The Creditor You Have When You’re Not Having a Creditor
Opes Prime Stockbroking Limited (Opes), and its related companies, were placed into administration on 27 March 2008 in dramatic circumstances. Rarely has the downfall of such a relatively small company made so many front page news headlines. Singapore visits by Mick Gatto, self-appointed “mediator”; fast cars; mysterious British Virgin Islands accounts, high fl ying celebrities crashing down – this collapse had it all. I heard somebody suggest more than once that this should be turned into a book or a movie.
Unfortunately for most of the Opes clients, the decline of Opes coincided with the decline in the stock market in Australia which was precipitated by the sub prime liquidity drought. As a result of a fall of over 40% to the All Ordinaries Index, those who provided their more speculative stock to Opes as security for their loans now find themselves in troubled waters.
At the second meeting of creditors of the Opes group of companies in Melbourne on 16 October 2008, the creditors ultimately (after a great deal of teeth gnashing) resolved to appoint John Lindholm, Peter McCluskey and Adrian Brown of Ferrier Hodgson as liquidators of the companies.
The sequel to the movie however is about to begin, as a result of a ruling of Justice Finkelstein in the Victorian Registry of the Federal Court of Australia in the Beconwood case (1). Finkelstein J handed down his judgment on 17 September 2008 after being asked a series of questions concerning how the administrators should make a just estimate of the claims of some of the creditors, and the dates upon which those creditors’ claims should be calculated in order to conduct the second meetings of creditors’ in the administrations.
The administrators were alleging that the clients of Opes were bound by the terms of a Securities Lending Agreement (SLA). In short, the SLA included various “netting out” provisions which were triggered by various Events of Default. The most relevant Event of Default in the SLA was as follows:
“An Act of Insolvency occurring with respect to the Lender or the Borrower and (except in the case of an Act of Insolvency which is the presentation of a petition for winding up or any analogous proceedings, or the appointment of a liquidator or analogous offi cer of the Defaulting Party in which case no such notice will be required) the Non Defaulting Party serves written notice on the Defaulting Party.”
The vast majority of the Opes clients had not issued any default notices, and most were merely assuming that the appointment of receivers and managers, as well as the appointment of administrators, amounted to an Event of Default on 27 March 2008 which automatically triggered the netting provisions.
Justice Finkelstein had earlier ruled in the Beconwood case (2) that neither receivers and managers, nor administrators, were “analogous offi cers” with respect to a liquidator. Finkelstein J had held earlier that the functions of an administrator and a receiver are starkly different to those of a liquidator, and noted that a liquidator’s role was “to get any assets of the company that is being wound up, dispose of those assets and out of the proceeds discharge the debts due to the creditors”3, while an administrator’s role “is little more than [to] take over the running of the company, and then only for a relatively short period”. He noted the role of a receiver was to “take control of the company’s assets (and sometimes manage its business), but for the single purpose of discharging the debt due to his appointor, the secured creditor” . With the second meeting of creditors fast approaching, the administrators had to determine the value of the “uncertain” or “contingent” claims (ie those pending the automatic netting off process) before they could permit those creditors to vote. Pursuant to Regulation 5.6.23 of the Corporations Regulations, the administrators could not permit those creditors to vote “unless a just estimate of [their] value has been made”.
In the Federal Court in September 2008, Finkelstein J held that, unless a default notice had already been served, or a call had already been made for the redelivery of equivalent security which had failed, then the creditors’ claims could not be calculated as at 27 March 2008. He stated:
“The counter parties whose redelivery obligations have not fallen due] present the most diffi culty. The difficulty arises for several reasons. First there is as yet no breach of the redelivery obligations… It is not possible to tell when the SLAs will be closed out and the assessment of what is due to the counter party (if anything is due at all) will depend upon the value of the equivalent securities at the close out date. It is difficult to do more than guess what that value might be.
The diffi culty in estimating the value of the claims of [those] counter parties does not, however, justify the administrators placing a nominal value on them. The administrators have suggested that a reasonable approach is to assess the value on the basis that close out occurs on a fi xed date, which is shortly before the second meeting of creditors takes place. That, I think, is a sensible way to proceed. To be on the safe side, it may be necessary to obtain an order under section 447A to set the appropriate date.”
This appeared to fl y in the face of the potential calculation under section 444A(4)(i) of the Corporations Act which deals with a possible resolution to enter into a Deed Of Company Arrangement (DOCA) at the second creditors meeting, which requires that those claims that are to be included in the DOCA must have arisen not later than the day when the administration began. At that stage no DOCA had been proposed.
Justice Finkelstein’s decision was only required for voting purposes, and not for the determination or adjudication on fi nal proofs of debt. One of the primary assumptions included in his Honour’s decision (namely that the company would go into liquidation) has now materialised. Are those creditors now in a different position than immediately before the
appointment of the liquidators?
There are a number of provisions of the Corporations Act which now fall into place that could not have fallen into place during the administration. In order, they are:
| Section 554 |
The amount of a debt or claim of a company (including a debt or claim that is for
or includes interest) is to be computed for the purposes of the winding up as at the relevant date |
| Section 9 |
“relevant date”, in relation to a winding up, means the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun |
|
Division 1,
art 5.6513A |
This deals with the commencement of winding up where that winding up has been ordered by the court – not applicable here |
|
Section 513B |
Where a company resolves by special resolution that it be wound up
voluntarily, the winding up is taken to have begun or commenced …
if, immediately before the resolution was passed, the company was under
administration – on the section 513C day in relation to the administration |
| Section 446A(2) |
A resolution of the creditors in an administration to appoint a liquidator is taken to have been passed by a special resolution of the company |
| Section 513C |
(relevantly) the day on which the administration began |
Therefore, the computation date in s554 is the date the administration began. - 27 March 2008, and not the date “the creditors resolve that the [company] should be wound up”4 , and not (as proposed by the administrators) some nominal date “shortly before the second meeting of creditors takes place”(5).
Now the date upon which the valuation of all creditors claims is fi xed, namely 28 March 2008. What is the effect of this? Some creditors, who by virtue of the fact that their shares have dropped lower in price than the value of their loan from Opes, are now considered debtors. This is evident from the schedule that was published by the administrators and distributed to the creditors prior to the second meeting. Even on 16 July 2008 “client F was a net creditor for $2,425,365.75. On 27 March 2008 that same creditor was calculated as being owed $24,743,046.79”. Most of the creditors’ claims are worlds apart between 27 March and 16 October 2008.
It would be extremely risky if the administrators were to rely upon the ruling of Justice Finkelstein in order to calculate both the date and therefore the value of the creditors’ claims in the Opes group liquidations. This is so particularly in circumstances where the Corporations Act, in the event of a liquidation, strictly dictates the timing of that calculation.
Moreover, those creditors who in the past had been waiting for the Event of Default to occur during the administration (and on Justice Finkelstein’s view it never did) are now also able to apply the provisions of section 553C of the Corporations Act: where there have been mutual credits, mutual debts or mutual dealings between an insolvent company that is being wound up and a person who wants to have a debt or claim admitted against the company, then it is only the balance of the set off which is admissible to proof against the company or is payable to the company as the case may be.
Lastly, those who have closely followed the press since the start of this fi asco would also be aware that the liquidators were in the midst of a mediation with ANZ, Merrill Lynch and ASIC. That mediation was recently terminated without a “global” settlement being reached. The liquidators have predicted that the “unavoidable” litigation between them and ANZ will be akin to an “Armageddon scenario”. We hope that the creditors’ debt calculations won’t be left behind once Armageddon is over. Perhaps once all the litigation bills are paid, there may not be much left for the creditors, regardless of what they’re owed. Armageddon has never come cheap.
(1) Beconwood Securities Pty Limited v Australia & New Zealand Banking Group Limited (2008) FCA 1425
(2) Beconwood Securities Pty Limited v Australia & New Zealand Banking Group Limited (2008) 66 ACSR 116
(3) At paragraph [60]
________________________________________________
Mark Addison | Partner | Sydney
Stacey Hahn | Lawyer | Sydney
Can an Unsecured Creditor Appoint a Special Purpose Liquidator?
In the recent decision of Lo v Nielsen & Moller Auto Glass (NSW) Pty Ltd [2008] NSWSC 407, the Supreme Court of New South Wales confi rmed that an unsecured creditor of a company in a creditors’ voluntary winding up may appoint a special purpose liquidator to investigate the company’s affairs alongside a liquidator already appointed by the company if it is shown to be just and benefi cial to do so.
Facts
Nielsen & Moller Auto Glass (NSW) Pty Limited (the “company”) was placed into voluntary administration and then into liquidation. Mrs Lo, one of a number of unsecured creditors, applied to the court for the appointment of two further liquidators in addition to the existing liquidator in order to investigate certain fi nancial dealings and allegations against the company and its former directors.
Mrs Lo alleged that all assets of value and some favoured creditors had been shifted out of the company and into a new company, leaving non favoured creditors with the company which was then subjected to voluntary administration and liquidation in circumstances where no return
for those remaining creditors could be expected. It was alleged that this was achieved in part by the director and his wife (as holders of a charge affecting the whole of the company’s property as securing loans made by them) relying on their security.
The administrator appointed by the company, who then became the liquidator made some preliminary findings in respect of the possibility of recovery for insolvent trading and unresolved questions about the charge granted by the company to the director and his wife. No action was pursued by the liquidator because there were no available funds. Mrs Lo was willing to fi nance the investigations only if her nominated special purpose liquidators were appointed. She raised concerns about the independence of the existing liquidator because he had been appointed by the director the subject of the allegations and because (she believed) he
was in offi ce only because of the support of that director.
Decision
The court thought the position was simple and clear. It found that there were aspects of the company’s affairs that required investigation. Mrs Lo was prepared to fund these investigations for the benefi t of all unsecured creditors. In this case, there was no issue with respect to allocation of funds from the company between the different liquidators because Mrs Lo was to fi nance the activities of the special purpose liquidators, meaning the two administrations were fi nancially independent of one another.
The court concluded that it had jurisdiction in a creditor’s voluntary winding up to appoint an additional or special purpose liquidator under s511 of the Corporations Act if it was satisfi ed that exercise of its power would be just and benefi cial. The court also concluded that Mrs Lo, as a creditor, had standing to make the application and because it was just and benefi cial to do so, ordered the appointment of the nominated special purpose liquidators with the powers specifi ed in Mrs Lo’s application.
In making the orders the court required that:
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Mrs Lo execute a funding agreement;
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Mrs Lo give the court an undertaking to perform her obligations under the funding agreement; and
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the special purpose liquidators give the court an undertaking that they would not look to company assets to defray their remuneration or expenses.
Comments
The court has endorsed a fl exible and convenient avenue for unsecured creditors who have lost faith in the liquidator appointed by the company to ensure thorough investigation of matters which, otherwise, may not be ventilated. The process of appointing a special purpose liquidator is likely to be more cost effective than applying to the court for orders to remove the existing liquidator. This is because an application to remove an existing liquidator is more likely to be contested and the applicant must show “cause” for the court to remove the liquidator. Instead, creditors may apply to the court for the appointment of a special purpose liquidator to
conduct specifi c investigations if it can be shown to be just and benefi cial to do so and the unsecured creditor is prepared to fund the special purpose liquidator and give appropriate undertakings.
Jai Moss | Associate | Sydney
Mortgagee Ordered to Pay Damages in Relation to the Sale of Land
The view for many years in Australia has been that the duty on a mortgagee appears to be that absence a statutory imperative to the contrary, the duty is essentially one of good faith. However, a recent decision has suggested that the duty is higher than this.
Sablebrook Pty Ltd v Credit Union Australia [2008] QSC 242 - a recent decision by the Supreme Court of Queensland - highlights the potential exposure of mortgagees when exercising their power of sale in respect of land. It is also a timely reminder that, in most instances, a mortgagee ought to go to market and seek reliable and current valuations when determining a reasonable sale price.
Legal framework
Section 85 of the Property Law Act 1974 (Qld), provides that a mortgagee exercising its power of sale is required to “take reasonable care to ensure that the property is sold at market value”. A similar statutory duty exists in the Northern Territory and analogous statutory duties of care exist in Tasmania and Victoria. An analogous (but not identical) common law duty to act in good faith exists in all other jurisdictions. For the purposes of this brief article, it can be assumed that the applicable tests will be largely similar in each jurisdiction.
Section 85(3) of the Act also provides that “a person damnifi ed by the breach of duty has a remedy in damages against the mortgagee exercising the power of sale”. Again, by and large, similar remedies are available in each jurisdiction. In short then, a breach of a mortgagee’s duty when exercising power of sale exposes them to awards for damages.
The property – vacant land improved only with a swimming pool - adjoined land owned and operated by owners of a resort. A dispute had arisen between the mortgagors and the resort as to rights of access to the pool for resort guests. That dispute was current at the time of the sale (although no proceedings had been instituted). Historically, there was also uncertainty as to whether the pool encroached on the resort land. It did not, and the mortgagee knew this prior to sale.
The mortgagee obtained a valuation of the property in December 2002 in the amount of $225,000. In late February 2003, the Body Corporate of the resort notifi ed the mortgagee of the dispute and alleged that pursuant to a previous agreement, the swimming pool was intended to be part of the body corporate common property and claimed an interest in the property.
The mortgagee sold the property to two owners of units in the resort development for $240,000 in late April 2003. The fi gure was $15,000 more than the mortgagee’s valuation conducted only four and a half months earlier. The mortgagee did not market the property for sale nor did it obtain a further valuation prior to sale.
The mortgagor sued the mortgagee alleging that it had breached its statutory duty to take reasonable care to ensure that the property was sold at market value. The breach was alleged to have occurred by virtue of failures to:
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obtain a valuation at or about the date of entry into the contract;
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offer the property for sale to the public at large;
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engage a local real estate agent and to advertise; and
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investigate the merits of the adjoining owner’s dispute and alleged
interest in the property.
The court noted that section 85 of the Act did not impose a strict obligation to sell at market value. Each case needed to be determined on its own facts. It would not always be necessary to put a property to the market. For example, it was conceivable that an enthusiastic buyer would offer a sum in excess of any likely market value. Nevertheless, a mortgagee ought be slow to act in such a manner, unless there was suffi cient reasons to do so.
The court's decision
The failure to make enquiries as to the movement of the market in the period between receipt of the valuation and contract of sale (ie four and a half months) was a breach of duty. Moreover, the valuation in the mortgagee’s possession proceeded on the basis that the swimming pool encroached on to the adjoining land. By the time of sale, the mortgagee knew this not to be the case. Nevertheless, it did not seek an updated valuation and ought to have done so in accordance with its statutory duty.
The mortgagee was not entitled to rely on a submission that due to the dispute as to access to the swimming pool it was reasonable to sell to the owner of the resort of the adjoining land. The threat of such a claim made it all the more important to take the property to market and to increase the number of potential purchasers. The offer made by the members of the body corporate had not been made in a competitive scenario and a failure to ensure this occurred was, likewise, a breach of duty.
Conslusion
The decision in Sablebrook is a timely reminder to mortgagees that they have a duty to exercise their power of sale with an aim towards achieving the best possible value for the property in the particular circumstances at play. Whilst it will not always be necessary to put a property to the market, doing so is often good protection for a mortgagee. Mortgagees should also be wary of any threatened or actual litigation in relation to property, particularly by adjoining owners or co-owners. Existence of any such litigation does not absolve the
mortgagee from going to the market to “litigation proof” a sale. Disputes as to encroachments or boundaries should also be resolved by obtaining an accurate survey.
This decision appears to follow what many have believed is the test in Australia as set out by the English Court of Appeal in Cuckmere Brick Co. Limited v Mutual Finance Limited ([1971]) CH949 which said that the duty of a mortgagee goes beyond that of acting honestly and without reckless disregard for the mortgagor’s interests and includes a duty to take reasonable care to obtain a proper price: ie; the true market value.
The issues presented by this decision will be of particular interest to mortgagees in a rapidly changing market. Mortgagees ought not assume that valuations only a matter of months old are necessarily reliable. In most instances, a mortgagee will never fall foul of the law if it expeditiously markets land for sale with the benefit of reliable and current valuations.
Scott Guthrie, Partner, Brisbane
Mortgagors Who Break Back in After Eviction
The decision of Johnson J in Perpetual Limited v Kelso and Anor [2008] NSWSC 906 shows the Supreme Court’s increasing unwillingness to grant relief to mortgagors who have broken back into a mortgaged property after they have been evicted pursuant to a writ of possession. Kelso confi rms that, where judgment for possession has been given and a writ of possession executed, an application to set aside default judgment will not ordinarily even be considered and the appropriate remedy for a mortgagee is to apply for a writ of restitution.
Facts
The plaintiff issued a statement of claim for debt and possession and obtained default judgment and leave to issue a writ of possession. A writ was issued by the Court and executed by the Sheriff. A short time after the eviction, the mortgagors broke back into the property and changed the locks.
The plaintiff then applied to the Court for a writ of restitution to restore its possession of the property. The application was opposed by the mortgagors who also fi led a notice of motion seeking to set aside the default judgment and stay any further action.
The decision
The Court held that the mortgagors’ re-entry to the property after the writ of possession had been executed constituted an act of trespass.
The appropriate remedy for a mortgagee when a judgment debtor / mortgagor has broken back into a security property after a writ of possession has been executed is for the mortgagee to apply to the Court for leave to issue a writ of restitution and then arrange for the Sheriff to schedule a further eviction.
The Court said that, if the mortgagors had sought to set the default judgment aside before the writ of possession had been issued and executed, it would have considered the application on the basis of the principles outlined in Balanced Securities Limited v Oberlechner [2007] NSWSC 80 at [19], i.e. that, to have default judgment set aside, a defendant must demonstrate:
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a reason for the failure to defend the claim;
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an arguable defence on the merits of the case; and
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that it is in the interests of justice to allow the defence to be
litigated.
However, in this case, the Court refused to consider the mortgagors’ application to have the default judgment set aside because the writ had already been executed and the mortgagors had wrongfully re-entered the property in direct contravention of the Court’s order that the plaintiff have possession of the land. As the writ had been executed, the defendants’ position was “hopeless.”
The Court noted that, had the writ not been executed, a number of other hurdles, such as those outlined above, would have had to be overcome before default judgment would be overturned. However in this case, the Court was doubtful that the defendants would succeed on that basis, even if they had fi led a motion before an eviction had been completed.
Note also that, when considering the application for a stay of enforcement of the judgment, the Court also took into account the fact that a kerbside valuation indicated that the mortgage debt significantly exceeded the value of the security property.
Consequences for mortgagees
This case reiterates the reluctance of the Court to overturn default judgment once a writ of possession has been executed.
The decision suggests that, when a mortgagee has obtained judgment against a difficult mortgagor for possession, it would be well served to proceed to execute its writ regardless of whether the mortgagor is seeking to refi nance. If a mortgagor is allowed to remain in the security property, the mortgagee increases the risk of having to defend an application to have default judgment set aside. Possession can always be returned to a mortgagor if refi nance is in fact achieved.
This case also provides clear authority that a writ of restitution is the correct remedy to pursue, should a mortgagor break back into a security property after an eviction has been completed.
Marcus Suliman, Lawyer, Sydney
A Closer Step Towards Uniformity
On 2 October 2008 the Council of Australian Governments (COAG) agreed on the recommendations of the Productivity Commission to a new consumer policy framework comprising a single national consumer law cutting red tape for businesses providing fi nancial services.
The two phase action plan follows the release of the Government’s Financial Services and Credit Reform Green Paper in June and agreements at the March and July COAG meetings to transfer consumer credit regulation to the Commonwealth.
The reform plan will be implemented over the next 2 years in two phases.
Phase 1
The key elements of Phase 1 include:
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enacting existing State legislation and the Uniform Consumer Credit Code into Commonwealthlegislation;
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establishing a national licensing regime to require providers of consumer credit and credit related brokering services and advice to obtain a licence from ASIC;
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extend ASIC’s powers to be the sole regulator of the new national credit framework with enhanced enforcement powers;
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require licensees to observe a number of general conduct requirements including responsible lending practices;
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require mandatory membership of an external dispute resolution body by all providers of consumer credit and credit related brokering services and advice;
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extend the scope of credit products covered by the Code to regulate the provision of consumer mortgages over residential investment properties;
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extend the operation of the Corporations Act to regulate margin lending; and
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regulation of trustee corporations.
The first phase changes will be dealt with by Commonwealth, State and Territory legislation by the end of June 2009 with a 2 year transition period for affected businesses.
Phase 2
The key elements of Phase 2 include:
The second phase is to be completed in the fi rst half of 2010.
Under the proposed changes for the fi rst time all fi nance brokers, advisors and credit providers will be covered by a national licensing scheme.
Lenders will be licensed by ASIC which will be given extra powers to police the scheme.
The next six months should be watched with interest as the Government begins releasing information regarding the implementation of Phase 1.
David Carter, Partner, Sydney
Adam Mazzaferro, Lawyer, Sydney
Review of the Draft Short Selling Bill
On 23 September, the government released an exposure draft of the Corporations Amendment (Short Selling) Bill 2008 (Bill) which requires the disclosure of covered short sale transactions of certain fi nancial products on Australian fi nancial markets, such as securities, managed investment products and other prescribed fi nancial products. The draft legislation was open for public comment until 21 October 2008.
There are two types of short sale transactions. A naked short sale occurs when a seller does not own and has not borrowed or arranged to borrow securities at the time of sale but intends to do so in order to meet the delivery obligation. A covered short sale occurs when the seller has arranged to borrow the securities in order to meet the delivery obligation prior to the time of sale.
Section 1020B of the Corporations Act (Act) regulates short sales by prohibiting them unless the seller has a “presently exercisable and unconditional right” to vest the securities. The prohibition is subject to some exemptions, including naked short sales in prescribed large cap stocks where the short sale is disclosed to the market in accordance with the market’s operating rules. The prevailing interpretation of these provisions has been that covered short sales are permitted, without any need for disclosure, on the basis that at the time of sale the seller, having entered into a securities lending agreement, has a “presently exercisable and unconditional right” to vest the securities.
In September 2008, responding to the global crisis on fi nancial markets, ASIC temporarily amended the operation of s1020B of the Act by banning naked short sales, banning covered short sales (subject to certain exemptions) and introducing an interim disclosure requirement for covered short sales (CO 08/751).
The Bill proposes to replace ASIC’s interim disclosure requirement for covered short sales, and add a permanent disclosure regime for covered short sales.
The Bill proposes to insert two new provisions, s1020BA and s1020BB in the Act. The proposed provisions require sellers to advise their brokers when the sale is a covered short sale, i.e. when the sale is covered by a securities lending arrangement. The broker must report details relating to such transactions to the relevant market operator. This applies to both client and principal trading.
The Bill also applies to sales that occur through crossings, whether the crossing occurs on or off market. (A crossing is a sale of prescribed products either on behalf of the buyer and seller of the products or on behalf of a client on one side and as principal on the
other side).
The proposed disclosure requirement applies to both Australian and overseas sellers. It will be an offence if a broker or a seller does not make disclosure under the proposed provisions. The regulations, a draft which is yet to be released, will specify details of the disclosures.
Michael Hodgson, Partner, Sydney
Naoko Aoo, Lawyer, Sydney
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