Can a guarantee be protected from a deemed discharge where the holder of the guarantee unilaterally designates an additional agreement to be the subject of the guarantee?
In Valstar, obligations under a mortgage granted by a company were guaranteed by two directors of that company. The mortgage was subsequently varied: the term was lengthened and the principal and interest rate were increased. The Court ultimately held that these variations “could not be regarded as unsubstantial” and that the guarantee could not be relied upon by the lenders.
Whilst Valstar affirms the largely settled position regarding “variation proofing” a guarantee, we are left with little guidance as to whether parties may agree that the subsequent designation of additional “guaranteed agreements” constitutes a discharge of that guarantee or whether, in this context, the operation of the common law is circumvented by the “variation proofing” clause.
On the basis of the reasoning in both Valstar and Schoenhoff, though there does not appear to be any case law directly on point, it seems to us that it is possible to expand the categories in existing “variation proofing” clauses to attract the benefit of the reasoning adopted in the cases and protect guarantees from the unilateral designation of subsequent guaranteed agreements.
Credit Activities - National Consumer Credit Protection Legislation
In my article which appeared in the June 2009 edition of the DibbsBarker Finance & Markets Update I outlined the registration and licensing requirement for Australia Credit Licences under the National Consumer Protection Legislation.
In this article I examine the “credit activities” which are regulated by the legislation and also consider the role of “credit representatives” being persons authorised by a licensee to engage in credit activities on their behalf.
Credit Activities
There are two broad categories of persons who engage in credit activities:
- the first category primarily covers credit providers being consumer lenders and providers of consumer leases but is extended also to cover activities in respect of mortgages and guarantees where they are taken to secure or guarantee obligations under a credit contract; and
- the second category is defined as persons who provide credit services.
In respect of the first category a person will engage in credit activities where:
Credit Service
In relation to the second category a person provides a credit service if that person:
- provides credit assistance to a consumer; or
- acts as an intermediary.
Credit Assistance
A person provides credit assistance to a consumer where they:
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suggest that the consumer:
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assist the consumer, in respect of a particular credit contract or consumer lease to:
A person will provide credit assistance regardless of whether they deal directly with the consumer or the consumer’s agent. A person will act as an “intermediary” where they act as an intermediary between the credit provider and a consumer for the purpose of securing a provision of credit, or between the lessor and a consumer for the purpose of securing a lease.
National Credit Code
The current Uniform Consumer Credit Code is, (with specific amendments based upon the new Credit Legislation), being adopted as a Schedule to the new legislation and is to be known as the National Credit Code (the Code).
Section 5 of the Code sets out the circumstances in which the Code will apply to the provision of credit. Generally, it regulates the provision of credit where it is provided:
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for personal, domestic or household use;
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to purchase, renovate or improve a residential investment property; or
- to refinance such credit.
Section 170 of the Code sets out the circumstances in which the Code will apply to consumer leases, principally where the goods are leased for personal, domestic or household use.
The definition of “credit” otherwise expressly excludes credit provided for business or investment use.
Credit activities will therefore not include:
- lending or leasing for business or investment purposes, which is not regulated by the legislation; or
- where a person engages in an activity in respect of credit but not a specified credit activity – eg: where a person provides credit assistance but not in relation to a particular credit contract with a particular credit provider.
Credit Representatives
A registered person or a licensee (credit provider) can authorise third parties to engage in credit activities on its behalf, without these persons having to hold a licence in their own right. These persons are known as “credit representatives”.
Importantly, the credit provider is generally responsible for the conduct and must specify in writing the credit activities which they can engage in.
Whilst it will be an offence to undertake credit activities after 1July 2011 (at the end of the transitional provisions) without a licence, there is a defence available where:
Liability of Licensees for Representatives
Where a representative acts for only one principal, that principal is responsible for the conduct of its credit representative, whether or not the conduct is within the authority of the licensee.
Where a credit representative acts for several principals, then the liability may relate only to one principal if it is clear that the representative’s actions relate only to activities undertaken on behalf of that principal. In other cases, the principals are jointly and severally responsible for the conduct, whether or not the representative’s conduct is within or outside his authority in relation to any of them.
The licensee will therefore be liable to the borrower or lessee (a client) to account for any loss or damage suffered as a result of the conduct of its representative.
The liability obligations do not, however:
- make a principal liable civilly or criminally as a result of the conduct of a representative, when they would otherwise not be liable; or
- relieve a representative of liability that they have to a client or the licensee.
A principal can obtain an indemnity from the credit representative or from another principal for any potential liability.
In The Matter Of Opes Prime Stockbroking Limited [2009] FCA 813
The Liquidators of Opes Prime Stockbroking Limited (Receivers and Managers Appointed) (In Liquidation) (OPSL), and three related companies, Leverage Capital Pty Limited (Receivers and Managers Appointed) (In Liquidation) (Leverage Capital), Hawkswood Investments Pty Limited (Receivers and Managers Appointed) (In Liquidation) (Hawkswood) and Opes Prime Group Limited (Receivers and Managers Appointed) (In Liquidation) (OPGL) sought leave under s411 of the Corporations Act 2001 (the Act), to convene a creditors' meeting to consider a scheme of arrangement.
On 1 July 2009 Justice Finkelstein granted leave for the meeting to be convened, he handed down his reasons for that judgment on 3 August 2009.
Within his judgment he reviewed several key aspects of the proposed scheme and its effect on creditors. The meeting was convened on 24 July 2009, and the creditors voted to approve the scheme. Justice Finkelstein approved the scheme of arrangement on 4 August 2009.
The judgment handed down by Justice Finkelstein on 3 August 2009 highlights the requirements and aspects that need to be addressed when schemes are propounded and applied to a vast array of parties, including secured and unsecured creditors.
The Proposal
The proposed scheme included the following:
The pooled assets, less $11.5 million will be distributed between the unsecured creditors. A panel of three experts (constituting one former superior court judge, a senior counsel and a well-known accountant) will rule on any dispute between creditors and the scheme administrators, concerning the existence and value of creditors’ claims.
The $11.5 million, will be distributed as follows:
- $1 million to CLF, a litigation funder which is funding a class action;
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$2.5 million to IMF, a second litigation funder which is funding several proceedings;
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$8 million to cover the legal costs incurred by Opes’ clients in other actions.
Within the judgment his Honour deals with the following key issues:
1.Third Party Release
Could a scheme of arrangement bar a claim against a third party?
The main argument in this matter was whether a scheme could bind a creditor in his capacity as a creditor of a third party.
His Honour reviewed both Australia and US decisions and concluded that ‘provided there is a sufficient nexus between a release and the relationship between the creditor and the scheme company, the scheme can validly incorporate the release.”
His Honour determined that there was sufficient nexus as the creditors' claims against the Opes companies and their claims against the banks largely overlapped. The scheme was in settlement of interlocking claims and, in the absence of the release, none of the claims would be compromised.
2. Classes of Creditors
The orders sought assumed that creditors constituted one class for the purposes of voting on the proposed scheme.
His Honour however constrasted client creditors with trade creditors. He noted client creditors would be required to forgo legal action, where they may be likely to recover 100 cents in the dollar, but would only receive 37 cents in the dollar under the scheme. Trade creditors would not be deprived of any right against banks and still receive 37 cents in the dollar.
His Honour applied the following principle in determining the specific classes of creditors:
Persons whose rights are so dissimilar they cannot sensibly consult together with a view to their common interest must be given separate meetings
He stated that the test is based on a similarity or dissimilarity of legal rights against the company, and not on a similarity or dissimilarity of interest not derived from such legal rights.
The question is, therefore, whether the rights which are to be released or varied under the Scheme and the new rights which the Scheme gives in their place are so different that the Scheme must be treated as a compromise or arrangement with more than one class.
His Honour concluded that client creditors and trade creditors could not consult together to reach a view on their common interests. They do not have sufficient rights in common.
3. Amalgamation
Consideration was given to whether the scheme required approval of members.
His Honour concluded that it was a transfer of assets and liabilities without an issue of new shares, and, therefore, the members' rights were not being altered.
He also noted that the members have no interest in what is being proposed because the companies are being wound up and their assets are insufficient to satisfy creditors in full. A meeting of members is therefore not required.
4. Right of Appeal
The scheme initially removed the right of appeal under section 1321 against decisions of the creditors' three man panel.
Whilst His Honour acknowledged that there may be good reasons for the lack of appeal, he concluded that a right of appeal cannot be excluded.
5. Payment of Legal Fees
His Honour was concerned that “the effect of the proposal is that money in the possession of the scheme of administrators will not be distributed parri passu”.
His Honour made no determination on this point but indicated that this issue would be considered at the approval hearing if the schemes are agreed by the creditors.
Conclusion
Justice Finkelstein granted leave for the convening of meetings to approve the scheme of arrangement. This decision enabled the largest scheme of arrangement in Australia history to be put to creditors. The issues addressed by Justice Finkelstein within his judgment will now form the basis of future schemes of arrangement to be propounded. The importance of this decision lies not just in the law it confirmed, but in the scale of the scheme of arrangement which it approved.
Noelle Heagney, Lawyer
