Contents:
September/October 2009
Contents:
In Goldman Sachs JBWere Managed Funds Limited v Coulthard (HC Wellington, CIV 2007-485-2472, 31 July 2009, MacKenzie J), Goldman Sachs sought relief orders under section 37AI of the Securities Act 1978.
Goldman Sachs JBWere Managed Funds Limited ('Goldman Sachs") was the responsible entity in relation to a number of Australian registered managed investment schemes offered to the public in New Zealand. From 1999 to 2003, Goldman Sachs relied on the Securities Act (Australian Registered Managed Investment Schemes) Exemption Notice 1999 ("Notice") to exempt it from the requirement to have a New Zealand registered prospectus for the funds. However, the exemption was subject to the conditions of the Notice being met. One of the conditions required Goldman Sachs to lodge various documents with the Registrar of Companies within a certain time. Goldman Sachs was late in filing some documents which meant Goldman Sachs had not complied with the Notice and so had allotted securities in contravention of section 37 of the Act.
Goldman Sachs sought relief orders validating the allotment of the securities. Relief orders were initially granted in favour of all investors who had been given notice of the relief application and had not objected. In this case, MacKenzie J was considering whether relief orders should also be granted in respect of investors who had objected to the initial application. In order to succeed, Goldman Sachs had to establish that the contravention of section 37 of the Act was caused solely by a failure to comply with the Notice. The Court must then grant relief if the contravention did not materially prejudice the interests of the objecting subscribers.
In relation to the first defendant, the Court held that the fact that the investor had suffered loss was not sufficient to establish material prejudice. There had to be a causal connection between the loss and the non-compliance. There was nothing in the evidence suggesting that the decision to invest in the particular securities might have been different if the requisite documents had been filed. Thus, the first defendant was not materially prejudiced by the non-compliance.
The second defendant objected on the basis that he was not aware of termination provisions relating to the fund. However, neither the compliance plan nor the constitution (which were the documents that had not been filed on time) included the relevant terms, so the second defendant had not been materially prejudiced by the filing non-compliance.
The third defendant made a "reliant objection" and argued that, if he had known of the non-compliance with the technical filing requirements, he would have lost confidence in Goldman Sachs' competence and would have redeemed his units. The court held that the mere theoretical possibility that the decision to invest may have been different if the investor had been aware of the non-compliance does not amount to material prejudice. There had to be actual evidence that the decision to invest would have been different if the circumstances of the non-compliance had been known. Accordingly, the third defendant had not been materially prejudiced by the non-compliance either.
As a result, relief orders were granted in respect of the allotment of the securities of all three defendants.
In the recent case of In re Bluebrook Ltd [2009] EWHC 2114(Ch) Justice Mann agreed to sanction schemes of arrangement which formed part of a wider debt restructuring that excluded out-of-the-money mezzanine lenders on the basis that they had no economic interest in the companies being restructured.
Three related companies sought court sanction of schemes of arrangement in order to implement a debt restructuring. Bluebrook Limited was the holding company, and IMO (UK) Limited and Spirecove Limited were its indirect subsidiaries (the "Group"). The Group's indebtedness comprised senior debt and subordinated mezzanine debt. An intercreditor agreement was in place which clearly subordinated the mezzanine debt to the senior debt, such that the mezzanine debt could not be repaid or demanded until after the senior debt had been paid.
The effect of the proposed restructuring was to transfer the Group's assets to a new group of companies. A small amount of the senior debt would remain with the Group; a large part of the senior debt would be novated to the new group; with the rest of the senior debt being substituted by the senior lenders taking equity in the new group. No assets were to be left in the existing Group to pay the mezzanine lenders. The proposed schemes were accepted by a majority of the senior lenders. However, the mezzanine lenders objected as they were being "shut out" of the compromise. They argued that the schemes should not be sanctioned as they were being unfairly prejudiced.
Central to the mezzanine lenders' argument was the value of the Group. Three valuations obtained by the Group put its current value, on a going concern basis, at a sum not exceeding £265 million (much less than the outstanding senior debt). A valuation obtained by the mezzanine lenders put the group's value at approximately £385 million (which exceeded the outstanding senior debt). Justice Mann preferred the Group's valuation, which had been based on "real world judgments as to what was likely to happen". Justice Mann commented that the technique used by the mezzanine lenders seemed to produce a range of possibilities instead of a professionally assessed valuation.
The mezzanine lenders raised a range of arguments as to why the court should not sanction the schemes including that the Group had improperly chosen to deal with the senior creditors only and that the boards of the Group companies owed a duty to its creditors generally (or, at least, they could have done better by the mezzanine lenders). Mr Justice Mann held that, on the basis of the valuation that he accepted, the mezzanine lenders had no economic interest in the companies. Accordingly, their rights were unaffected by the schemes and the Group did not need to negotiate with them. Further, the consequences of not sanctioning the schemes could include a further deterioration in value for the senior lenders with no real possibility of an improved position for the mezzanine lenders. Accordingly, the court sanctioned the schemes.
In Westpac Banking Corporation v Commissioner of Inland Revenue [2009] NZCA 376 the appellant banks were unsuccessful in their appeal that unpresented bank cheques and drafts are not money "owing" and "payable" for the purpose of the Unclaimed Money Act 1971.
In his judgment for the majority, Robertson J noted that the first matter for the appellants was to distinguish the present facts from those in the Privy Council decision of Commissioner of Inland Revenue v Thomas Cook (New Zealand) Limited [2006] 2 NZLR 722, which is binding on the Court of Appeal. That case involved drafts issued by Thomas Cook but not presented by their respective payees within six years of purchase by Thomas Cook's customer. The Privy Council was unanimous in the view that the monies unclaimed under the drafts were owing and payable from the date of issue for the purposes of the Unclaimed Money Act. Accordingly, the unclaimed money was payable to the Crown.
Thomas Cook was not able to be distinguished on its facts. However, the appellants argued that Thomas Cook should not be followed as it was incorrectly decided (i) on the basis that the Privy Council was unaware of the true nature of the instruments that were the subject of the proceedings; (ii) there was insufficient argument before the Privy Council on the deciding issue; (iii) the Privy Council based its decision on an assumption which was not binding on the Court of Appeal; and (iv) that the statutory history of the Unclaimed Money Act was overlooked, resulting in incorrect interpretation. Justice Robertson dismissed the first three arguments and considered the fourth to be "too frail" an argument to depart from precedent. The minority judgment given by Baragwanath J concurred with the majority decision, but went on to set out why the decision in Thomas Cook was correct. Accordingly, the appeal was dismissed.
In Shephard and Dunphy as Liquidators of Carm Holdings Ltd (In Liquidation) v Carm Holdings Limited (In Liquidation) (HC Wellington CIV-2009-485-1332, 16 September 2009, Associate Judge Gendall) the liquidators of 21 companies applied for a pooling order under section 271(1)(b) of the Companies Act 1993.
Pooling orders cut across the fundamental principle of the Companies Act that each company is a separate legal person by enabling the liquidation of related companies to proceed as though they were one company. In deciding whether it is just and equitable to make a pooling order, the Court must have regard to a number of matters set out in the Act, being the extent to which any of the companies took part in the management of any of the other companies, the conduct of any of the companies towards the creditors of any of the other companies, the extent to which the circumstances that gave rise to the liquidation of any of the companies were attributable to the actions of any of the other companies, the extent to which the business of the companies have been combined, and any other matters as the Court thinks fit. What is just and equitable to make a pooling order in each individual case depends upon the circumstances of the particular case.
In this case, after examining the shareholding of the various companies, the Court was satisfied that all the companies concerned were "related companies" under section 2(3) of the Act. The procedural requirements of section 271A of the Act were complied with and all creditors and affected parties had been served with the application. The Court then went on to consider the grounds for the orders sought to determine whether it was just and equitable for the orders to be made.
The liquidators submitted that the companies were run to a certain extent as if they were a single broad entity with their records confusingly intermingled. Money was freely moved between the different companies, much of which could, at best, be characterised as inter-company borrowings. Parties who dealt with the companies often assumed they were dealing with a single entity, and were paid by whichever company has sufficient funds. This made administering the liquidations of those companies separately a practical impossibility.
Associated Judge Gendall was satisfied that the creditors and others dealing with the companies would not be unduly prejudiced if the order was made. Pooling the companies would enable the liquidators to act in the best interests of all creditors across the group and use the pooled resources of the various companies to obtain the highest return. Therefore, it was just and equitable for the order to be made.
In Re Octaviar Ltd (No 7) [2009] QCA 282, the Queensland Court of Appeal unanimously overturned McMurdo J's decision in the Supreme Court. Octavier granted a deed of charge in favour of Fortress in respect of all liabilities under any "Transaction Document". "Transaction Document" was defined in a Facility Agreement (under which an Octavier subsidiary was the borrower) as including any document that Fortress and Octavier agree in writing is a Transaction Document for the purposes of that Facility Agreement. Fortress and Octavier subsequently agreed in writing that an Octavier guarantee ("YVE Guarantee") of an unrelated facility was a Transaction Document.
The Public Trustee of Queensland sought to have the deed of charge avoided under the Corporations Act in relation to the YVE Guarantee for failure to comply with registration requirements. The Public Trustee was successful at first instance (see the April 2009 Banking Law Update). Fortress appealed that decision.
The Judges gave separate, but concurring judgments. There were two issues to consider:
- whether the YVE Guarantee was a "Transaction Document"; and
- whether the deed declaring the YVE Guarantee to be a Transaction Document constituted a "variation in the terms of the charge ... increasing the liabilities" (which would require registration).
In relation to the first issue, the Judges took a natural interpretation of the definition of "Transaction Document" and found that the YVE Guarantee was clearly a Transaction Document. The alternative interpretations proposed by the Public Trustee would have unnecessarily required a strained interpretation of the definition.
The Public Trustee argued that the Act applied to any change that resulted in the liabilities secured increasing as such change altered the proprietary interest which operated by way of security in respect of the company's property. Fortress argued that the Act did not apply unless the terms of the instrument creating or evidencing the charge were amended.
The Court did not favour the Public Trustee's argument for a number of reasons, including because it would require a secured party to register a variation every time the borrower made a drawing under the facility ("an onerous and improbable outcome") and it would not assist other creditors to determine the actual amount secured at any particular time. Agreeing that the YVE Guarantee was a Transaction Document did not constitute a variation to the terms of the charge. Rather, it was a change in accordance with the terms of the charge. Accordingly, no registration requirements applied.
The case of Peace and Glory Society Limited (in liquidation) v Samsa [2009] NZCA 396 involved an appeal by the liquidators of Peace and Glory Society Limited ("PGS") against the High Court's decision that Mr Samsa was not liable for a breach of his duties as director of PGS under sections 136 of the Companies Act.
Mr Samsa was the sole director of PGS. The company entered into an agreement to purchase property it planned to develop. PGS later became insolvent and the property was bought by Mr Samsa in his personal capacity. An obligation on PGS to pay GST arose on the sale. The GST obligation was not met and PGS was placed into liquidation by the Commissioner of Inland Revenue for the unpaid GST of over $46,000 plus late payment penalties and interest. The liquidators claimed that Mr Samsa was aware that PGS was insolvent and allowed it to incur GST obligations that could not be met, thus breaching section 136, which states that a director must not agree to the company incurring an obligation unless the director believes on reasonable grounds that the company will be able to perform the obligation. Mr Samsa claimed that he was faced with the difficult decision of either allowing his insolvent company to accrue holding costs of the property or purchasing the property himself.
The High Court found Mr Samsa was not liable under section 136. The High Court noted that Mr Samsa chose the least unattractive of the few choices available to him in buying the property. The liquidators appealed against this decision, claiming that the there had been a clear breach of section 136 and that Mr Samsa should pay the amounts owing. Mr Samsa accepted that he had breached section 136 but claimed that any liability must be viewed in light of the purpose of section 136, which is to compensate those who suffered a loss as a result of illegitimate trading.
The Court of Appeal held that Mr Samsa had breached section 136 but that his culpability should be assessed under section 301, which allows the Court discretion to determine whether and to what extent a director should be required to contribute to the assets of a company in liquidation. The Court of Appeal held that the High Court was not wrong to take into account Mr Samsa's "dilemma" in having to decide between allowing an insolvent PGS to accrue holding costs of the property and purchasing the property himself. In its reasoning the Court of Appeal noted that Mr Samsa paid fair value for the property and that although there were some personal advantages to him in the sale, he also took on additional debt and did not deliberately choose a course designed to disadvantage the IRD.
The appeal was dismissed and despite the breach of section 136, Mr Samsa was not required to contribute to the unpaid GST.
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 received the Royal Assent on 16 October 2009. Parts 1 (Preliminary Provisions) and 4 (Institutional arrangements and miscellaneous provisions) have come into force. The Ministry of Justice will be consulting affected industries, and the public, on when the obligations within Part 2 (AML/CFT requirements and compliance) of the Act should come into force.
The Act implements the first phase of reforms to New Zealand's anti-money laundering and countering financing of terrorism (AML/CFT) regulatory regime. It is designed to bring New Zealand into line with the international standards for AML/CFT frameworks, as set out by the Financial Action Task Force Recommendations.
The Act provides:
- a set of reporting requirements for financial institutions and casinos (referred to as reporting entities)
- a risk-based approach, intended to minimise compliance costs
- an enforcement regime, including new civil and criminal offences
- a regime for supervision, monitoring and enforcement by three supervisors
The relevant AML/CFT supervisor for a reporting entity will depend on the type of entity and/or type of product or service that the entity provides.
- The Reserve Bank will supervise banks, life insurers and non-bank deposit takers
- The Securities Commission will supervise issuers of securities; trustee companies, futures dealers, collective investment schemes, brokers and financial advisers
The Department of Internal Affairs will supervise casinos, non-deposit taking lenders, money changers and other reporting entities that are not covered by the Reserve Bank or Securities Commission.
The Securities Act (Pyne Gould Corporation Limited) Exemption Notice 2009 ("Exemption Notice") came into force on 6 October 2009.
The Exemption Notice is noteworthy because it grants Pyne Gould Corporation Limited a limited exemption from section 37A(1)(b) of the Securities Act 1978, which provides that no allotment of securities offered to the public shall be made if, at the time of allotment, the investment statement or prospectus relating to the securities is known by the issuer (or its directors) to be false or misleading in a material particular by reason of failing to refer, or give proper emphasis, to adverse circumstances.
Pyne Gould owns 20.7% of PGG Wrightson Limited. On 27 August 2009, PGG Wrightson announced that it is considering offering shares for subscription. Pyne Gould registered a combined investment statement and prospectus on 23 September 2009 in respect of its own share offer, but (as noted by the Securities Commission in its reasoning for the Exemption Notice) if a share offer is announced by PGG Wrightson while the Pyne Gould offer is open, then investors in the Pyne Gould offer will need to know how the PGG Wrightson offer, and Pyne Gould's participation in that offer, may affect the value of Pyne Gould shares.
The Securities Commission noted that the Act does not contain a mechanism by which issuers can amend investment statements. The exemption is granted on the basis that (among other things) certain information about the possible PGG Wrightson offer is included in the Pyne Gould offering document and that, if PGG Wrightson makes an announcement about its own offer, and the announcement refers to an event or matter that is material to the Pyne Gould offer, then Pyne Gould must publish a notice that contains particulars of the material events or matters referred to in the PGG Wrightson announcement.
The Securities Act (Cash and Term Portfolio Investment Entities) Exemption Notice 2009 ("Exemption Notice") came into force on 9 October 2009.
The Exemption Notice grants exemptions in respect of portfolio investment entities that invest solely in debt securities issued by the PIE's parent bank or a related company of the parent bank from:
- section 37A(1)(a) of the Securities Act 1978 (which provides that no allotment of securities offered to the public shall be made if the subscriber did not receive an investment statement before subscription);
- sections 52(1) and (3) of the Act (which relate to the requirement of an issuer to maintain a register in respect of the units);
- section 54 of the Act (which requires an issuer to send either the security or a certificate to a holder that properly evidences the nature, ownership, terms and conditions of the holder's security).
These exemptions recognise that, in these circumstances, an investment in the PIE is no different to an investment in the underlying bank debt security and should be treated similarly under securities laws. The exemptions in respect of investment statements follow the exemptions granted in the Securities Act (Continuous Debt Issues) Exemption Notice 2002, except that the conditions (an investment statement must be sent to the subscriber) of the exemptions in this notice are new. The exemptions and conditions in respect of register and certificate requirements follow the Securities Act (Continuous Debt Issues) Exemption Notice 2002.
On 13 October 2009, Commerce Minister Simon Power announced that the Government is proposing to amend the Financial Advisers Act 2008 and the Financial Service Providers (Registration and Dispute Resolution) Act 2008. The proposed amendments include:
- requiring a qualifying financial entity ("QFE") to name the individual contractors whose advice it will take responsibility for, instead of automatically being responsible for advice from all its contractors;
- allowing a QFE's employees and named contractors to provide financial adviser services on the QFE's category 1 products (ie, securities (other than call debt securities and term deposits), estates or interests in land and futures contracts), without being individually licensed. This is currently permitted only for the QFE's employees; and
- permitting a QFE's employees and named contractors to provide financial adviser services for products for which the QFE is a promoter under the Securities Act 1978. Currently, the Financial Advisers Act 2008 allows this only if the QFE is the issuer of the product.
In addition, term life insurance, bonus bonds and call building society shares are intended to be re-characterised as category 2 (more simple) products to ensure they are accessible.
The Federal Reserve Bank of New York issued a press release on 24 September 2009 announcing the establishment of the OTC Derivatives Regulators' Forum. The press release is entitled A Global Framework for Regulatory Cooperation on OTC Derivative CCPs and Trade Repositories and can be found here.
The Forum has been established to provide regulators with a means to cooperate, exchange views and share information relating to central counterparties (CCPs) for over-the counter (OTC) credit derivatives.
The Forum is comprised of international financial regulators including central banks, banking supervisors, market regulators and other government authorities that have direct authority over OTC derivatives market infrastructure or major OTC derivatives market participants. ASIC, APRA and the Reserve Bank of Australia are all involved in the Forum. New Zealand is not currently represented.
The International Organisation of Securities Commissions' (IOSCO) Technical Committee has published its final report on Unregulated Financial Markets and Products. The report addresses issues related to incentives, regulatory structure and oversight, risk management, counterparty risk and lack of transparency with respect to securitised products (including asset-backed securities, asset-backed commercial paper and structured credit products such as collateralised debt obligations and synthetic CDOs and collateralised loan obligations) and credit default swaps (CDS). The final five recommendations contained in the report are as follows:
Securitised Products:
- Wrong incentives: That regulators require originators and/or sponsors to retain long term economic exposure to the securitisation, require enhanced transparency through disclosure by issuers, require independence of service providers and require service providers to maintain the currency of reports.
- Inadequate risk management: That regulators provide support for improvements in disclosure about the performance of underlying assets, review investor suitability requirements, and encourage the development of tools to assist investors in understanding complex financial products.
- International coordination: That jurisdictions should asses the scope of their regulatory reach and consider which enhancements are needed to regulatory powers in order to support the recommendations listed above in a manner promoting international coordination of regulation.
CDS:
- Counterparty risk and lack of transparency: That regulators provide sufficient regulatory structure for the development of Central Counterparties (CCPs) to clear standardised CDS, encourage the standardisation of CDS to facilitate CDS clearing and facilitate and support disclosure and information sharing in relation to CDS data and market information.
- Regulatory structure and oversight: That jurisdictions should consider the scope of their regulatory reach and consider which enhancements are necessary to support IOSCO's recommendations in respect of counterparty risk and lack of transparency, in a manner promoting international coordination of regulation. IOSCO believes that the recommendations relating to CDS might be adapted for other unregulated markets and products in particular standardised and non-standardised OTC derivatives where such products pose systemic risks to international finance markets.
The September 2009 Reserve Bank of New Zealand Bulletin (Vol 72, no 3) was released on 30 September 2009 and can be read at the link: http://www.rbnz.govt.nz/research/bulletin/. The bulletin focuses on strengthening the economy in light of the economic and financial crisis and lessons that can be learnt from history and contains the following:
- an article by Kevin Hoskin and Stuart Irvine entitled Quality of bank capital in New Zealand on the quality of capital held by banks in New Zealand and in particular focuses on the determination of minimum capital levels for banks which have been accredited to operate as 'internal models' banks under the Basel II international framework for bank capital;
- the paper supporting the public lecture by Eric Leeper, Professor of Economics at Indiana University entitled Anchoring fiscal expectations. In his lecture Professor Leeper argues that enhanced transparency could make fiscal policy more predictable and effective, similar to the way in which greater transparency in monetary policy has improved its effectiveness;
- an article by Matthew Wright entitled 'Mordacious years': socio-economic aspects and outcomes of New Zealand's experience in the Great Depression which looks at lessons that can be learnt from the socio-economic and political aspects of the Great Depression and parallels with the recession that began in 2007-2008;
- Financial crises, sound policies and sound institutions: an interview with Michael Bordo by John Singleton in which Professor Bordo talks about his research on financial crises and New Zealand's financial vulnerability, and about the challenges for central banks in dealing with the current crisis;
- a speech, The financial crisis: whodunnit? by Howard Davies which looks at the various parties involved in the financial crisis; and
- a speech given by Governor Alan Bollard in July 2009 in which Dr Bollard argues that certain basic factors will promote sustainable growth and reduce New Zealand's economic vulnerability. These factors include greater durability and depth in funding markets including a lengthened maturity profile for bank funding.
The Companies Act 2006 (UK) came into force on 1 October 2009. The Act puts company law onto a UK-wide footing, replacing both Great Britain Companies Act 1985 and Northern Ireland's Companies (Northern Ireland) Order 1986.
The Companies Act 2006 has substantially rewritten company law to make it easier to understand and more flexible, especially for small businesses. The Act partly restates the Companies Act 1985 and 1989 and partly rewrites them while also introducing new provisions.
The paper Why do Capital Markets Matter for New Zealand? was recently published by the Capital Markets Development Taskforce Secretariat. The paper looks at the links between capital market development and economic growth, and shows why the development of New Zealand's capital markets matters.
International evidence suggests that market development leads to more investment, higher labour productivity and faster economic growth. The paper concludes that although New Zealand investors and companies have access to world capital markets, New Zealand's own markets, infrastructure and institutions remain important to its economic success.
http://www.med.govt.nz/upload/69901/Why capital markets matter.pdf
The preliminary report, Capital market integration: a review of the issues and an assessment of New Zealand's position by Glenn Boyle, BNZ Chair of Finance at the University of Canterbury was issued in March 2009 by the Ministry of Economic Development and the Capital Market Development Taskforce. The paper discusses the benefits and risks of market integration, and looks at where New Zealand stands in relation to regional and world markets.
The paper concludes that there is little evidence to suggest that New Zealand capital markets suffer from a lack of integration. The degree of integration between New Zealand and Australian markets appears high. Beyond Australia, New Zealand may be more integrated with other Asia-Pacific countries than with the older and more developed markets of Western Europe. Finally, the paper briefly comments on New Zealand's need to pay closer attention to investor property rights if it is to gain the full benefits of integration.
http://www.med.govt.nz/upload/69893/CapMktIntegratReport.pdf
The report Implications of Household Savings on Household Patterns for Capital Markets by Nick Davis from Martin, Jenkins & Associates Limited was commissioned by the Capital Markets Development Taskforce to better understand the impact of New Zealanders' savings practices on the structure and level of development of New Zealand's capital markets.
The report identifies the trends in the New Zealand household sector's rate of savings, describes the changes over time and compares these trends with other OECD countries. It compares the stock, and flows-based measures of savings, and examines how savings rates have followed changes in house prices.
The European Commission ("EC") has announced its proposals for a review of the Prospectus Directive following consultation with stakeholders. The proposals are aimed at improving the legal clarity of the Prospectus Directive, reducing administrative burdens on issuers and addressing the overlap with the Transparency Directive.
The Prospectus Directive sets out the rules governing the prospectus required to be made available to the public when a public offer or admission to trading of transferable securities in a regulated market takes place in the European Union ("EU"). A key development is the introduction of the "passport mechanism", where a prospectus approved by the competent authority in one member state is valid for offers and admission to trading of securities across the entire EU.
Major changes proposed by the EC include:
- some types of securities issue will be subject to less comprehensive disclosure requirements;
- the format and content of the prospectus summary have been improved;
- there are clearer exemptions from the obligation to publish a prospectus when companies sell through intermediaries and for employee share schemes;
- disclosure requirements that currently overlap with the EU directive on transparency for security issuers will be repealed;
- issuers of non-equity securities will be able to determine their home member state;
- the definition of 'qualified investors' in the Prospectus Directive will be aligned with the one of 'professional clients' as defined in the Directive on markets in financial instruments.
These proposals are likely to come into effect in 2010.
An officials' issues paper released by the Policy Advice Division of Inland Revenue and the Treasury in September recognises the importance of a well functioning corporate bond market in New Zealand, and the possibility that the current approved issuer levy ("AIL") and non-resident withholding tax ("NRWT") regimes are hindering the development of New Zealand's corporate bond market.
Officials appear to have accepted, in principle, a long-held concern that AIL/NRWT increases the cost to New Zealand businesses of borrowing on the international capital markets, because non-resident lenders generally require a return calculated on an after AIL/NRWT basis even where tax credits for withholding taxes are available to the bond holder in its home jurisdiction.
The issues paper proposes that AIL could apply at a rate of 0% for interest paid on certain "qualifying bonds" (as AIL is not available on interest paid to associates the proposal does not extend to lending between associated persons). A "qualifying bond" would be a debt security that belongs to a group of identical debt securities that satisfy either a "widely held test" or a "stock exchange test". These tests would be broadly as follows:
- The widely held test would require that: (i) the debt securities be held by at least 100 non-associated investors (or investors that could not reasonably be expected by the issuer to be associated); and (ii) no person (or group of persons that the issuer could reasonably expect to be associated with each other) holds more than 10% of the debt securities (disregarding securities initially held by an underwriter for up to a year).
- The stock exchange test would require that the debt securities be listed on a recognised stock exchange.
These proposed tests are derived from Australia's corresponding "Public Offer Test Exemption" (in section 128F of the Australian Income Tax Assessment Act 1936). However, there are some significant differences, in particular:
- The proposal includes only two of the four tests from the Australian exemption.
- The widely held test in the issues paper focuses on who the debt securities are "held by" and it is proposed that this would be retested annually. The difficulty with this aspect of the proposal is that an issuer has no control over who holds its debt securities at a given time; indeed the whole point of raising debt by way of tradable securities is to enable the securities to be dealt with in the secondary market. This issue does not arise under the Australian exemption which focuses on the position as at the point debt securities are "offered for issue". The same issue arises in relation to the requirement that no person (including associates) hold more than 10% of the debt securities (there is no corresponding requirement in the Australian widely held test).
- The proposal also suggests specific exclusions for private debt placements, debt that is not widely offered and asset-backed securities.
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