludes by affirming his strong support for Elias CJ's dissenting judgment. He states that in this circumstance the purchaser was denied its bargain on the basis of a highly questionable inference from the terms of the contract.

The April 2008 issue of the Law Quarterly Review contains the article The beneficiary's bank in documentary credit transactions by EP Ellinger.

The article analyses the use of letters of credit to finance international sales and commerce. An applicant (who is usually an importer of goods or services) requests a bank ("issuing bank") to issue a letter of credit in favour of his counterparty (who is usually the exporter of goods or the provider of services) ("beneficiary").

This article analyses the rights and remedies created by the string of contracts involved in a letter of credit ("Documentary Credit Transaction"). At present, most, if not all, of the contracts in a documentary credit transaction incorporate a set of guidelines known as the Uniform Customs and Practice for Documentary Credits ("UCP"), which are drafted by the International Chamber of Commerce ("ICC").

The writer looks first at the contractual relationship of the beneficiary with their bank. There is a discussion of the distinction between negotiation and collection. The article emphasises the importance of the contract in determining the rights and responsibilities of the parties when receiving a letter of credit. It looks at how beneficiaries may try to secure their rights to the amount of the credit by requiring a confirmation to be added to the letter of credit, and the bank's right of recourse against the beneficiary.

Secondly, the writer looks at the rights of the beneficiary's bank against the issuing bank. The nature of the rights depends on whether the letter of credit is of a "straight" type or "negotiation" type. If it is a straight credit, that is, if the letter of credit is addressed solely to the beneficiary, the beneficiary's bank does not have the right to enforce the credit in its own name. In contrast, a negotiation credit allows negotiation by a designated bank (or even a specific branch of a bank). If this is the case, the beneficiary's bank, as promise, becomes entitled to enforce the credit in its own name, provided it has negotiated the documentary draft or the documents.

Lastly, the article looks at the rights of various parties in the event of competing claims to an amount of credit. It looks at:

The December 2007 issue of the Journal of Banking and Finance Law and Practice contains three articles of interest.

The first is an article by Anne-Marie Neagle entitled Collateral retrieval derivatives transactions: a collateral provider's perspective on posting collateral.

The article examines the collateral provider's perspective on the provision of collateral in derivative transactions. This is interesting to note as although there has been much academic and professional commentary over the years on the commercial value of collateral in financial markets and the legal position of the collateral taker, the legal position of the collateral provider has received less attention.

The article first looks at some background issues examining the purpose and use of collateral in derivative transactions. This includes a discussion on how commonly derivatives are in fact collateralised, the types of collateral used in derivatives transactions, and the documentation of collateralised derivatives.

The article then looks at how a collateral provider might retrieve the value of collateral provided in connection with a derivatives exposure. This includes a discussion on the mechanisms of retrieving the value, such as:

The article then examines how a collateral provider might retrieve the actual collateral itself. This part of the article highlights some of the key legal risks associated with the retrieval of actual collateral as opposed to retrieval of the value of the collateral.

The second article is entitled How not to write a cheque by Alan L Tyree.  A recent Australian case, Food Bis Ltd v Riley and National Australia Bank Ltd [2007] QDC 201, was discussed.  At issue was when can, and will, a bank be liable for conversion in situations where it has acted as an agent for collection regarding cheques obtained by its customers.

The case involved a situation where one party, AE, convinced RG, a director of Food Bis, that it was possible to purchase a number of luxury cars for a reasonable price which could then be on-sold at a profit (this was false).  RG therefore gave AE a cheque for $185,000 made payable to "SR Autos or bearer".  The cheque was crossed with two parallel lines with the words "account payee only" written between the lines. 

The cheque was given to AE who then passed it on to SR Autos.  SR Autos then presented it for collection by the National Australia Bank for the account of SR Autos.  The manager requested that SR Autos endorse the cheque as there was no account with the name "SR Autos".  In response, SR Autos wrote on the back of the cheque "Pay SR Autos" and signed "SR Autos".  Of note is that at one point the collections officer, who had been put on alert by SR Autos' banking history, had advised the manager that the police should be called in; this advice was not followed.  The drawee claimed that the bank was guilty of conversion by virtue of collecting the cheque.

Section 95 of the Cheques Act 1986 (Cth) provides a "financial institution" that is collecting a cheque for a customer has a defence to conversion if it can be shown that it performed the collection "in good faith and without negligence".  The test of negligence is whether the transaction of paying in the cheque, coupled with circumstances antecedent and present, was so out of the ordinary that it ought to have caused the bank to make inquiries.  A number of factors should have indicated that inquiries were needed, so the bank was unable to rely on this defence.

Section 50 of the Act, however, provides that in order to defeat a claim of conversion, it may be shown that the bank was entitled to possess the cheque.  Thus the bank must show that it it is the holder in due course by showing that the cheque was negotiated to it, so as to make it a holder, and that it took it in good faith, for value and without notice of any defect in title.  As the bank was not an endorsee, this could only be achieved if the cheque was a bearer cheque, which it was.  For the purposes of the Act, an act is done in good faith if done honestly, whether or not it is done negligently.  It was said that although the bank manager was careless in failing to make inquiries, he was not dishonest, therefore the requisite element of good faith was found.

A bank has a lien on all cheques which come into its possession as a banker of the balance of money due from the customer.  The lien is unaffected by the fact that the bank receives the cheque as an agent for collection.  This satisfies the "for value" requirement.  Therefore the bank, under section 50, was able to defeat the drawee's claim of conversion.

The moral of this story is therefore, that when drawing a cheque one should always cross out "or bearer" or mark the cheque "not negotiable".  Had the phrase "or bearer" been crossed out, then the bank could not have been a holder in due course leaving the drawer entitled to relief.  However, even if the drawer had not crossed out the words "or bearer", the end result would have been avoided had the cheque been marked with the words "not negotiable" as this would have prevented the bank from obtaining better title to the cheque than that of its customer (SR Autos).

The third article by Angela Flannery is entitled Rights of guarantors: Subrogation not always available - Bofinger v Rekley Pty Ltd [2007] NSWSC 1138.

The article considers the recent decision of the New South Wales Supreme Court in Bofinger v Rekley Pty Ltd [2007] NSWSC 1138. This case involved the Bofinger's who gave a guarantee and mortgage over their house to secure the obligations of their property development company. When the development company faced financial problems the Bofingers voluntarily sold their home and paid out part of the 1st mortgage over the development site. The development was eventually completed and the Bofingers brought proceedings seeking a declaration that by paying out part of the 1st mortgage they stood in the 1st mortgagees shoes and were entitled to the surplus sale proceeds of the development.

The general equitable principle of subrogation is that after a guarantor has satisfied its obligations in full, the guarantor has the right to be subrogated to the creditor's rights against the primary obligor. In other words, the guarantor is entitled to stand in the shoes of the creditor to enforce the principal obligation guaranteed. This will include a right to enforce any security which was provided to the creditor for the primary obligor's liabilities.

Chief Justice Young ruled that in the current case there was no question of unconscionability and subsequently no room for applying the equitable doctrine of subrogation. It was expected that each of the mortgagees would receive payment in full of their debt, subject only to the payment of the debts of the prior ranking mortgagees (if any), before the Bofingers would be entitled to any proceeds of the sale of any properties.

The Court confirmed that there is an established line of authority indicating that a surety's right of subrogation may be waived, either expressly or by implication from the guarantor's conduct. Here, it found the Bofingers had expressly waived their right of subrogation.

In conclusion the author notes that although guarantors typically expect to have a right of subrogation in the event that they discharge their guarantee obligations, this will not always be the case. Situations must be considered on a case by case basis to determine whether unconscionability will give rise to a right of subrogation. In the absence of unconscionability, equity will not interfere with the rights established at law.

The Volume 13, 2007 issue of the Auckland University Law Review contains an article by Felicity Monteiro entitled "Documentary Credits: The Autonomy Principle and the Fraud Exception: A Comparative Analysis of Common Law Approaches and Suggestions for New Zealand".  

The law on documentary letters of credit is highly controversial as it attempts to balance two competing principles: upholding the autonomy of documentary letters of credit (the utility of documentary letters of credit is reliant upon their inherent autonomy from the underlying transaction), and preventing fraud (the fraud exception entitles an issuing bank who is presented with fraudulent documents to refuse payment, or alternatively, the applicant (ie the buyer in international trade) may be entitled to an injunction to prevent such payment). 

Internationally, there is no agreed construction of the fraud exception; instead domestic legal systems have construed the exception differently. This article examines the contrasting approaches to the scope and standard of the fraud exception from around the common law world assessing the justifications for the different approaches.  The author shows how the English courts have applied a very narrow construction of the exception, applying it only to cases of fraud in the documents.  On the other hand, United States and Canadian courts have widened the exception to include fraud in the underlying transaction and Australian and Singaporean courts have expanded the exception even further to include unconscionable conduct.

After analysing the various ways in which the fraud exception can be conceptualized, the author argues that the exception should be seen as creating an implied term in the contract between the issuing bank and the applicant.  Under this approach, it is implied into documentary credit contracts that the bank will not pay out on documents in the face of clear fraud.  To do so, according to this reasoning, would be beyond the bank's mandate.

The author notes that it is unclear how the New Zealand courts will treat the fraud exception as it has not yet arisen at an authoritative level.  The author argues that when the issue arises, New Zealand should adopt the mandate approach.  The author argues that this approach is bolstered by domestic banking law which supports a contractual approach and a duty of care owed by the bank to withhold payment when it has clear notice of fraud.

Issue 3, 2008 of the Journal of International Banking Law and Regulation includes The article The German co-determination system: A model for introducing social responsibility requirements into Australian law?(Part 1) by Florian Schwarz. The article addresses whether Australian corporations should take a lead from the recent move of their German counterparts and move away from maximising shareholder wealth as the primary corporate objective and towards satisfying the requirements of all "stakeholders", particularly focusing on employees.

Globalisation has led to massive pressure on Western corporations as they are forced to compete with corporations in emerging economies which often have lower cost structures. This has generated lively debate about the role of corporations in society and their responsibilities towards stakeholders such as employees, the environment, consumers, and creditors as these groups' interests are often marginalised in the pursuit of competitive advantage. Recently Australian commentators have argued that the profit maximisation model is out of date and Australian companies need to address the marginalisation of stakeholders by changing their corporate structures and strategies.

The prototype provided by the author for such a change is the German co-determination system. This system addresses the marginalisation of employees in a globalising economy by giving employees representation at board level, giving them a voice in the direction and strategy of the corporation.

Schwarz concludes that the lesson to be learnt from the German experience is that corporate social responsibility needs to be incorporated as an objective of Australian corporations. Recent high profile corporate scandals, and ruthless cost cutting measures, have lead to widespread mistrust of large corporations, resulting in social and political pressure for change. As such it is the best interest of corporations to move towards satisfying all "stakeholders" in order to rebuild their reputations, provide a point on competitive difference from corporations in emerging economies and be "good corporate citizens".

Issue 4, 2008 of the Journal of International Banking Law and Regulation contains the article entitled Use of international reporting standards by foreign and US issuers by Hal S. Scott. 

The United States Securities and Exchange Commission ("SEC") in November 2007 decided to allow foreign issuers of securities in United States public markets the option of stating their accounts using international financial reporting standards ("IFRS"), without reconciliation to United States generally accepted accounting principles ("United States GAAP"), for financial years ending after November 15, 2007.  Such foreign issuers could also continue to state their accounts in US GAAP.

At present, United States issuers do not have the option to state their accounts in IFRS and therefore cannot realise potential operational cost savings.  However, a European Union company using IFRS at home and in the United States can largely avoid using United States GAAP.  A United States company cannot use IFRS at home and will be required to convert any accounts in IFRS into US GAAP.  An option to use IFRS would put them on the same competitive footing as their United States competitors.

There are some holdouts on the question of whether United States issuers should be permitted to use IFRS.  If IFRS was optional, United States firms may decide not to use IFRS as it is too principles-based for the litigious United States marketplace.  The principal argument for mandatory IFRS is that a global economic world is better with one accounting standard. 

If the United States does not give United States issuers any option to use IFRS, and United States issuers believe this is a competitive disadvantage, two outcomes might result.  Either the United States issuers frown and bear it; or they explore going abroad - issuing their securities in foreign capital markets.

This publication is included in Russell McVeagh's website on the Internet: www.russellmcveagh.com

The transmission/publication is intended only to provide a summary of the subject covered. It does not purport to be comprehensive or to provide legal advice. No person should act in reliance to any statement contained in this publication without first obtaining specific professional advice. If you require any advice or further information on the subject matter of this newsletter, please contact the partner/solicitor in the firm who normally advises you, or alternatively contact:

Prue Flacks or Guy Lethbridge | WELLINGTON	John Powell, Ross Pennington or Geoff Busch | AUCKLAND
WELLINGTON VODAFONE ON THE QUAY 157 LAMBTON QUAY PO BOX 10-214 WELLINGTON NEW ZEALAND PHONE 64 4 499 9555 FAX 64 4 499 9556	AUCKLAND VERO CENTRE 48 SHORTLAND STREET PO BOX AUCKLAND NEW ZEALAND PHONE 9 64 367 8000 FAX 64 9 367 8613