All Monies or No Monies?
A secured lender may wish to cross-collateralise security taken by it with all the debts of a borrower or group of borrowers. Mortgages in such a package may operate as security for “all monies”. The decision of Young CJ in Eq in Vella v Permanent Mortgages Pty Ltd [2008] NSWSC 505 (Vella) highlights the need to carefully consider whether the use of an “all monies” mortgage is appropriate in a particular transaction.
Facts
Vella was a case arising from complicated facts in which six proceedings involving numerous parties were consolidated.
Essentially, the plaintiff and a rogue were the holders of a joint bank account. The rogue arranged via loan agreements for monies to be borrowed from two lenders, secured by “all monies” mortgages over the plaintiff’s real property. The rogue forged the plaintiff’s signature to the loan agreements and mortgages. The rogue then extracted the advanced monies from the joint account.
The plaintiff sought to have the mortgages set aside arguing that, since the execution of the documents was forged and since the plaintiff did not receive any money from the lenders, nothing was owed by the plaintiff under the mortgages.
Relevant issues
The mortgages, though forged, were registered and by virtue of the Real Property Act 1900 (NSW) became indefeasible security interests. The central question was what debts the mortgages secured. If no monies are secured by the mortgages then the mortgagees, notwithstanding the indefeasibility of their security interests, are not able to resist an application for cancellation of the forged documents.
Young CJ in Eq referred to a principle from the “Tsai” line of cases (Tsai Principle) ([309]): if in a mortgage there is a reference to “all monies” owing by a mortgagor and monies have never been advanced to the mortgagor nor has the mortgagor ever signed any loan agreement, then nothing is owed by the mortgagor under the mortgage ([310], [328]). If the mortgage refers to a specific sum advanced and secured, then that covenant would operate by virtue of the doctrine of indefeasibility even though the mortgage was forged.
It was held that although the lenders’ solicitor did not need to warn its clients of the possible danger of fraud nor advise on the possible implication of the Tsai Principle ([504]-[506]), the solicitor should have considered the Tsai Principle in determining the type of mortgage the solicitor should prepare. The evidence did not establish such a consideration. Accordingly, the solicitor was negligent in using an all monies mortgage when a mortgage which referred to a specific loan amount would have protected the lender in the case of fraud ([542]-[543]).
Consequences for lenders and advisors
Whilst this decision does not justify changing the practice of using “all monies” mortgages as there are clear commercial and procedural benefits, it further highlights that lenders should always make appropriate enquiries as to the identity of the borrower before advancing funds.
In addition, in preparing a mortgage, a lender (and its advisors) should consider whether an “all monies” mortgage is appropriate for the relevant transaction. If the client is engaging in a one-off deal, it may not be appropriate to prepare such a mortgage as, if fraud is later found, the mortgagee’s cloak of indefeasibility may be lost in the absence of proof that the mortgagor actually received the proceeds.
Jeff Baker, Senior Associate, Sydney
Josh Khoo, Paralegal, Sydney
A Push Towards Uniformity – Financial Services & Credit Reform
The current division of responsibility between State and Federal based laws in regulating financial services has lead to uncertain outcomes for consumers, added costs for businesses and a lack of responsiveness in policy making.
The first step in promoting a uniform legislative framework for financial services came about late last year when the Productivity Commission released a report entitled “Review of Australia’s Consumer Policy Framework” calling for a national approach to regulation of consumer laws.
The Productivity Commission review was met with support from both industry and consumer groups.
Green Paper
The next step in the reform process came about with the release of the Federal Government’s Green Paper on Financial Services and Credit Reform on 3 June 2008 (Green Paper).
The Green Paper sets out options for the extension of Commonwealth regulation of financial services and credit with the aim of improving, simplifying and standardising financial services and credit regulation throughout Australia.
The Green Paper outlined the transfer of financial services, including mortgages, mortgage brokers, margin lending, non-bank lending and trustee companies from State based legislation to Federal regulation.
At the time of release of the Green Paper, Senator the Hon. Nick Sherry, Minister for Superannuation & Corporate Law said:
“The Financial Services and Credit Reform Green Paper provides a plan for change – to benefit the consumer, while reducing red tape and compliance costs for business, and ensuring Australia stays ahead in the international financial services market,”
After the release of the Green Paper the Federal Government received submissions from industry and consumer lobby groups calling for a complete takeover of the remaining credit related matters, which includes credit cards, car loans and personal loans.
The concern from all sides was that, if it was not a complete transfer of control, the potential for inconsistencies and added costs would remain.
COAG Approval
The agreement for a full Commonwealth takeover of financial services and consumer credit was completed on 3 July 2008 when the Council of Australian Governments (COAG) confirmed State and Territory government approval for a Federal take over of regulation of the issues outlined in the Green Paper as well as transferring those areas which had been left out of the Green Paper, such as credit cards, car loans and personal loans.
The agreement means that, upon implementation, no aspect of financial services regulation would be left with the States making Australia one of the few Western countries with a single national financial services regulation.
The COAG communique released on 3 July 2008 stated that the Commonwealth regulation of consumer credit will provide for a consistent regime that extinguishes the gaps and conflicts that may exist in the current regime. The new regime is anticipated to introduce licensing, conduct, advice and disclosure requirements that meet the needs of both consumers and businesses.
The new regime is also set to eliminate inconsistencies in State and Territory regulation of credit, including regulations on interest rates and credit cards and a proposal to broaden the unfair contract term legislation currently in force in Victoria.
End of the Code as We Know It?
Now that agreement has been reached on responsibility for regulation the real interest will be in the details of how this will work.
One of the major issues is what to do with the existing Uniform Consumer Credit Code (UCCC) and the state based bodies who currently oversee the UCCC.
The Australian Bankers Association supports the retention of the UCCC and have it re enacted as stand alone Commonwealth legislation as it believes it will “mean far fewer changes for credit providers in their compliance arrangements including documentation, procedures, staff training and IT systems and ultimately less confusion for consumers”.
Alternatively, consumer groups such as the Consumer Law Action Centre see the change of regime as also providing a chance to change elements of the UCCC such as those relating to pre-contractual disclosure and use of comparison rates.
In relation to the appointment of the national regulator, the primary support is for ASIC to be appointed as the sole regulator. However there may be an element of support to maintain a dual regulation model so as to retain a role for the existing state based regulators.
What is overwhelmingly agreed is that the new regime should bring about the clamping down on non compliant credit providers, finance brokers and pay day lenders.
What’s next?
Discussions on ways to improve, simplify and standardise financial services and credit regulation in Australia on a uniform platform will be held over the next few months through a COAG working group.
Senator Sherry aims to have a plan developed regarding the new regime before the next Premier’s meeting in October with the new regime to be finalised in the next six to 12 months.
David Carter, Partner, Sydney
Adam Mazzaferro, Lawyer, Sydney
Mutual Recognition by ASIC and Hong Kong’s SFC of Cross-border offerings of Retail Managed Funds
On 7 July 2008, ASIC signed a ‘declaration of mutual recognition’ with the Hong Kong Securities and Futures Commission (SFC). The declaration will facilitate the sale of retail funds to investors in each other’s countries.
This development follows the discussion of mutual recognition arrangements in the joint consultation paper Cross Border recognition: Facilitating access to overseas markets and financial services issued by ASIC and the Treasury in June.
SFC’s recognition of Australian Managed Investment Schemes (MIS)
SFC will recognise all Australian MISs for the purpose of authorisation under section 104 of the Securities and Futures Ordinance, provided that:
-
the Australian MIS is managed by an AFSL holder and is a registered scheme;
-
the Australian MIS complies with the following requirements set out in the SFC’s Code on Unit Trusts and Mutual Funds:
-
appointment of a separate custodian who is an AFSL holder for safe custody of the scheme assets;
-
core investment restrictions;
-
the monthly dealing requirement; and
-
appointment of a Hong Kong representative and an approved person; and
-
having regard to all offers of interests in the Australian MIS at any me, promotion of membership has not been principally aimed at persons in Hong Kong and there is no reason to believe that the manager of the Australian MIS intends that promotion of membership of the scheme will be principally aimed at persons in Hong Kong.
SFC may require other reasonable disclosure requirements and impose specific conditions on an Australian MIS.
ASIC’s recognition of Hong Kong collective investment schemes (CIS)
ASIC will recognise all Hong Kong CISs as being exempt from the registration requirement in the Corporations Act provided that:
-
the Hong Kong CIS and its manager (that holds a licence issued by the SFC to operate Hong Kong CISs) are primarily regulated by the SFC and are not subject to regulatory concessions applicable because of their regulation outside of Hong Kong; and
-
having regard to all offers of interests in the Hong Kong CIS at any time, promotion of membership has not been principally aimed at persons in Australia and there is no reason to believe that the manager of the Hong Kong CIS intends that promotion of membership of the scheme will be principally aimed at persons in
Australia.
New Proposal for Improving Disclosure for Unlisted Property Schemes
On 8 July 2008, ASIC released a consultation paper including a draft regulatory guide that sets out 8 disclosure principles requiring information on the key risks and features of unlisted property schemes to be disclosed to retail investors.
General
ASIC proposes to define an unlisted property scheme as an unlisted managed investment scheme that has, or is likely to have, at least 50% of its non-cash assets invested in real property or in other unlisted property schemes.
The guide applies to registered unlisted schemes in which retail investors have invested directly or indirectly (e.g. through an investor directed portfolio service).
However, it will not apply to property security funds:
- whose only exposure to property is through investments in listed property schemes; or
- that do not have any investment by retail investors.
The disclosure principles apply to both upfront disclosure in Product Disclosure Statements and ongoing disclosure. In addition, ASIC proposes that compliance committees and compliance plan auditors for unlisted property schemes should be aware of and monitor the responsible entity’s application of, and compliance with, the disclosure principles.
The proposed disclosure principles
ASIC’s proposed disclosure principles deal with the following 8 key risks and features of unlisted property schemes:
-
Gearing ratio;
-
Interest cover;
-
Scheme borrowing (including maturity profile and breaches of loan covenants);
-
Portfolio diversification (including property/lease profiles, investment strategy and funding arrangements);
-
Valuation policy;
-
Related party transactions;
-
Distribution practices; and
-
Withdrawal rights.
What’s next?
New Financial Ombudsman Services
From 1 July 2008, the new Financial Ombudsman Service (FOS) commenced operation. It represents the merger of the three largest complaints schemes operating in the financial services industry, i.e. Financial Industry Complaints Service, the Banking and Financial Ombudsman Service and the Insurance Ombudsman Service. ASIC is responsible for the new FOS.
FOS will continue to operate all procedures, policies and terms of reference of the three existing schemes, with an intensive consultation period over the next 18 months during which a single terms of reference will be created for the FOS.
Emma Hodgman, Partner, Sydney
Security for Costs Ordered Against a Liquidator Acting Personally
It is a common misconception amongst lawyers and liquidators that there is a long standing line of authorities to the effect that “security for costs” will not be ordered against a liquidator of a company when the liquidator is suing personally.
This understanding was summed up conveniently by Blackburn CJ in the case of Re Pavelic Investments Pty Ltd (1983) 1 ACLC 1207:
“The foundation of my decision on this application is that the Court should apply what appears to be a rule of practice so inveterate as to be almost a rule of law, namely, that the liquidator of a company, appointed by the Court, is not required to give security for costs save for very exceptional circumstances. I need not set out all the authorities to support this: the leading case is Re Strand Wood Co Ltd (1904) 2 Ch 1. The rationale of the rule is partly that the liquidator is performing a public function on behalf of all of the creditors and directors of the company, and partly that it is within the province of the Court in the appropriate case to award costs against the liquidator personally.”
- This summation sets out not only the “rule” but also why the Courts developed such a policy. Other reasons for the rule include:
-
There are statutory provisions which enable a liquidator to avoid the expense of litigation, if there are no assets to fund the litigation.
-
If the liquidator does sue personally, then he exposes all his personal assets to the risk of an unfavourable costs order, which is not limited to the assets in the liquidation.
-
The liquidator receives no personal gain from running the litigation, save for his professional costs and disbursements which are subject to the control of the Court or the creditors.
This “rule” however is a misconception.
In a recent decision of the NSW Court of Appeal (comprising Hodgson JA, Basten JA) and Campbell JA, in the matter of Green (as liquidator of Arimco Mining Pty Ltd) v CGU Insurance Ltd 2008 NSWCA 148 reviewed this principle, in the specific circumstances where a litigation funder was funding a liquidator.
The relevant factual background was as follows:
-
Martin John Green (Green) in his capacity as liquidator of Arimco Mining Pty Limited (in liquidation) (Arimco) commenced proceedings against the former directors and officers of Arimco and CGU (as insurer of the directors and officers).
-
Green was pursuing an insolvent trading claim relating to the period 1 February 1999 to 14 March 1999 in relation to debts with a value of $22 million.
-
In December 2004 Green brought CGU into the proceedings and at the same time disclosed that the proceedings were financed by a litigation funder under an agreement dated 7 December 2004.
-
Green settled the matter with the directors and officers.
-
The proceedings against CGU were set down for a 4 week trial commencing 15 July 2008. As at March 2008 Green’s legal costs amounted to over $1 million.
-
On 6 March 2008 CGU issued an application for security for costs.
-
On 9 May 2008 Justice Einstein ordered Green to pay $450,000.00 by way of security being the costs that CGU estimated it would incur to the conclusion of the matter.
-
Both parties appealed.
The decision of the Court of Appeal was handed down on 20 June 2008. Hodgson JA gave the leading judgment including a detailed review of the general principles applied to applications for security for costs.
This article is too short to undertake a detailed review of the decision. The main issue raised in the judgment was the apparent conflict between the rule of practice set out above and the unfettered discretion of the Court to deal with an application for security for costs.
Within the decision Hodgson JA set out guidelines that a Court should consider during such an application, as follows:
-
Liquidators, suing personally, are generally to be treated in the same way as a natural person. Costs orders will be made against them if proceedings fail, and security for costs may be ordered against them in accordance with Uniform Civil Procedure Rule (UCPR).
-
Although security for costs can be ordered in other circumstances, this is not the usual or normal course and special circumstances are required.
-
Where the plaintiff is a company in liquidation (not the liquidator), then security for costs will be more readily available.
-
Security should not be refused on the ground that this will frustrate the litigation, unless it is also shown that those who stand behind the company, and would benefit from the litigation, are unable to provide security.
-
Cases in which security for costs might be ordered outside those provided for in UCPR include, where the plaintiff:
-
has dissipated assets;
-
has not paid previous costs orders;
-
brings a weak case to harass the defendant; and/or
-
brings a case for the benefit of others. (However he noted the distinction that although a liquidator does bring the case for the benefit of others he does so under a statutory right).
In determining the application, Hodgson JA recognised that the factual circumstances did not give rise to an entitlement under the UCPR. His Honour did express concern however that the litigation funder could delay or attempt to avoid any liability for a costs order.
His Honour stated that a court should be ready to order security for costs where a non-party, who stands to benefit from the proceedings, is not a person interested in having rights vindicated, but is a person whose interest is solely to make a commercial profit from funding the litigation.
His Honour also said that the court system is primarily there to enable rights to be vindicated and the Court should therefore be particularly concerned that persons (being the litigation funder) whose involvement in litigation is purely for commercial profit should not avoid responsibility for costs if the litigation fails.
The Court decided that given:
-
the very heavy costs of the action itself;
-
the involvement of the litigation funder; and
-
the fact that the liquidator would be unable to meet an dverse costs order,
were together, sufficient to justify the order for security that Justice Einstein had made.
In summary the involvement of the litigation funder took the case outside the normal position in which a liquidator suing personally is considered to be in the same position as an ordinary natural plaintiff and thus generally liable to an order for security for costs only in the circumstances set out in the UCPR.
The Courts have accepted that litigation funding is a part of the
insolvency landscape but the decision makes it clear that they will not be entitled to take advantage of the treatment generally accorded a liquidator suing personally.
Richard Lyne, Senior Associate, Sydney
If you would like more information, please contact a member of our Financial Services Team listed on the right hand side of the screen.
To view a print friendly version of this update please click on the PDF below.
