Banking & Finance Update - June 2006
In brief: Partner Diccon Loxton and Paralegal Stanley Mok provide a brief summary of recent cases relating to the world of banking and finance.
Recent cases
- Argo Capital
Investors Fund Spc v Essar Steel Ltd
Assignment – Syndicated loans – Interpretation of assignment - Home Building Society
Ltd v Pourzand
Priorities – Mortgages over land – Priority agreement interpretation - Commissioners of
Inland Revenue & Anor v Deutsche Morgan Grenfell Group Plc
Restitution – Tax payments made under both mistake of law and unlawful demand - National Equity
Financial Services Pty Limited v The Home Loans Group Pty Limited
Contract termination, Interpretation - Deangrove Pty Limited
(Receivers and Managers Appointed) v Buckby
Receivers – General and statutory duties in relation to power of sale – s420A, s180 Corporations Act - Business judgment rule - Esber v Massih
Equity – Constructive trusts – Joint venturers - Re Ansett
Australia Ltd
Insolvency - Administrators – Consolidation of group - Pooling assets of group of companies – Duties of deed administrators and trustees to creditors of separate companies
Argo Capital Investors Fund Spc v Essar Steel Ltd [2005] EWHC 2587 (Comm) – High Court of Justice, Queen's Bench Division, Commercial Court, Justice Clarke
Assignment – Syndicated loans – Interpretation of assignment
Phew! Assignment agreement interpreted liberally so as to constitute assignment of debt and not proceeds.
Background
A fund acquired the debt owed by the borrower to one of the banks in a syndicated facility by arranging for the selling bank to enter into an assignment agreement with another bank, which then entered into a participation agreement with the fund.
The assignment agreement stated in its recitals that the 'Assigned Asset', being 'all rights, title and interests in the principal amount of the loan...' was transferred. Clause 9 warranted that the 'Assigned Asset' was effectively assigned. However, the specific assignment provision only transferred the 'Assigned Amount', being the amount of the debt owed by the borrower to the selling bank.
The fund sued the borrower for the debt, including interest under the facility, by service of a claim form. The borrower sought to dismiss the claim on the basis that the fund was only an assignee of the proceeds and not of the rights to the debt.
Decision
The fund won and the borrower's application was refused.
The assignment agreement validly transferred the legal rights to the debt and did not only apply to the proceeds of the debt. This was because the phrases 'Assigned Asset' and 'Assigned Amount' were taken together to determine the nature of the asset assigned by the selling bank to the other bank. Therefore, on a purposive construction of the assignment provision, the parties intended to transfer the rights included in the 'Assigned Asset' even though the clause only strictly assigned the proceeds according to the meaning of the 'Assigned Amount'.
It did not matter that the assignment of the rights could affect binding instructions issued by the majority of the syndicate to each bank under the facility. If the fund ignored the instructions, the selling bank and the other bank could possibly be liable to the syndicate for breaching the terms of the facility. However, this was not significant enough to alter the construction of the assignment agreement.
More information: A copy of Argo Capital Investors Fund Spc v Essar Steel Ltd is available online.
Home Building Society Ltd v Pourzand [2005] WASCA 242 – Supreme Court of Western Australia Court of Appeal, Justice Wheeler, McLure and Murray
Priorities – Mortgages over land – Priority agreement interpretation
Priority agreement covers mortgages over new property even though mortgages over original property discharged. 'And' dispersive not conjunctive. Surrounding circumstances relevant.
Background
The first and second mortgagees advanced money to a borrower secured by registered mortgages over the borrower's property. The borrower sold the property and bought another financed by extra funds from the first mortgagee, which, by a deed of priority, ranked over the second mortgage. The mortgages were discharged and swapped for new mortgages over the purchased property.
Clause 7.1 of the deed of priority prevented each mortgagee from assigning 'its Securities' unless the assignee entered into a deed undertaking to be bound by the deed of priority. Importantly, the definition of Securities referred to the registered mortgages 'and any other security' held by the mortgagees over the borrower's assets.
The first mortgagee later assigned its new mortgage to a bank, but failed to cause the bank to enter into a deed in accordance with clause 7.1. Following the default of the borrower, the bank kept for itself all the proceeds from the sale of the property. If the bank was bound by the deed of priority, the second mortgagee would have received some of the proceeds.
At first instance, the second mortgagee succeeded in suing the first mortgagee for damages. The first mortgagee appealed.
Decision
The second mortgagee won and the appeal was dismissed.
The deed of priority applied to the new mortgages as they were included in the phrase 'and any other security' on its proper construction. This was because the word 'and' was intended to be used in a dispersive rather than conjunctive way and therefore meant 'and/or' in this case.
Surrounding circumstances are relevant. They must be known (or perhaps ought reasonably to have been known) to the parties. In this case, the deed of priority could not have been objectively intended to apply only to the old mortgages because the parties knew that the proceeds of sale from the old mortgages could have been insufficient to satisfy the moneys owing. This could have required the parties to seek additional security to support existing or additional advances with the same priority ranking. Therefore, the deed of priority was intended to apply to the new mortgages even after the old mortgages were extinguished to account for this possibility.
More information: A copy of Home Building Society Ltd v Pourzand is available online.
Commissioners of Inland Revenue & Anor v Deutsche Morgan Grenfell Group Plc [2005] EWCA Civ 78 – Supreme Court of Judicature Court of Appeal (Civil Division), Lord Justices Buxton, Rix and Parker
Restitution – Tax payments made under both mistake of law and unlawful demand
Tax paid under mistake of law not recoverable, but recoverable if made under unlawful demand. Mistake of law only applies to private transactions.
Background
A subsidiary incorporated in the United Kingdom made tax payments on three dividends distributed to its offshore parent companies on the basis of statute found to be invalid in a subsequent case. The payments were therefore paid under both a mistake of law and an unlawful demand from Inland Revenue. The subsidiary sued Inland Revenue for restitution of the tax payments.
The subsidiary relied on Kleinwort Benson v Lincoln City Council [1999] 2 AC 349, which allowed restitution for payments made under a private transaction due to a mistake of law. It sought to extend this principle to payments on a supposed tax liability to Inland Revenue even though it could have relied on statute or alternatively the principles of restitution for unlawful demand from Woolwich Equitable Building Society v Inland Revenue Commissioners [1993] AC 70.
The government argued that the subsidiary's claims were statute barred under the Limitations Act 1980 (UK) on the basis that the payments were made under an unlawful demand and not under a mistake of law.
The subsidiary succeeded at first instance. Inland Revenue appealed.
Decision
Inland Revenue won on the legal issue, but eventually lost on two of the three tax payments.
The subsidiary was limited to the principles of restitution for unlawful demand from Woolwich and was not entitled to rely on principles for recovery for mistakes of law under a private transaction. There was no separate common law action for a payment to Inland Revenue under a mistake of law because the Kleinwort Benson principle was confined to mistakes of law paid under private transactions.
Therefore, tax payments made under both a mistake of law and unlawful demand would be covered exclusively by the Woolwich principle.
Unfortunately for Inland Revenue, it
only won on one of the three payments because it lost on pleading issues
regarding the timing of the subsidiary's claims for the payments.
More information: A copy of Commissioners of Inland Revenue & Anor v Deutsche Morgan Grenfell Group Plc is available online.
National Equity Financial Services Pty Limited v The Home Loans Group Pty Limited [2006] NSWSC 310 – Supreme Court of New South Wales, Equity Division, Justice Einstein
Contract termination, Interpretation
Court applies weird interpretation to contract to preserve broker's commissions. Be careful in your drafting.
Background
A mortgage broker was appointed by a loan aggregator to refer loan applications to the aggregator's panel lenders under an introducers agreement in return for upfront and trailing commissions.
Clause 7.3 of the agreement stated that if the broker breached its terms at the time that it was terminated 'and/or' the broker made misleading, deceptive or untrue statements, or had been a party to fraudulent or misleading conduct, then the aggregator could cease paying commissions.
Additionally, clause 3.8 of the agreement stated that the aggregator had entered into a separate agreement with the lenders to facilitate their business activities and that the terms of the separate agreement were deemed to be incorporated into the agreement, which would prevail to the extent of any inconsistency.
A winding up application, which was later dismissed, was made against the broker for unpaid taxes. The aggregator terminated the agreement on the basis that the application was an event of default under the lending agreement and, therefore, also an event of default under the introducers agreement. It then ceased paying commissions to the broker.
The broker sued the aggregator for the unpaid commissions.
Decision
The broker won.
The aggregator was not entitled to cease paying commissions to the broker because the requirements of clause 7.3 was not satisfied. This was because the meaning of the phrase 'and/or' was synonymous with 'and either' on the proper construction of the clause. This meant that the clause could not apply unless the broker breached the introducers agreement and one of the two phrases dealing with misleading conduct was satisfied.
With respect to clause 3.8, the incorporation of the terms of the lending agreement into the introducers agreement was not absolute because incorporation had to be mutatis mutandis. This meant that modifications and adaptations could be required to ensure consistency between the imported clauses and the terms of the receiving agreement.
In this case, the default clause in the lending agreement which applied on the service of a winding up application on the aggregator or the lender was not incorporated into the introducers agreement because it would be inconsistent with the default clause in the introducers agreement. Therefore, the aggregators was not entitled to terminate the agreement based only on the winding up application against the broker.
More information: A copy of National Equity Financial Services Pty Limited v The Home Loans Group Pty Limited is available online.
Deangrove Pty Limited (Receivers and Managers Appointed) v Buckby [2006] FCA 212 – Federal Court of Australia, Justice Branson
Receivers – General and statutory duties in relation to power of sale – s420A, s180 Corporations Act 2001 (Cth) - Business judgment rule
A receiver and manager not liable for preferring buyer who apparently could complete but didn't, over one that apparently couldn't complete.
Background
A property developer gave security to a lender by granting a registered first mortgage over unsold units and an equitable charge over the assets and undertaking of the developer. The developer then by deed granted to a listed company a conditional right to purchase the majority of the units for valuable consideration.
Later, a receiver and manager was appointed by the lender over the assets of the developer. He received two offers for the units; one from the builder of the development who had already contracted to purchase other units and the other from the company for a lower price based on funding from a bank on terms the company could not have met.
The receiver and manager refused to recognise the deed, rejected the company's offer and eventually accepted the builder's offer after putting the two offers in competition against each other. Unfortunately, the builder never settled on the transaction.
The developer sued the receiver and manager for financial loss suffered as a result of the rejection of the company's offer, which was allegedly a breach of the receiver and manager's general law and statutory duties under s180 and s420A of the Corporations Act 2001 (Cth).
Decision
The receiver and manager won.
The receiver and manager did not breach general law or s180 and s420A of the Corporations Act because he took all reasonable care throughout the selling process to obtain the market value or the best price reasonably obtainable for the units. His refusal to accept the company's offer and acceptance of the builder's offer was reasonable because of the possibility that the company would be unable to pay for the units and the commitment shown by the builder from entering the purchase contract.
It was unfortunate that the builder reneged on the offer, but the receiver and manager's decision was justified taking into account the circumstances at the time. The decision was therefore a valid business judgment under s180(3) of the Corporations Act, which satisfied the requirements of s180(2) of acting in good faith for a proper purpose and under a rational belief that the judgment was in the best interests of the developer.
Also, the receiver and manager was justified in putting the two offers in competition with each other because the company had an incentive to counter-offer since it had paid consideration for its right to purchase, which would be extinguished if the units were sold to the builder. His refusal of the company's offer was not a complete close of further negotiation because it was supposed to encourage the company to increase its offer to match the builder's offer. Therefore, he had acted in accordance with the principles set out in Forsyth v Blundell (1973) 129 CLR 477.
Finally, the developer suffered no financial loss as a result of the rejection of the company's offer. The company could not have completed the offer even if it was accepted by the receiver and manager taking into account the fact that the funding for the company's offer was unobtainable on the terms provided by the bank.
More information: A copy of Deangrove Pty Limited (Receivers and Managers Appointed) v Buckby is available online.
Esber v Massih [2006] NSWSC 321 – Supreme Court of New South Wales, Justice Hall
Equity – Constructive trusts – Joint venturers
Former school friends fall out over property development paid for by one but built by the other. Court finds there was a joint venture giving rise to constructive trust.
Background
A financier and builder agreed to undertake a property development project by purchasing and redeveloping property. The financier provided the initial capital with the balance supplied from a loan in the financier's name. The purchased property was found by the builder, but registered in the financier's name only.
The builder coordinated the negotiation, management, administration and construction for the project. He was not paid a margin for costs and received no profit for his work. The builder had also deposited a significant amount of money into the financier's loan account to support payment of construction costs.
The project was documented by a quotation between the financier and the builder's family company. The builder was not party to any project agreement and the property was developed without a building contract. Most invoices for subcontractor work were directed to the builder personally, but were paid by the financier.
The builder sought a declaration that the financier held half of the interest in the property on constructive trust for the builder pursuant to an alleged joint venture agreement. The financier disagreed, arguing that their relationship was merely contractual in nature and that the builder did the work in lieu of repayment of a loan.
Decision
The builder won.
The true nature of the relationship between the builder and financier was that of a joint venture agreement with a common view to profit. The project proceeded on the basis that the builder and financier would share the profits from the sale of the property equally. Therefore, the financier held a half interest in the property on constructive trust for the builder.
There were various factors which justified this conclusion. The builder had found and negotiated the price of the property without detailed instruction, he expended considerable time and energy preparing for the project without any fee or compensation, and had managed the project without any project agreement. Additionally, the builder had assumed personal liability for subcontractor work, which was instead paid directly by the financier. This was inconsistent with a contractual building relationship because such work would ordinarily be paid for by the builder who would request compensation in progress claims submitted to the financier.
Furthermore, the lack of a builder's margin on costs, the failure by the financier to pay to the builder amounts set out in progress claims, and the direct financial contributions made by the builder were consistent with the builder being compensated by the sharing of profits on the completion of the project. This suggests that the builder and financier proceeded as a joint venture with both having a proprietary interest in the property.
Accordingly, the builder had a proprietary interest in the property itself (not just the proceeds) and that entitled him to apply for the appointment of trustees for the sale of the property and distribution of the proceeds pursuant to s66G of the Conveyancing Act 1919 (NSW).
More information: A copy of
Esber v Massih is available online.
Re Ansett Australia Ltd (ACN 004 209 410) [2006] FCA 277 – Federal Court of Australia, Justice Goldberg
Insolvency - Administrators – Consolidation of group - Pooling assets of group of companies – Duties of deed administrators and trustees to creditors of separate companies breached
Deed administrators of a group of failed companies bound by deeds to pool assets could not do so as they could not disregard creditors of individual companies. Group administrators must act in the interests of creditors of separate companies.
Background
A group of failed companies were placed into administration together for the purpose of determining whether they should continue to operate or be liquidated. A substantial number of the companies had individual groups of creditors with interests in the companies' assets.
By deeds of company arrangement most of the companies provided for the pooling of all assets and liabilities to be approved by a meeting of creditors in the event of administration. Some of the companies had earlier entered into trust deeds which transferred to trustee companies cash and assets for certain creditors.
The administrators proposed to pool the trust assets by moving and voting for a resolution because they argued significant time and costs would be saved. They also entered into deeds of compromise with major creditors to ensure the creditors would vote in favour of the pooling. If the pooling took place, creditors of specific companies could be disadvantaged from the sharing of assets with all creditors of the group.
The administrators as trustees sought directions from the court.
Decision
The court ruled against the administrators and refused to make favourable orders.
The voting by the administrators in favour of the pooling resolution would be a clear breach of their duties as trustees of the property held by the trustee companies for the creditors. The administrators were in effect seeking to distribute the trust property otherwise than in the creditors' interests by making the property available to all creditors of the failed companies. Therefore, the court refused to make an order under s63 of the Trustee Act 1958 (Vic) to give directions to the effect of approving the pooling proposal.
Approval for consolidating assets would only be given effect if the different companies were so blended together as to make it impracticable to keep them separate and creditors had dealt with the companies as part of a single economic unit. The court looked at principles applicable to substantive consolidation in the USA. Consolidation must also be in the best interests of the creditors generally and no particular creditors must be significantly disadvantaged. It would not be enough that administration of the companies separately was complex, required increased time and costs or would create difficulty when identifying creditors.
In this case, creditors did not deal with the group companies as a single economic unit even though the group historically operated like a single entity. The task of administering the group companies separately was not impossible despite it requiring significant time and costs. This suggests that there is a significant threshold for satisfying the court for approval of pooling.
Furthermore, administrators of a group of companies must act in the interests of the creditors of each of the companies and cannot sacrifice them for the benefit of the group because the protection of rights of creditors is not a balancing exercise. Here, the fact that the administrators had a contractual obligation to pool assets under the deed of company arrangement could not justify the potential breach of their duties.
More information: A copy of Re Ansett Australia Ltd is available online.