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Allens Arthur Robinson

Finance & Banking Update -  December 2003

In this issue: Read about the latest developments in the world of banking and finance.

Cases

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Guarantee — Banking — Margin lending facility — Variation of guarantee — Signing contract (Schoenhoff v Commonwealth Bank of Australia [2003] NSWSC 918) Supreme Court of New South Wales, Einstein J

Guarantors bound by documents they signed without reading; still bound by extra advance on-lent to them.

Background

A married couple mortgaged shares to secure a margin lending facility between a bank and the husband's colleague. The guarantors said they did not read the risk disclosure forms and did not understand several other documents they signed in pledging the shares. The husband also claimed the borrower represented that the guarantee would only be for a short time, when in fact it was for a long period of time. The borrower's loan was gradually increased by the bank, causing a rise in the couple's exposure to liability. Some of the additional money was applied to the guarantors, again increasing the borrowers' indebtedness and contrary to the purpose clause.

The guarantors brought proceedings for relief from the surety agreement. They claimed the borrower's misrepresentations and their failure to properly read and understand the terms and conditions of the contract meant they were not bound by it. Moreover, when the bank advanced funds to the borrower the guarantors' rights were altered such that they should be discharged from their obligations under the guarantee.

Decision

The bank won.

The husband was unable to prove on the balance of probabilities that any misrepresentations were made.

In determining whether a party assented to a contract, the documents must be considered objectively to establish the parties' intentions. If the documents are signed it will usually not matter that they were not read. In this case, the signing of the documents by both parties indicated an intention to be bound by all of the terms and conditions of the guarantee.

The court then applied the principle in Ankar v National Westminster Finance that a surety is discharged where conduct of the creditor alters the surety's rights, unless the alteration is unsubstantial and not prejudicial to the surety. In deciding this, a detailed inquiry will not be made into the effects of the alteration, although some evaluative judgment is necessarily required. The court found that the bank's advance was clearly for the benefit of the guarantors so that, if there was a variation of the principal contract, it was obviously unsubstantial. The guarantors were not discharged.

For more, see a copy of the case.

Guarantee and indemnity — Bankruptcy — Requirement of notice — Liquidated sums (ANZ Banking Group Ltd v Coutts [2003] FCA 968) Federal Court of Australia, Conti J

Demand required to create liability under guarantee 'and indemnity'.

Background

An overdraft facility between a bank and a company was the subject of a guarantee and indemnity. Following liquidation of the company a default judgment was entered in favour of the bank against the guarantor. A bankruptcy notice was then served for the indebtedness, requiring payment. This amount became overdue and when the guarantor issued payment the bank did not accept the cheque, claiming it was then owed a greater amount due to additional interest and legal expenses and keeping the bankruptcy notice on foot. The bank then applied to amend the creditor's petition to incorporate the increase. The guarantor argued that the additional amount was not in existence as a liquidated sum at the time of the act of bankruptcy and there was no written demand for it, meaning the indebtedness could not be increased.

Decision

The guarantor won. The application for leave to amend the creditor's petition was denied.

Section 44 of the Bankruptcy Act 1966 (Cth) provides that a creditor's petition shall not be presented against the debtor unless there is a debt owing which is a liquidated sum and the debt is payable either immediately or in the future. Furthermore, the debt must exist at the time of the act of bankruptcy relied upon for the notice.

In this case, the liquidated sum for the additional interest and costs was not due at the time of the relevant bankruptcy and therefore could not be presented against the guarantor. The guarantee and indemnity also required the bank to present a written demand for payment of any guaranteed amount. The 'principal debtor' clause did not remove the need for a demand to be given under the guarantee clause. In this case, the guarantee and indemnity provided the bank with the right to treat the debtor as a principal debtor but the bank did not purport to avail itself of this right. Despite the inclusion of the usual indemnity language, the document may not be an indemnity and may be a collateral observation.

Hence the bank's claim failed because the additional moneys were not in existence as a liquidated sum at the time of bankruptcy and there was no written demand for the amount payable at or before that time.

For more, see a copy of the case.

Mortgage contract — Variation via informal contractual agreement (ANZ Banking Group Ltd v Ciavarella [2003] NSWCA 304) New South Wales Supreme Court of Appeal

Bank held to informal settlement agreement despite reference to formal deed.

Background

The bank lent money to the borrowers on security.

Upon default of the facilities, mediation was conducted which broke down, with the borrowers rejecting a deed proposed by the bank which contained a 'twelve point plan'. Following this, the bank sent the respondents a letter attaching a 'thirteen point plan' (providing for a deed setting it out), which was accepted by the borrowers 10 days later in a fax which also included further proposed terms for the consideration of the bank. The bank then withdrew the 13 point plan and stated that the acceptance was conditional. The bank notified the borrowers that demands had been issued, a receiver had been appointed and that it had commenced proceedings for recovery of the amounts due. The borrowers then successfully cross-claimed for an order restraining the receiver permanently from continuing to perform his functions. The bank then appealed against the decision of the cross claim.

Appeal

The borrower won. The appeal was dismissed.

The letter proposing the 13 point plan did constitute an offer which was duly accepted. It was unconditional as the further proposed terms were merely an attempt to see whether the Bank would make further concessions.

The inclusion of the requirement for a deed in the 13 point plan did not justify any inference that the borrowers would only contemplate themselves as being bound by a formal deed as opposed to the informality of the exchange of correspondence. There was nothing to suggest that the informal plan was anything but standard for the bank. The bank's documentation allowed for variation of facilities by notice, with no indication that the notice is not effective immediately without any need for further more formal documentation.

The terms of the 13 point plan were sufficiently definitive to ascertain the parties' agreement, with no need for a formal deed. There was an offer and acceptance via exchange of correspondence.

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Banking — Appropriation of payment — 'True inference' to appropriate (Karam v ANZ Banking Group Ltd [2003] NSWSC 866) Supreme Court of New South Wales, Santow J

Borrower able to designate which accounts receive payments. Deposit in overdraft account sufficient appropriation. Bank's contracted right to shift deposits not enough.

Background

A bank lent money to a borrower through five accounts. The first two were with respect to the purchase of a property and the construction of a factory. The other three were current accounts for use in trading. The bank was authorised under the loan agreements to transfer deposits made by the borrower on the current accounts to the first two accounts. Certain deposits were then made by the borrower into the current accounts which were subsequently transferred to the first two accounts by the bank. The borrower argued that the bank did not have permission to appropriate the deposits to the first two accounts, since the borrower had already appropriated them to the current accounts when payment was made.

The bank argued that the borrower did not appropriate and this omission allowed the bank to transfer the payment to the first two accounts.

Decision

The borrower won. The bank was liable for the misused funds.

In Healey v CBA it was held that a debtor who owes distinct debts to a creditor and makes payment to the creditor may appropriate the money as the debtor pleases, and the creditor must apply it accordingly. If the debtor does not direct an appropriation at the time payment is made, the right of application devolves on the creditor. The customer's intention to appropriate need not be express, but can be inferred from the circumstances of the case known to both parties. In this case, the inference may be drawn that an appropriation was made by the borrower when the moneys were deposited into the current accounts.

There was no overriding ability for the bank to move funds around, despite the authority of the bank to debit payments following a deposit. By the time the bank "moved" the deposit, the appropriation had already been made.

For more, see a copy of the case.

Mortgages — 'All moneys' guarantee — Variation of contract — Unconscionable conduct (Commonwealth Bank of Australia v McArthur [2003] VSC 31) Supreme Court of Victoria, Dodds-Streeton J

'All moneys' guarantee covers varied loan arrangement despite variation.

Background

A mother sought funds to discharge a previous loan, in which she and her son were joint borrowers, and for use as working capital for her son's business. The previous bank was repeatedly pressing for repayment. A bank agreed to lend the money, with the mother as guarantor for 'all moneys' under the contract, conditional upon a satisfactory valuation and sent a letter to the mother to that effect. The son arranged a valuation but this was not satisfactory, so the bank conducted a second valuation. This valuation was lower and resulted in the bank only being able to lend the required amount if some of the debt was short term, meaning repayments would be more onerous. This variation was explained in a second letter sent to the son. The relevant funds were then advanced. The son soon defaulted on his repayment obligations. Meanwhile, he had not signed or returned the second letter and claimed his mother knew nothing about it. They argued they had not agreed to the second letter's variations and that the mother should be discharged from her obligations as a surety under the Ankar special principle.

The bank was also said to have acted unconscionably in altering the principal contract and the mortgage should be rescinded on the basis that the mother was a passive investor of limited experience, the bank knew the new repayment schedule was unsustainable and the mother did not know about the second letter until it was too late for alternative finance to be arranged. Finally, they submitted the bank was not entitled to be subrogated to the rights of the previous mortgagee.

Decision

The bank won and could enforce its rights under the mortgage. The son's counterclaim failed.

In Ankar v National Westminster Finance it was found that a surety is discharged from its obligation when its rights are altered so as to materially prejudice its interests. However, where there is a widely drafted 'all moneys' guarantee, as there was in this case, a fresh advance or a subsequent loan is within the scope of the guarantee and reliance on the Ankar principle fails. The special principle appears to have no legitimate application to 'all moneys' guarantees.

The bank did not exhibit unconscionable conduct. In this case, the mother understood the relevant documents, there was no misrepresentation by the bank and the bank believed the son was able to sustain repayments. Accordingly, the mortgage was valid and enforceable. The company was a quasi-partnership between mother and son. She was well aware of the financial position of a 'de facto director'. Given that the mortgage was enforceable, it was unnecessary to consider whether the bank was entitled to be subrogated to the previous mortgagee's rights.

For more, see a copy of the case.

Mortgages — Remedies of mortgagee — Appointment of receivers — Election (Esperance Market Garden (WA) Pty Ltd v Cribb [2003] WASC 165) Supreme Court of Western Australia, Pullin J

Mortgagee able to appoint receiver within 30 day period in demand notice.

Background

A company borrowed money from a lender with a property as security. The mortgage specified that following an event of default the lender may appoint a receiver. The secured moneys were repayable upon an event of default occurring, or if there were no event of default then repayable 30 days from any demand of repayment. An event of default included failure to pay interest and the mortgagor could exercise its power of sale 30 days after default. The borrower defaulted on its repayments and the lender served a notice of default demanding payment in 30 days and subsequently appointed a receiver to sell the secured property. The appointment was made without waiting 30 days from default. The borrower argued that the service of a notice of default was an election not to appoint a receiver immediately and instead to make the appointment after 30 days' notice. The immediate appointment of the receiver was therefore said to be invalid.

Decision

The borrower lost. The receiver's appointment was deemed valid.

In contract law, election occurs when there is a right to two alternative and inconsistent rights, such as the right to termination and the right to keep a contract on foot. The borrower submitted that such an election had occurred when the lender opted to appoint a receiver only after 30 days, then the election was breached when the lender immediately appointed a receiver. However, a mortgagee's right to remedies may be exercised concurrently and hence there was no election in serving the notice of default.

For more, see a copy of the case.

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Media releases / websites

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Draft GST ruling on securitisation (ATO draft GST ruling 2003/D6)

The ATO has released a draft ruling on the GST consequences of the assignment of income streams such as those in securitisation vehicles. The ruling defines the supply of the right to an income stream as a financial supply. Furthermore, if underlying property is transferred in a securitisation arrangement but legal title remains with the assignor, any consideration furnished at the date of assignment relates solely to the provision of the right to the income stream. Hence, the supply remains with the assignor who is liable to remit the GST for that underlying supply. The draft ruling is silent on the assignor's eligibility to claim input tax credits in this context.

GST and long-term non-reviewable contracts (Minister for Revenue and the Assistant Treasurer media release No. 109/03, 21/11/03)

The Minister for Revenue and the Assistant Treasurer, Senator Helen Coonan, has announced the Federal Government's intention to amend the way GST is applied to long-term non-reviewable contracts that will not have had a review opportunity by 30 June 2005. From 1 July 2005, all suppliers with such contracts will be allowed to recover the net impact of the New Tax System reforms from the recipient. Where the recipient does not accept an appropriate price adjustment GST liability will be transferred to the recipient and the supplier will collect and remit the GST.

For more, see the media release.

Remission of general interest for disputed tax debts to be investigated (Minister for Revenue and the Assistant Treasurer media release No. 108/03, 21/11/03)

Senator Helen Coonan has requested an investigation by the Inspector-General of Taxation into the administration of General Interest Charge (GIC) remissions involving groups of taxpayers. GIC remissions in relation to participants in Employee Benefit Arrangements will also be examined.

For more, see the media release.

Commodity hedging taxation reform (Minister for Revenue and the Assistant Treasurer media release No. 107/03, 21/11/03)

The Federal Government has postponed the commencement date of reforms to commodity hedging taxation arrangement which were originally due on 1 July 2003. The deferral is in response to issues raised in industry submissions, as well as the upcoming incorporation of international accounting standards which would materially affect the commercial accounting treatment of commodity hedging arrangements.

For more, see the media release.

APRA releases paper on second round of general insurance reforms (APRA media release No. 03-74, 20/11/03)

APRA has released a discussion paper on a proposed second round of reforms to the general insurance industry. The paper recommends revision of the existing prudential standards and guidance notes in light of experience and market developments and an increase in disclosure regarding activities of general insurers to promote market discipline. These changes are aimed at refining and clarifying prudential requirements while also improving the transparency and usefulness of information disclosed by general insurers.

For more, see the media release.

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ALP superannuation policy (ALP media release, 20/11/03)

Opposition Treasury Spokesman Mark Latham has released the Australian Labor Party's superannuation policy. The first chapter of the policy proposes to:

  1. automatically consolidate inactive superannuation accounts;
  2. introduce a standard reporting format for all funds;
  3. provide that choice of at least five different investment options must be offered to all fund members;
  4. introduce choice of fund with appropriate consumer safeguards; and
  5. provide non-discriminatory treatment for same-sex couples.

The second chapter includes proposals for 'clear, simple and comparable' fee disclosure; the prohibition of fund entry or exit; full compensation to members for losses in the event of theft, fraud or business failure; increased powers and resources to APRA, ASIC, the ATO and the Superannuation Complaints Tribunal; consumer protection measures; and reform of the regulation of superannuation fund trustees.

Review of the Insurance Contracts Act (Minister for Revenue and the Assistant Treasurer media release No. 105/03, 18/11/03)

Senator Coonan and Parliamentary Secretary to the Treasurer Ross Cameron have released a report on the first phase of the Review of the Insurance Contracts Act 1984 (Cth). The report's focus is on the impact of s54 'claims made' and 'claims made and notified' policies. The aim of the Review is to address the high cost and lack of availability of professional indemnity and similar types of insurance. Of particular concern is the current judicial interpretation of s54 which outlines the circumstances in which insurers cannot refuse to pay claims.

For more, see the media release and a link to the report.

ASIC gives limited Class Order relief for general advice in offer documents provided to wholesale clients (ASIC media release No. 03-36, 12/11/03)

ASIC has released a new Class Order (CO 03/911) giving licensing relief for entities that do not require a licence for dealing in particular financial products because of s766C(4) of the Corporations Act 2001 (Cth) (the self-dealing exception). No licence is required where an offer document is given to wholesale clients by these bodies and the document contains only general advice about its own securities.

For more, see the media release.

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ACCC to publish reasons for its merger decisions (ACCC media release No. 233/03, 12/11/03)

Chairman Graeme Samuel has announced the ACCC will extend its explanations of the reasons for its merger decisions to cases where a merger was rejected, approved with enforceable undertakings, or if the parties sought public disclosure. The extension is designed to further inform interested parties of the various market conditions and issues that attract its attention. Mr Samuel stressed, however, that the regulator would continue to protect any confidential information received from the amalgamating companies or third parties.

For more, see the media release.

Australian bank profits in context (ABA media release, 11/11/03)

The Australian Bankers Association has released a report prepared by Dr Kim Hawtrey of Macquarie University which asserts that the average non-interest income of Australian banks has declined in the past decade, in contrast to rises in such income from other banks around the world. The report indicates that growth in Australian banks' income is attributable to increases in revenue from wealth management and financial market operations rather than retail banking fees from household, small business and large business.

For more, see the media release.

ASIC seeks comment on draft guidance on management of conflicts of interest (ASIC media release No. 03-338, 29/10/03)

ASIC has called for public comment on a draft guidance paper on the new conflicts management obligation for licensees under the recently announced CLERP 9 legislation. The draft paper incorporates proposals stemming from ASIC's 'Research Analyst Independence' research report and the Technical Committee of the International Organisation of Securities Commissions' report into conflicts of interest.

For more, see the media release.

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Legislation update

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FSR update
Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Cth)

The Superannuation (Government Co-contribution for Low Income Earners) Act 2003 (Cth) has received royal assent. The legislation will reduce the superannuation surcharge rate from 15% to 12.5% over three years and also provides for a scheme whereby the Government will match contributions of low income earners up to a maximum of $1,000 per year.

For more, see the legislation.

Duties Amendment (Land Rich) Bill 2003 (NSW)

The Duties Amendment (Land Rich) Bill 2003 (NSW) has been passed in an attempt to prevent complex accounting manoeuvres being used by investors to avoid stamp duty on real estate. The Bill taxes all investment entities when shares change hands when those entities have fewer than 300 investors (previously 50) and more than 60% of their assets consist of property (previously 80%). Prior to the Bill, NSW had been penalised by the Commonwealth Government Grants Commission for failing to extract sufficient revenue from unit trusts. The Bill is aimed in part at avoiding the incursion of these penalties in the future. Industry and business groups have criticised the Bill as prescribing double taxation, the incidence of tax being both when a company purchases land and when shares are issued.

For more, see the Bill.

State Revenue Legislation Further Amendment Bill 2003 (NSW)

The State Revenue Legislation Further Amendment Bill 2003 (NSW) has been passed and provides for, among other things:

  1. a transfer duty to be imposed on the statutory vesting of NSW land by or under the law of any jurisdiction;
  2. a new s24 of the Duties Act 1997 (NSW) which expands the anti-avoidance provisions to prevent the value of dutiable property being artificially reduced;
  3. transfer rates of up to 5.5% on the premium paid or payable for a lease; and
  4. amendments to s208 of the Duties Act 1997 (NSW).

For more, see the Bill.

Superannuation Safety Amendment Bill 2003 (Cth)

The Government has introduced to Parliament the Superannuation Safety Amendment Bill 2003 (Cth). The Bill requires trustees of superannuation funds regulated by APRA to be licensed, the preparation of risk management plans and enhanced reporting requirements to increase the flow of information to APRA. The Bill is aimed at improving confidence in the Australian superannuation system and thereby encouraging the public to save.

For more, see the Bill.

 

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