Contents:
October 2008
Contents:
Re HIH Casualty and General Insurance Limited and other companies; McMahon v McGrath [2008] 3 All ER 869
This case recently came before the House of Lords. It concerned the court's jurisdiction to order an ancillary liquidator to remit assets to another country for distribution under the other country's insolvency laws.
In brief, the facts of the case are as follows. Four Australian insurance companies presented petitions for winding up to the Supreme Court of New South Wales. Some of the companies' assets were located in England, and ancillary liquidators had been appointed over them. The Australian court wrote a letter to the High Court in London requesting that they instruct the ancillary liquidators to remit the assets to the Australian liquidators for distribution.
The English Court at first instance and the English Court of Appeal refused to accede to the Australian court's request, as the English Court's co-operation was premised on the assumption that there would be a pari passu distribution in the principal liquidation. In Australia, however, insurance companies have a separate liquidation regime, with the result that English creditors would be worse off than under the pari passu principle. The English Court held that its jurisdiction did not extend to authorising assets to be remitted where the distribution was not to be made pari passu but gave preference to some creditors to the prejudice of others. The Court of Appeal held that there was such a jurisdiction, but that it should only be exercised if the distribution in the country of liquidation gave an advantage to the non-preferred creditors to counteract the prejudice suffered.
Lord Hoffmann for the majority in the House of Lords held that the Courts had jurisdiction to order the remittal of assets. The fact that a foreign jurisdiction would not distribute the assets of a company in liquidation in the same way as those assets would be distributed under an English law liquidation did not prohibit the remittal of assets to the principal liquidator. Rather, any differences between the English and foreign systems of distribution were relevant only to whether the court should exercise its discretion to order remittal.
Unlike the Court of Appeal, Lord Hoffmann decided that an order for remittal should be made. He held that the purpose of the power to direct remittal was for English courts to co-operate with the courts in the country of the principal liquidation to ensure that all the company's assets are distributed to its creditors under a single system of distribution, so far as it would be consistent with justice and the United Kingdom's public policy.
In this case, he found that the application of one country's law to the distribution of all assets was more likely to give effect to the expectations of creditors as a whole than the distribution of some of the assets according to English law. Further, subsequent to the commencement of the liquidation, regulations were put in place in England to make special provision for distribution to creditors of insolvent insurance companies. Accordingly, although those regulations do not apply to the current liquidation, it could not be said that the Australian regime was contrary to justice and public policy in the United Kingdom. As the companies were Australian companies, and the overwhelming majority of their assets and liabilities were in Australia, the liquidation of the four companies should be governed solely by Australian law.
Elders New Zealand Ltd v PGG Wrightson Ltd (2008) 10 NZCLC 264,352
This Court of Appeal decision considered the effect of a court-approved amalgamation under Part 15 of the Companies Act.
Wrightson Limited and Elders New Zealand Limited co-owned stock saleyards. Certain agreements and company constitutions provided for rights of pre-emption in the case of one of the co-owners seeking to dispose of its interests in the saleyards.
Subsequently, Wrightson and Pyne Gould Guiness were amalgamated under Part 15 of the Companies Act. The court orders made under Part 15 provided that:
- PGG and Wrightson would amalgamate, with Wrightson continuing as the surviving company under the name PGG Wrightson Limited;
- PGG Wrightson would succeed to all the property, rights, powers and privileges of Wrightson; and
- Wrightson would be removed from the New Zealand register of companies.
Elders claimed that the court-approved amalgamation amounted to a disposal by Wrightson of its interests in the co-owned saleyards to PGG Wrightson in such a way as to trigger Elder's rights of pre-emption and issued proceedings in the High Court.
In the High Court, Allen J followed the approach in Carter Holt Harvey Ltd v McKernan [1998] 3 NZLR 403 (CA) which held that the outcome of an amalgamation is that the amalgamated company is not an assignee but simply stands in the shoes of the amalgamating company. As a result, the amalgamation did not involve a transfer or disposition from Wrightson to PGG Wrightson and did not trigger Elder's pre-emptive rights.
The Court of Appeal agreed with that decision. In particular, the Court held that:
- An amalgamation approved under Part 15 of the Act has the same effect as an amalgamation under Part 13, although the process requirements for the approval on an amalgamation under Part 13 do not apply.
- The court-approved amalgamation is binding on all parties dealing with the amalgamated company, including Elders.
- The amalgamation did not amount to a disposal of assets to the amalgamated company. Accordingly, Elders was not able to exercise its pre-emptive rights.
Pioneer Insurance Company Limited v White Heron Motor Lodge Limited (HC, Napier CIV 2007-441-1014, 21 April 2008, Associate Judge D I Gendall)
This case considered whether a loan facility, guarantee agreement and their requisite corporate authorisations were enforceable where it was argued that these documents were imperfectly executed.
White Heron Motor Lodge Limited entered into an arrangement whereby it loaned $1 million to a subsidiary of Pioneer Insurance Company Limited. Pioneer and all its shareholders then guaranteed this loan.
Both the loan agreement and the guarantee agreement were imperfectly executed. Relevant parties had failed to sign the agreements in all of their various capacities (as guarantors personally, as trustees of guarantor trusts and in some cases, as directors). In addition, only one director signed the guarantee agreement on behalf of Pioneer when there were in fact two directors of Pioneer, and the shareholders resolution referred to a draft board resolution which provided for two directors to sign all agreements. Further, attorneys signed the shareholders' resolution (a required corporate authorisation for the transaction) on behalf of two of the shareholders, however, no power of attorney was produced in evidence.
When the borrower defaulted on the loan, White Heron sought payment from Pioneer. Pioneer resisted the claim on the basis that the documents were not executed properly and were not binding on it.
The Associate Judge held that the documents were adequately signed and were binding on Pioneer. The ruling was based on the following grounds:
- As there was proper consideration for the guarantee it was not necessary for the guarantee to be in deed form or executed as a deed.
- The guarantee was executed in accordance with the execution requirements for a simple contract.
- The Associate Judge was satisfied the Companies Act requirements for major transactions and interested directors were met by the shareholder resolution and the reference in those resolutions to the draft board resolutions did not affect the manner in which the guarantee may be executed.
New Zealand Associated Refrigerated Food Distributors Limited v Simpson and Walton (HC Wellington, CIV 2007-485-1563, 28 April 2008, Dobson J)
Directions were sought from the Court as to how to allocate the proceeds of sale of a business between a PMSI supplier and a general secured creditor.
Receivers were appointed to Service Foods Manawatu Limited and all remaining assets of Service Foods were sold. Prior to the receivership, New Zealand Associated Refrigerated Food Distributors Limited ("NZARFD") supplied wholesale foodstuffs to Service Foods and had a registered security interest which was a purchase money security interest or PMSI under section 16 of the Personal Property Securities Act.
The 28 April 2008 judgment
The principal issue considered by Dobson J was how to determine (a) the value of goods supplied after the PMSI was perfected; and (b) which goods were not paid for.
The receivers relied on a pre-PPSA decision where it was held that a party wishing to assert a reservation of title must identify stock which has not been paid for: Geal Investments Ltd v Ivil Hotels. Justice Dobson considered that the PPSA had not made any material changes that required the approach in Geal to be distinguished. However, the Court said that due to the lifespan of the goods, it could be established which goods held by Service Foods at the time of receivership were subject to the PMSI.
The next issue was how to determine which goods had not been paid for. This was not straight forward as Service Foods had paid rounded amounts as and when it could, rather than paying particular invoices. In the absence of any express terms, Dobson J held that the oldest debts should be paid first, as is the default position as found in Clayton's Case (Devaynes v Noble, Clayton's Case (1861) MER 529).
It was argued for the receivers that if the Clayton's Case presumption applied then there should be a "ruling off" of the indebtedness, so that all payments received after the PMSI was perfected should be applied to liabilities incurred after that date and not to goods supplied before this, thereby reducing the value of secured goods first.
In the opinion of Dobson J, this argument invited an analogy to section 293(5) of the Companies Act 1993 which provides that where a charge is given within one year, all payments received after the charge was given shall be deemed to have been appropriated towards payment of property sold on or after the giving of the charge. Justice Dobson adopted this reasoning, stating that post‑PPSA jurisprudence has been influenced by the need to align the operation of the PPSA and the Companies Act.
Application for recall
NZARFD invited the recall of the 28 April 2008 judgment which had not yet been sealed on the basis that, amongst other things, Dobson J had not addressed arguments that marshalling could apply and had relied on section 293 of the Companies Act without hearing argument on its application.
While not accepting NZARFD's marshalling argument, Dobson J agreed that both parties should be afforded an opportunity to expand on their arguments concerning "ruling off". The issues as defined by the Court were set down and the parties invited to file and serve their arguments.
New Zealand Police v Moneyworld Asia (NZ) Limited (HC Auckland, CRI-2007-004-26847, 16 September 2008, John Hansen J)
In this decision, the court was asked to determine the appropriate penalty for a conviction for money-laundering.
Moneyworld Asia (NZ) Limited pleaded guilty to 25 counts of money laundering contrary to section 243 of the Crimes Act. Moneyworld's client had obtained the money by selling significant amounts of pseudoephedrine, which Moneyworld remitted to China on behalf of the client. The company's guilty plea was made on account of their recklessness as to whether the funds remitted were the proceeds of a serious offence.
The Crimes Act only provides for a sentence of imprisonment in relation to money laundering. However, John Hansen J agreed that, as Moneyworld is a company, the court is able to impose a fine pursuant to section 39 of the Sentencing Act.
In determining the quantum of the fine imposed on Moneyworld, John Hansen J took the starting position that, based on the maximum fines that can be imposed for related offences under the Financial Transactions Reporting Act, an appropriate maximum fine would be somewhere between $300,000 and $350,000. This amount happened to be approximately equal to ten times the gain to Moneyworld from the transaction (John Hansen J stated that this method of calculating the fine may prove to be a useful starting point in cases such as these).
The amount of the fine was then mitigated by a number of factors. The factors taken into account included the following:
- Moneyworld's early guilty plea;
- the full and immediate co-operation by Moneyworld and their parent company;
- the fact that Moneyworld is a reputable company carrying on a legitimate business;
- Moneyworld's financial means, in particular that they are not in a position to pay a substantial fine; and
- Moneyworld's demonstration of a change of practice to prevent a breach of the money laundering provisions in the Crimes Act re-occurring.
The Court took the position that the above factors warranted a significant discount of the fine imposed on Moneyworld. As a result, Moneyworld's fine for a breach of section 243 of the Crimes Act was reduced to $102,400 (that is, $100,000 for the first offence and $100 for each subsequent offence).
Jones v Auto Imports and Wholesale Limited (HC Wellington, CIV-2008-435-183, 22 September 2008, Clifford J)
This decision permitted the discharge of a financing statement on the Personal Property Securities Register on the basis that there was no underlying security interest.
Jones sold Japanese import motor vehicles to Auto Imports and Wholesale Limited. There was a history of trading whereby Auto Imports bought cars from Jones directly via an online auction. Those sales were subject to standard terms and conditions, which included a retention of title clause. However, the sales in question in this proceeding were completed over the phone, not on the internet. Further, the invoices were issued under the name of "Alps Trading Corporation". The only term on the Alps Trading invoices was for "payment seven days from invoice".
Jones registered financing statements on the PPSR against Auto Imports for the two cars in question on the basis that the standard terms were also incorporated into these particular sales, even though completed over the phone. Auto Imports made demand to have the financing statement discharged in accordance with the Personal Property Securities Act. Jones brought proceedings in order to maintain the registration of the financing statement.
Justice Clifford found that the contract for sale and purchase was between Auto Imports and Alps Trading, not Jones personally. Reasons for this finding included that the invoice and bank account details were in the name of Alps Trading, not Jones, and electronic communication identified Jones as acting as an agent of Alps Trading, not individually. Jones was unable to produce documentary evidence showing that he used the Alps Trading name and bank account to carry out trading on his own behalf. Accordingly, the online terms and conditions were not incorporated into the sale and purchase agreement and there was no basis for the registration of the financing statement being maintained.
In addition to the Reserve Bank of New Zealand Amendment Act 2008 (noted in the September 2008 Banking Law Update), the Review of Financial Products and Providers has resulted in the enactment of two further Acts: the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008, both of which were passed in late September 2008. While certain preliminary and administrative provisions of both Acts are now (or soon to be) in force, the substantive obligations imposed by those Acts are yet to come into force.
Financial Advisers Act 2008
The Financial Advisers Act establishes a new regulatory regime by introducing standards for, and providing oversight of, "financial advisers". A financial adviser is a person who, in the course of business, performs a "financial adviser service", that is:
- gives "financial advice" (ie makes a recommendation or gives an opinion or guidance in relation to acquiring or disposing of a “financial product”);
- makes an "investment transaction" (ie receives, handles or invests money or other property on behalf of another person in relation to acquiring or disposing of a “financial product”); or
- provides a "financial planning service" (ie analyses an individual's current financial situation, identifies his or her financial goals, and develops options for realising those goals.
Financial products are divided into two categories, with category 1 products (eg securities (other than call debt securities or bank term deposits), futures contracts, and real property) being considered more complex than category 2 products (eg call debt securities, bank term deposits, consumer credit contracts and insurance products). The Act imposes different requirements on financial advisers depending on which category the financial adviser service relates:
- An individual who is registered under the Financial Service Providers (Registration and Dispute Resolution) Act 2008 ("Registered") (discussed below) and authorised by the Securities Commission pursuant to the criteria outlined in the Act ("Authorised") may provide a financial adviser service in relation to a category 1 product and provide financial planning services.
- An individual who is Registered but not Authorised may provide a financial adviser service in relation to a category 2 product.
- An employee or agent of a "qualifying financial entity" ("QFE") may provide a financial adviser service in relation to a category 2 product without being either Registered or Authorised.
- An employee of a QFE may provide a financial adviser service in relation to a category 1 product issued by the QFE without being either Registered or Authorised.
QFE status is granted by the Securities Commission under the Act. A QFE will be responsible for the conduct of its employees and agents.
The Act includes certain universal disclosure and conduct requirements for financial advisers. The Act also provides for a code, outlining minimum standards of professional conduct for authorised financial advisers (ie those who can advise on category 1 products) to be prepared. The code will be prepared by the Commissioner for Financial Advisers (in conjunction with the code committee). Both of these roles are established by the Act.
Financial Service Providers (Registration and Dispute Resolution) Act 2008
The Financial Service Providers (Registration and Dispute Resolution) Act 2008 establishes a compulsory public register for persons who are in the business (whether or not the principal business) of providing "financial services".
The Act is intended to better ensure that New Zealand complies with the Financial Action Task Force's Recommendations on Anti-Money Laundering and Countering the Financing of Terrorism. Accordingly the definition of financial service is very broad. In addition, persons who provide, or offer to provide, a financial service to the public will be required to be a member of a Ministerially-approved dispute resolution scheme.
These regulations relate to the definition of facility in the Financial Transactions Reporting Act 1996 and deem remittance card facilities not to be facilities for the purposes of section 6 of that Act if certain conditions are met. The regulations have the effect of exempting financial institutions from the requirement to verify the identity of the second card holder of the remittance card facility. The purpose of these regulations is to facilitate remittances from people in New Zealand to people in other countries, particularly Pacific Island countries.
This notice replaces the Securities Act (Australian Registered Managed Investment Schemes) Exemption Notice 2003. This notice carries over the exemptions relating to offers of securities in Australian registered managed investment schemes under distribution reinvestment plans. This notice also allows issuers who have previously relied on the 2003 notice to continue to rely on that notice until 30 September 2010. It is anticipated that, in future, issuers of Australian registered managed investment schemes will use the regime for the mutual recognition of securities offerings instead of these types of exemption notice.
Section 78 of the Reserve Bank of New Zealand Act sets out certain matters that the Reserve Bank must have regard to when considering whether a registered bank (or an applicant for registration) has been carrying on its business in a prudent manner (or in the case of an applicant, has such ability). These regulations set out additional factors for the Reserve Bank to consider. Those factors are policies, systems and procedures (or proposed policies, systems and procedures) to detect and deter money laundering and the financing of terrorism.
The Overseas Investment Act sets out certain factors that the relevant Ministers must have regard to when determining whether an overseas investment in sensitive land will, or is likely to, benefit New Zealand. Additional factors may be prescribed in regulations. Following the hurried making of regulations in early 2008, certain business groups made a complaint to the Regulations Review Committee in relation to that use of the regulation-making power.
In their report to Parliament, the Regulations Review Committee recommended that the Government:
- review the regulations in question to consider whether the matters prescribed by the regulations are more appropriately addressed in primary legislation;
- amend the Overseas Investment Act 2005, either to omit that regulation-making power or to require consultation with relevant parties prior to regulations being made; and
- take steps to ensure that primary legislation does not allow regulations to be made adding factors or criteria listed in primary legislation, where such factors or criteria are to be taken into account in ministerial decision-making.
Issue 10, 2008 of the Journal of International Banking Law and Regulation contains an article entitled Conflict of interest in financial advisory services in Australia after ASIC v Citigroup: what next? by Yashwardhan Bandi.
The article examines the relationship between a financial advisor and its client in light of the recent Federal Court of Australia decision in ASIC v Citigroup Global Markets Australia Pty Ltd (2007) 62 ACSR 427 ("Citigroup case"); in particular, whether the relationship creates a fiduciary obligation on the financial advisor to act in the best interests of its client.
The relationship between a financial advisor and its client is, on its most fundamental level, a contractual one. However, there is potentially a co-existent fiduciary relationship if one party has the capacity to affect the interests of the other and that second party is vulnerable and places reliance on the first party. Because of these characteristics, the stronger party has a duty of loyalty towards the weaker party. This includes avoiding conflicts of interest, not personally benefitting from the relationship, and disclosing material information.
The Citigroup case addressed the issue of a fiduciary obligation in relation to management of conflict of interest. Toll Holdings Limited ("Toll") engaged Citigroup Global Markets Australia Pty Ltd's ("Citigroup") Investment Banking Division ("IBD") to provide financial advisory and investment banking services in relation to a proposed takeover. Despite the existence of formal Chinese walls between the IBD and Equities divisions, a trader in Citigroup's Equities division bought and sold shares in the target company using information that was only available to the IBD. The Australian Securities and Investments Commission ("ASIC") subsequently brought proceedings against Citigroup alleging that Citigroup owed a fiduciary duty to Toll, and had breached that duty by not ensuring that adequate arrangements for managing conflicts of interest existed.
Jacobson J in the Federal Court observed that a fiduciary relationship arose between a financial advisor and its client when "the advisor holds himself out as an expert on financial matters and undertakes to perform a financial advisory role for the client". This was to be gleaned from the true construction of the contract between the parties and from any prior fiduciary relationship between the parties. He found that Citigroup had no fiduciary duty to inform Toll of its trading in shares in the target company because informed consent was implied from Toll's knowledge of Citigroup's structure and method of operation.
The author suggests that the guidance from ASIC and in the Corporations Act 2001 to deal with controlling, avoiding and disclosing conflicts of interest is largely redundant. It is suggested that in most commercial relationships there is no co-existent fiduciary duty because the parties are on an equal footing, and all the defining features of a fiduciary relationship can, and are, contracted out of because:
- The power exercised by one party expressly contemplates that they can have a personal interest;
- The obtaining of a personal benefit is an inevitable consequence of the exercise of the power; and
- Personal interests are required to be disclosed.
Jacobsen J also observed that there was no restriction in the law to prevent a fiduciary from contracting out of, or modifying his or her fiduciary duties, for example in a mandate letter, particularly where no prior fiduciary relationship existed.
The September 2008 issue of The Modern Law Review contains an article by Rizwaan Jameel Mokal entitled What liquidation does for secured creditors, and what it does for you. This article analyses the liquidation process, challenging the proposition that secured claimants 'stand outside' liquidation.
The article analyses the decision in the Leyland Def case ([2004] UKHL 9), and criticism of it. In that case the House of Lords set out to answer the question of correct priority between the expenses properly incurred by the liquidator of an insolvent company, and debt claims against the company secured by a floating charge. The floating charge was given priority, as the assets subject to the floating charge were determined to be beneficially owned by the chargee. The article is critical of the Leyland Def decision, which it considers to be incorrect as a matter of law.
The Leyland Def decision applied the proposition that secured claimants 'stand outside' liquidation. The article contends that this proposition is wrong based on the nature (the dual duality) of liquidation proceedings; the principle that they serve both public and private functions and further the interests of both secured and unsecured creditors. The proposition mistakes a secured creditor's choice to gain immunity from the liquidation process, for a compulsion to stand outside the process. The article also argues that the proposition is incorrect as a matter of history and practice, and is rendered unsustainable by statute.
The article concludes that secured creditors have never 'stood outside' the liquidation process. Liquidation is identified as an important tool for the protection of secured creditors' interests. The author considers it right that floating charge holders should not rank ahead of liquidation expenses; that a floating charge holder should have to pay their fair share of liquidation expenses where assets in the liquidated company are insufficient to meet all preferential claims.
The August 2008 issue of the Company and Securities Law Journal contains the article Private equity bids: managing conflicts of interest when public companies go private by Michael Hruby.
The article focuses on conflicts of interest that may arise in private equity transactions when senior target company officials participate in the bidding consortium, or receive benefits in return for supporting the bid. The current Australian regulatory framework addressing the issue is analysed, under the premise that the nature of the private equity industry makes it vulnerable to conflicts of interest.
Hruby asserts that the conflicts of most concern arise at the board and senior management levels of the target company, and outlines various scenarios in which conflicts may arise, such as:
- in management buyouts, conflict between securing the highest possible bid price for current shareholders, and minimising the amount the bidding consortium must pay to secure control of the company; and
- conflict between advancing the best interests of the company in an impartial manner and receiving direct or indirect financial benefits by participating in a takeover of a company.
Other conflicts occurring internally with a private equity fund and those for external advisers of a company are also highlighted.
The current Australian regulatory framework does not specifically address private equity takeover bids. Instead, there are general law duties of directors and senior officers, the Corporations Act 2001 (Cth) ("Corporations Act"), guidance from the Australian Takeovers Panel, and the Australian Securities Exchange Limited Listing Rules ("ASX Listing Rules"). The law under each limb of the framework is discussed.
The Australian Takeover Panel's Guidance Note 19: Insider Participation in Control Transactions ("Guidance Note"), released in June 2007, is welcomed by Hruby as reflecting commercial reality. The three key areas of concern identified in the Guidance Note are:
- addressing conflicts of interest where insiders are involved in a bid or potential bid;
- provision of information to potential rival bidders; and
- disclosure of information to target shareholders.
Hruby opines that in a leveraged buyout, fiduciary and statutory duties do not adequately protect shareholders and believes the Guidance Note is only a partial solution to the issues raised by private equity bids. Hruby advances the following recommendations:
- full disclosure of material information for both rival bidders and target shareholders;
- a ban on participation by the target chairperson in a private equity bid consortium; and
- the mandatory production of independent expert reports in all private equity transactions with insider participation.
The September 2008 Company and Securities Law Journal contains the article The OPES Prime litigation: securities "lending" transfers legal title to securities by Michael Legg. The article summarises the recent Australian case, Beconwood Securities Ltd v Australia and New Zealand Banking Group Ltd [2008] FCA 594.
The case centred around the collapse of Opes Prime and the competing claims between Beconwood, a client of Opes Prime who had "lent" them shares to secure a loan facility, and ANZ, who provided funding lines to Opes Prime secured over the shares that Beconwood had "lent" to Opes Prime. The decision is of major significance as this was a test case for hundreds of Opes Prime clients who entered into similar securities lending arrangements.
The issue before the Court was whether the legal construction of securities lending agreements between Opes Prime and its clients conferred an equitable interest allowing the clients to recover their shares from ANZ, or instead, whether the securities lending contract passed unencumbered title in the securities to ANZ. In addition to providing a summary of the arguments put forward in the judgment the author provides a useful background on securities lending generally.
After providing a detailed summary on securities lending the author goes on to consider the dispute that was before the Court. The document in question in the case was the widely used standard Australian Master Securities Lending Agreement ("SLA"). Beconwood's argument was that the SLA it entered into with Opes Prime was in reality a legal mortgage and that it retained an equity of redemption: although property in the security passed to Opes Prime, Beaconwood retained an equitable right to regain title to the security upon repayment of the loan. Following this line of reasoning, Beconwood claimed that even after the transfer of the securities by Opes Prime to ANZ this right to regain title existed.
Justice Finkelstein rejected Beconwood's argument on three grounds. Firstly, that the express terms of the SLA provide that unencumbered title passes on delivery, and secondly, because when the transaction came to an end there was no obligation in the SLA to hand back, in specie, the securities initially lent. The third reason relied upon by the Court was that the netting and set-off provisions within the SLA which come into effect on default, convert redelivery obligations into payment obligations. In the view of Justice Finkelstein these three reasons confirmed that the parties to the SLA did not intend any equitable property rights to exist over the lent securities.
The Court held that the SLA resulted in an absolute transfer of ownership in the securities lent by Beconwood to Opes Prime and rejected Beconwood's claim that it had any rights in respect of the securities.
The author concludes the article by agreeing with the decision on the grounds that it is consistent with international precedent and with the practices and expectations of the securities industry. He added that if the SLA had been found to not transfer complete legal title in the securities loaned, then this may have had a negative impact on the liquidity, efficiency and international competitiveness of the Australian capital markets.
The Personal Properties Securities Act 1999 and trusts - when is an interest under a trust a security interest?
The September 2008 issue of the New Zealand Business Law Quarterly contains the article The Personal Properties Securities Act 1999 and trusts - When is an interest under a trust a security interest? by Jonathan Orpin.
This article examines when an interest under a trust is a security interest. Orpin examines cases such as Stiassny v North Shore City Council [2008] 1 NZLR825 (HC) which states that an assessment of whether a trust interest is in substance a security interest, securing payment or performance of an obligation, will depend on the purpose of the transaction, the role and relationship of the parties, the practicality and commercial reality, and the parties intentions. Orpin believes this approach is inconsistent with the statutory regime and argues in favour of a three stage enquiry based on the statutory definition of "security interest".
Orpin submits the correct approach to determining whether a trust creates a security interest is to carefully apply the statutory definition in s 17(1) of the Personal Properties Securities Act 1999 ("PPSA"). The three step approach to the application of the definition Orpin proposes is:
- identify the interest in personal property;
- determine whether the interest is created or provided for by a transaction; and
- determine whether the interest in substance secures payments or performance of an obligation.
Orpin states the first step of identifying the interest in personal property is straightforward. An equitable interest in personal property held on trust is an "interest in personal property" for the purposes of the PPSA.
The next step in Orpin's enquiry is to determine whether the interest in personal property is created or provided for by a transaction. The language of the definition "created or provided for", is broad enough to cover two situations: (i) where the trust is "created" by a transaction as a security device; and (ii) where a transaction makes use of a trust already in existence to provide security. Orpin states that the interest must result from a "transaction". This means that the interest must arise consensually. Interest in personal property in trusts arising by operation of law will therefore be excluded from the ambit of the act.
The third step in Orpin's approach is to determine whether the interest in substance secures payment or performance of an obligation. Payment or performance of an obligation must be secured by interest in personal property and not a transaction. Orpin states that this obligation must be a non-trust obligation and must be separate from the trustee's obligations as trustee. Therefore there must be some obligation on the trustee, other than the trust, which the beneficiary's equitable interest secures.
Orpin suggests that the adoption of this three step test will give effect to the statutory definition of security interest and arrive at justified results. Orpin submits that trusts that truly secure payment or performance of an obligation will be captured by the test but others will not.
"I'm banking on you" - rethinking reliance
The financial services compensation scheme and deposit insurance reform
Credit cards and connected lender liability
The August 2008 Lloyd's Maritime and Commercial Law Quarterly contains three articles of interest.
The first article is entitled "I'm banking on you" - rethinking reliance by Mark Stiggelbout.
The article considers the decision of the House of Lords in Customs & Excise Commissioners v. Barclays Bank Plc [2006] UKHL 28 ("Barclays"). The author saw the case as significant in two aspects:
- first, for the Court's recognition of "voluntary assumption of responsibility" as an independent duty of care; and
- secondly, for the differing approaches adopted by Lord Bingham and Lord Hoffman in interpreting "reliance".
The issue tested in Barclays was whether Barclays Bank owed a duty in tort not to cause the Customs & Excise Commissioner economic loss by allowing payments to be made out of their clients' accounts which were subject to a freezing order. The House of Lords, overruling the Court of Appeal, reached the conclusion that no tortious duty of care is owed by a bank served with a freezing order upon a customer's account to take reasonable care to ensure that no payments are made out of the account.
In assessing whether Barclays Bank owed the Commissioner a duty of care, the Court not only tested whether Barclays Bank owed a duty of care under the traditional Caparo test, but also applied the separate test of whether Barclays Bank was liable to a breach of a "voluntary assumption of responsibility". The author believed that the Court's recognition of a voluntary assumption of responsibility as an independent duty of care was a "significant advantage" to the House of Lords as the test "is a perfectly principled head of liability that needs no help from policy in order to set sensible limits to recovery".
A significant element in showing that there has been a voluntary assumption of responsibility involves assessing whether the claimant relied on the defendant's careful execution of the task. Much of the author's analysis turned on assessing Lord Bingham and Lord Hoffman's contrasting interpretation as to what constitutes "reliance".
The author was critical of Lord Bingham's narrow interpretation of reliance. The test applied by Lord Bingham considered that the Commissioner could be said to rely on Barclays Bank, where it can be shown that if the Commissioner had not relied on the Barclays Bank, he would have acted differently. The difficulty the author envisaged with this interpretation was that it was at odds with the ordinary usage of the word reliance and it placed the onerous evidentiary burden on the claimant of having to prove the hypothetical; namely that, if they had not relied on the defendant, they would have done y instead.
The author, however, found Lord Hoffman's interpretation of "reliance" as "more satisfactory". Specifically, he condoned Lord Hoffman's approach of asking two questions from the defendants point of view. Firstly, did the defendant assume the said responsibility to the claimant, and secondly, did the defendant assume the said responsibility for the purpose he knew the claimant would use it.
In concluding the author expressed his hope that Lord Bingham's interpretation of reliance did not prevail over Lord Hoffman's, as he believes, this could lead to the concept of voluntary assumption of responsibility being stretched beyond its natural limits.
The second article is entitled The Financial Services Compensation Scheme and deposit insurance reform by Harry McVea.
In the United Kingdom deposit insurance is provided under the Financial Services Compensation Scheme ("FSCS"). The author examines the role of the scheme in the wake of the collapse of Northern Rock and highlights areas in need of reform.
The FSCS was established in 2001 under the Financial Services and Markets Act 2000 and is operated as a company limited by guarantee by the Financial Services Authority ("FSA"). The scheme provides a last resort for investors who have lost money as a result of the activities of a person authorised by the FSA but who cannot successfully claim against that person because their entitlement to redress is frustrated by an empty or near empty pot. It covers losses incurred by individuals and small businesses and is funded by levies on the financial sector.
The key goal of deposit insurance is to promote stability within the financial system by preventing panic from spreading to customers of other banks should one bank fail. The Northern Rock collapse highlighted four key areas in need of reform in order to achieve this objective: coverage and protection levels provided, funding, promptness of payment and public awareness levels.
From 1 October 2007, the protected amount under the FSCS in respect of deposits was raised to £35,000, a level which covers approximately 96% of British bank customers. Consideration is currently being given to removing the netting that is applied to the customer's deposits in respect of monies owed by the customer to the failed bank (eg a mortgage).
The FSCS is currently funded on a pay-as-you-go model, whereby levies are calculated according to forecasts based on claims in the previous 12 months. The author strongly advocates a pre-funded model, as exists in the USA, to ensure that sufficient funds are immediately available. The FSA intends to speed up the process by which the FSCS operates, with a goal of making payments within a week of a collapse.
The final aspect of necessary reform of the FSCS is to increase public awareness of the scheme. Barely one percent of respondents in one survey conducted by the FSA were able to state the applicable limits.
The third article is entitled Credit cards and connected lender liability by Christopher Hare. It considers the impact of the recent House of Lords decision in Office of Fair Trading v Lloyds TSB Bank [2008] 1 Lloyd's Rep 30 on the law surrounding connected lender liability under the Consumer Credit Act 1974 (UK) ("CCA") and its application to credit card issuers.
Connected lender liability gives a consumer a right of recourse against a lender that provides finance for the acquisition of goods or services from a third party merchant. Section 75 of the CCA renders the lender jointly and severally liable with the merchant for any misrepresentations made to the debtor with respect to the goods or services supplied and for any breaches of its supply agreement. Further, nothing prevents a consumer from making the lender its first port of call, even when there is a perfectly viable claim against the merchant.
The case considered the impact of two developments on s75. The first, whether four-party credit card transactions could attract connected lender liability, was not part of the subsequent appeal to the House of Lords (permission to appeal on this point was declined, leaving the Court of Appeal decision as the leading authority). The second part of the article concentrates on the House of Lord's unanimous decision that s75 can apply to foreign transactions.
In a three-party arrangement the parties are the financial institution, who issues the credit card, the customer, and the merchant, who accepts the credit cards of a particular issuer/network, in return for that issuer reimbursing the merchant for purchases made. However, suppliers are increasingly recruited to a particular network by financial intermediaries, separate from the issuer. This gives rise to a four-party transaction where the intermediary undertakes to reimburse the merchant (less a "merchant service fee"), and agrees in turn to seek reimbursement (less an "interchange fee") from issuer. There is no direct agreement between the issuer and merchant.
In the Court of Appeal the defendant banks unsuccessfully argued that a four-party transaction could not give rise to connected lender liability on the basis of the wording of the CCA. The author agrees with this result but has concerns with the interpretation of the term "arrangement" to described the relationship between the issuer and the merchant and in particular the possibility it may allow courts to impose connected lender liability when the issuer has no control whatsoever over whether a particular supplier accepts its credit card. The author prefers a more equitable approach looking at the transaction as a whole.
The House of Lords rejected the argument that foreign transactions were outside the CCA because they had not been contemplated at its inception. Their Lordships focussed on a straightforward statutory construction. Further, this interpretation gave effect to the CCA's consumer protection aims.
The case did not clarify however, the situation of an issuer not being British-based. The European Union Second Banking Consolidation Directive ("SBCD") allows "credit institutions" of Member States to provide services in another Member State. It would be contrary to consumer protection goals if a British consumer would have less protection merely by using a credit card from a European institution, entitled to operate in Britain under the SBCD. The converse may also apply, ie if a British bank issued a card in Europe. This raises governing law issues across the various four party agreements. A final argument seeking to limit the international application of the CCA where the issuer's indemnity against the supplier under the CCA did not apply was also rejected. It was noted that the issuer-supplier indemnity contained in the CCA was only one of a number of ways in which the issuer could recoup any losses and indeed was often only a last resort if a direct contractual obligation could not be used.
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 |
AUCKLAND |