1.2 Private equity consultation document

In February 2007 the British Venture Capital Association and a group of major private equity firms asked Sir David Walker to undertake a review of the adequacy of disclosure and transparency in private equity. Following on from this on 17 July 2007 the working group led by Sir David published a consultation document "Disclosure and Transparency in Private Equity".

The consultation document recommends enhanced communication and more substantive reporting by the private equity industry as a whole. The proposals it makes on how this is to be achieved do not involve any changes to existing legislation and include the following:

The consultation period closes on 9 October 2007. The consultation document is available here.

On 17 July 2007, the Corporations and Markets Advisory Committee (CAMAC) released a discussion paper "Long-tail liabilities: The treatment of unascertained future personal injury claims".

The paper responds to a request from the Parliamentary Secretary to the Australian Treasurer, the Hon Chris Pearce, MP, for the Committee to consider the adequacy of arrangements under the law for the protection of individuals who in the future may have personal injury claims against companies. The request refers to the report of the Special Commission of Inquiry into James Hardie in 2004, in which David Jackson QC said that:

The difficulty arises with businesses that have been involved in the manufacture and distribution of products that give rise to health problems or diseases after the lapse of a significant period of time. The onset of some diseases, for instance asbestos-related conditions, is difficult to predict, as there is a long gap between exposure to the product and the manifestation of the disease.

Any move towards making special provision for future personal injury victims has to take into account:

Particular problems also arise where corporate insolvency is involved. The challenge is how to protect victims whose claims may not come to light until after the company has been wound up.

The request from the Parliamentary Secretary asked CAMAC to review a proposal that seeks to protect persons to whom a company has or may have long-tail liabilities. That proposal involved the extension of existing creditor protections to persons with potential future injury claims, a procedure for dealing with those claims in an insolvency and an anti-avoidance provision.

CAMAC invited comments on this proposal and received a number of submissions, which have been taken into account in developing the discussion paper.

In the discussion paper, CAMAC raises various issues and puts forward a number of policy options for further consideration with a view to developing workable solutions.

Some of the questions raised by the Committee are:

The paper also raises questions about the current accounting requirements dealing with the disclosure of contingent corporate liabilities.

The discussion paper is available on the CAMAC website.

KPMG Corporate Finance's Global M&A Predictor, published on 16 July 2007, suggests that global merger and acquisition (M&A) activity is about to peak, and forecasts a fall in overall deal volumes this year.

Although liquidity remains high, and deal values continue to rise, KPMG expects global deal volumes in 2007 to be below those achieved in 2006, a year during which both average deal size and the number of deals hit record highs.

The forecast, based on a detailed analysis of KPMG Corporate Finance's Global M&A Predictor - a forward looking index of 1,000 leading companies' net debt to EBITDA ratios and price earnings ratios - reveals that pressure has come off, as regards international asset prices, with 12 month forward PE valuations (the valuation ratio of share price to estimated earnings per share) increasing only marginally.

KPMG's research also highlights that significant cash and debt capacity remain. However, a modest decline in deal appetite and confidence, rather than capacity or average deal value, is expected to prevail in the coming months.

Importantly, due to the relatively sound market fundamentals and generally strong corporate balance sheets, KPMG believes that, in contrast to the steep dot-com collapse of 2000, the slow-down will be gradual.

(a) Forecast M&A activity by world region

KPMG's Global 1,000 analysis shows that, in the first five months of 2007, there was a significant discrepancy between the key trend indicators of deal values and volumes. The last time the market witnessed this kind of 'disconnect' - where the average deal size rose, but the number of deals fell - occurred at the height of the dot com boom in 2000.

KPMG's analysis shows that the appetite for M&A transactions appears to be slowing, despite conservative balance sheets. Twelve month forward PE valuations rose marginally to 17.1x compared to 16.8x in both June and December 2006 which implies a restriction on the available "bid" premium in the marketplace. Balance sheet capacity remains conservative but has tightened marginally from 0.85 times to 0.91 times.

Of the major global regions, Europe remains the most positive in terms of potential M&A activity, due to rising PE momentum, while Asia Pacific once again looks the weakest. The US remains static in terms of valuation, suggesting the potential for a slow down.

In terms of sector regions, the best M&A prospects appear to reside in Utilities Europe, Basic Materials North America, Oil and Gas North America, Industrials Europe and Consumer Services Europe with the weakest prospects being Consumer Services Asia Pacific and Consumer Goods Asia Pacific.

(b) Europe

KPMG's analysis shows that Europe continues to exhibit the strongest M&A picture out of all the major global regions. Twelve month forward PEs for those constituents within KPMG's Global 1,000 stood at 16.2x at the end of the first five months of 2007, some 7.3 percent above the 15.1x at the end of 2006. Net debt to EBITDA ratios for the region weakened slightly, from 0.8 times to 0.88 times.

By sector, Utilities are eliciting the most significant "activity" signals, with forward PEs up 12.7 percent to 19.8x. Net debt to EBITDA ratios in European Utilities remain typically among the highest of any sector and have deteriorated slightly from 1.44 x to 1.52 x. Industrials has also shown a strong tendency with PE's up 10.9 percent to 17.7x, with net debt to EBITDA weakening slightly from 1.59 x to 1.65 x.

Consumer Services and Telecoms were also strong (PE up 9.6 percent and 8.4 percent respectively). Oil and Gas was the weakest performer though balance sheets remain very strong with net cash, though this position has deteriorated during the past six months.

(c) The Americas

The U.S. traded sideways in terms of valuation with an almost unchanged forward PE of 17.9x, slightly up from 17.7x six months ago. Similar to Europe, balance sheets remain robust though have deteriorated with net debt to EBITDA ratios of 0.82 times to 0.96 times.

Within the region, the most positive sector is Oil and Gas with forward PEs rising 13.6 percent from 11.7x to 13.3x. Balance sheets remain strong at 0.41 times indicating that this represents the comparatively hot sector going forward. Telecoms is close behind with forward PEs rising 11.2 percent from 15.7x to 17.5x, though net debt EBITDA ratios have deteriorated to 1.41 times. According to Dealogic data this is the fourth consecutive drop in deal volumes. Most other sectors within the U.S. remain relatively stable, though Healthcare has experienced negative developments in forward PEs from six months ago (down 4.1 percent to 17.7x).

(d) Asia Pacific

Asia Pacific has continued to experience a valuation decline, down a further 4.9 percent to 17.0x, compared to 17.9x as at the end of December 2006 and 18.9x as at the end of June 2006 continuing to suggest an "easing" of potential M&A activity. Contrary to North America and Europe, its balance sheet has strengthened with net debt EBITDA falling from 1.0 times to 0.97 times. Furthermore foreign direct investment in Asia is expected to remain strong, particularly China.

The biggest "fallers" contributing to valuation weakness and therefore falling appetite for deals in the region are Consumer Services and Oil and Gas. Consumer Services forward valuation declined 8.7 percent from 22.5x to 20.6x, with Oil and Gas forward PE down by 7.1 percent from 12.4x to 11.5x. Only telecoms remained "warm" with forward PE's up 9.4 percent to 17.5x with net debt EBITDA remaining modest and 0.34 times.

The Australian capital markets reaped a record amount of equity, raising $65 billion in financial year 2006-07, an increase of 50 percent on the previous year, according to KPMG's Capital Markets Survey 2006-2007 released on 16 July 2007.

According to KPMG, the year saw record equity and debt raisings; significant M&A and private equity (PE) activity; a booming mining sector; and an expanding superannuation industry, all enhanced by a relatively efficient regulatory framework.

Placements became the largest source of new equity during the year, exceeding IPOs for the first time since 2004. They raised a total of $19.5 billion in funds from 1414 separate placements.

The survey showed a drop in the average size of floats due to the boom in the resources sector. Smaller companies trying to capitalise on the booming commodities and energy sectors, such as uranium stocks, were a key trend, resulting in a decline in the average IPO value to $47 million. The market witnessed a record breaking 102 floats in the materials sector and 43 floats in the energy sector.

Total equity raised 2005 - 2006 ($ billion)

Australia is now the largest centre for hedge funds and absolute return funds in the Asia Pacific region with current assets under management of $62.7 billion. The assets managed by Australian based hedged funds and fund-of-hedge-funds have more than quadrupled in the past three years.

The survey is available on the KPMG website.

On 13 July 2007, the International Ethics Standards Board for Accountants (IESBA), an independent standard-setting board within the International Federation of Accountants (IFAC), issued an exposure draft proposing to strengthen three components of the independence requirements contained in the IFAC Code of Ethics for Professional Accountants (the Code).

In December 2006, as a result of a comprehensive review, the IESBA issued an exposure draft proposing revisions to the existing independence requirements contained in the Code. In that exposure draft, the IESBA indicated that there were three areas that the IESBA would revise in a future exposure draft:

The IESBA is now seeking comment from interested parties on these three matters.

The exposure draft is available on the IFAC website.

On 12 July 2007, the Committee of European Securities Regulators (CESR) published its second set of guidance on the implementation of the Market Abuse Directive (Ref CESR/06-562b). In this guidance CESR has developed a common understanding amongst its Members regarding treatment of the following aspects of the Directive and associated issues concerning market abuse.

(a) What constitutes inside information?

The guidance in this context gives: further clarification on 'information of a precise nature' (a term used in the Directive); further guidance on making information public; amplifies what is meant by the concept 'information likely to have a significant price effect'; and provides a non-exhaustive list of indicative types of events or information which may constitute inside information.

(b) When is it legitimate to delay the disclosure of inside information?

The guidance provides illustrative examples of the two circumstances where the Directive generally recognises a potential legitimate delay of disclosure of insider information (for example 'negotiations in course' and 'decisions taken which need the approval of another body'). Depending on the circumstances of the specific case in question, a delay can be legitimate where there are confidentiality constraints relating to competitive situations; or product development or selling of major holdings in another issuer that could be jeopardised by disclosure.

(c) When does information relating to a client's pending orders constitute inside information?

This section of the guidance covers what can be defined as a client's pending order and includes factors to be used in an assessment of when inside information would be involved; in particular it provides further specification of the terms 'price sensitivity' and 'precise nature'.

(d) Insider lists in multiple jurisdictions

To reduce the burdens on issuers that are subject to the jurisdiction of more than one EEA Member State with respect to insider list requirements, CESR is recommending that the relevant competent authorities recognise insider lists prepared according to the requirements of the Member State where the issuer in question has its registered office, thus leading to a mutual recognition system.

On 12 July 2007, the European Commission put forward measures which would simplify the business environment for EU companies in the areas of company law, accounting and auditing. The proposed measures, which are set out in a Communication, would remove or reduce a range of administrative requirements that are considered outdated or excessive. All interested parties are invited to comment on the proposals by mid-October 2007.

(a) Proposed simplification measures

The Commission would like to know stakeholders' views on a range of possible simplification measures. The key measures under consideration are:

On the basis of discussions with Member States, the European Parliament and stakeholders, the Commission will carry out full and comprehensive impact assessments, which will also take account of administrative costs.

Comments can be sent directly to Unit MARKT.F.2.

(b) Background

The European Council of March 2007 underlined the importance of reducing administrative burdens for EU businesses. The Commission has outlined the way for achieving this objective by adopting a simplification program.

European company law, accounting and auditing have been identified as priority areas within this initiative. First analyses carried out by a number of Member States have shown that administrative costs caused by EU rules in these areas are particularly high.

The Communication should also be seen in the context of the Commission's forthcoming review of the Single Market, which is part of the "Citizens' Agenda". The final report on this initiative will be presented in autumn 2007.

The Communication is available on the Europa website.

On 11 July 2007, the Australian Prudential Regulation Authority (APRA) released a paper that sets out its response to submissions on its proposals on securitisation.

These proposals updated APRA's existing prudential framework for securitisation to incorporate the new Basel capital adequacy regime, known as the Basel II Framework, as well as market developments.

APRA's response paper is accompanied by a final draft Prudential Standard APS 120 Securitisation that incorporates a number of amendments suggested in the consultation process.

The final draft prudential standard sets out the general requirements applying to the involvement of an authorised deposit-taking institution (ADI) in securitisation activities, as well as the methodology for the calculation of an ADI's credit risk regulatory capital requirement for securitisation exposures.

The proposals form part of the Basel II capital adequacy regime for ADIs that will come into force on 1 January 2008. The full suite of Basel II prudential standards is expected to be finalised in late 2007.

Comments on the response paper and the final draft Prudential Standard APS 120 Securitisation can be submitted via email by 10 August 2007.

The documents are available on the APRA website.

On 9 July 2007, the Committee on the Global Financial System (CGFS) released a report entitled "Financial Stability and Local Currency Bond Markets". It was prepared by a working group chaired by David Margolín, General Director of Central Bank Operations Bank of Mexico.

In releasing the report, Mr Margolín pointed out that the rapid development of local currency bond markets over the past five years or so had strengthened the financial systems of many emerging market economies (EME). Currency mismatches, the cause of so many earlier crises, have been eliminated or substantially reduced. Foreign financial institutions are channelling increasing volumes of funds into these markets. Many countries have therefore overcome the supposed inability to borrow in local currency. They have done this by adopting better macroeconomic policies, more prudent debt management strategies and significant financial sector reform.

Mr Margolín noted that the Working Group nevertheless identified certain features of EME bond markets, which reflect the comparative immaturity of these markets.

These characteristics could create significant financial system risks. He drew attention to four key points:

The full report is available on the BIS website.

On 9 July 2007, the UK Auditing Practices Board (APB) announced a review of its Ethical Standards for Auditors (ESs). The review is designed to ensure that the ESs are consistent with changes in the law which will arise from the implementation of the Statutory Audit Directive in 2008 and reflect developments and research since they were originally issued in 2004.

The APB intends to issue an exposure draft of its proposed revisions to the ESs later in 2007. An accompanying consultation paper will describe the rationale for the proposed revisions.

As part of its review the APB has undertaken two research studies and has published a summary of this work. The studies involved:

The APB research is focussed on the corporate experience; information on the reaction of auditors has been provided by the accountancy bodies and academic research has recently been undertaken that provides a valuable insight into the views of investors.

Further information is available on the FRC website.

On 2 July 2007, the Australian Prudential Regulation Authority (APRA) released details of proposed changes to capital requirements for authorised deposit-taking institutions (ADIs) and general insurers (GIs).

These proposed changes are outlined in a discussion paper and incorporated in draft Prudential Standards APS 110 Capital Adequacy and APS 111 Capital Adequacy: Measurement of Capital. In addition, to maintain consistency in APRA's approach to capital adequacy between ADIs and GIs, a number of these amendments will be carried over to Prudential Standard GPS 110 Capital Adequacy.

The proposed changes arise from the adoption of the Basel II Capital Framework in Australia, finalising APRA's treatment of conglomerate groups containing one or more locally incorporated ADIs and responses to accounting and market developments since the standards were last updated.

APRA proposes to finalise and issue the ADI prudential standards in late 2007. They will have effect from 1 January 2008 as part of a substantial set of changes to prudential standards to implement the Basel II Capital Framework. Changes to capital requirements for GIs will be implemented in 2008.

The discussion paper and the draft prudential standards for ADIs are available on APRA website.

On 2 July 2007 it was announced that the Australian Parliamentary Joint Committee on Corporations and Financial Services is to inquire and report on the engagement and participation of shareholders in the corporate governance of the companies in which they are part-owners, with particular reference to:

Written submissions are invited and should be addressed to:

The Secretary
Parliamentary Joint Committee on Corporations and Financial Services
Department of the Senate
Parliament House
Canberra ACT 2600

The closing date for submissions is 14 September 2007.

For further information please contact:

Committee Secretary
Parliamentary Joint Committee on Corporations and Financial Services
Department of the Senate
PO Box 6100
Parliament House
Canberra ACT 2600
Australia
Phone: +61 2 6277 3171
Fax: +61 2 6277 5719
Email: corporations.joint@aph.gov.au

On 2 July 2007, the UK Financial Services Authority (FSA) published the results of its review of controls over inside information in relation to public takeovers and sets out its next steps.

The review identified a number of areas where both regulated and non-regulated firms could strengthen their controls around inside information. Key areas where improvements could be made were the following:

The FSA will be doing further work on these and other controls with FSA regulated firms through its ongoing supervisory relationships. In relation to non-regulated firms the FSA is working with other industry bodies to consider ways to share the good practice points it has identified and thus help to raise overall standards. As part of this the Markets Division is progressing work on a Statement of Good Practice, which could be used as a basis to demonstrate high standards and robust controls for handling inside information.

The review helped identify the factors that could contribute to the different types of leaks that may occur around public takeovers: accidental leaks, where staff may have inadvertently allowed information to escape into the public domain; intentional leaks to the media for strategic positioning; and intentional leaks for market misconduct purposes.

Further information is available on the FSA website.

On 28 June 2007, the New Zealand Securities Commission announced that the New Zealand Exchange Limited (NZX)'s performance as a registered exchange continues to be good, according to the Securities Commission's annual oversight review of the exchange.

The Commission's overall conclusion is that NZX is satisfying its obligation to operate its markets in accordance with its conduct rules. The Commission does make some specific recommendations for improvement, and has communicated its concerns and recommendations to NZX, NZX Discipline and the Special Division.

The Commission reviewed NZX's performance of its regulatory functions as a registered exchange under the Securities Market Act 1988. This review focussed on NZX's arrangements in the 2006 calendar year for discharging its obligations.

The Commission reports on NZX's performance under the following headings:

Among its recommendations, the Commission notes:

The review is available on the New Zealand Securities Commission website.

On 28 June 2007 the Monetary Authority of Singapore (MAS) and Singapore Exchange Limited (SGX) released the findings from a study they had commissioned on the current state of corporate governance of SGX-listed companies in Singapore. This is the first comprehensive review of the state of corporate governance practices of SGX-listed companies based on key areas in the Singapore Code of Corporate Governance since the Code was introduced in 2001.

Associate Professor Mak Yuen Teen of the National University of Singapore carried out the study. He reviewed the annual reports of 659 mainboard and SESDAQ-listed companies to assess how well they disclosed and implemented the best practice guidelines as set out in the Code. He also held discussions with a number of independent directors and other market participants. The report sets out eight key recommendations to strengthen corporate governance practices of SGX-listed companies.

MAS and SGX will study the report findings to help determine what practical steps they can take with industry stakeholders to enhance corporate governance of SGX-listed companies. MAS and SGX are exploring two immediate initiatives.

The first, in conjunction with the Singapore Institute of Directors (SID), is to initiate a review of how they can significantly enhance current efforts in director training and professional development in Singapore.

The second is to examine giving practical guidance for audit committees on how they can better perform the critical role they play in the performance and governance of listed companies. MAS and SGX will discuss these and other initiatives with various stakeholders, including the Accounting and Corporate Regulatory Authority (ACRA), and professional associations such as the Institute of Certified Public Accountants of Singapore (ICPAS) and SID.

The full report is available on the MAS website.

On 27 June 2007, the UK Professional Oversight Board (POB), part of the Financial Reporting Council, published the third annual report from its Audit Inspection Unit (AIU) on findings from its audit quality inspections for 2006/7.

Based on its work, the AIU considers the quality of auditing in the UK to be fundamentally sound. Subject to the agreement of satisfactory action plans by firms in response to the AIU's recommendations, it anticipates recommending the continued audit registration of all firms for which it undertakes full scope inspections.

The AIU considers this has been a challenging year for the audit firms given the implementation of IFRS and the first full year of application of the ISAs (UK and Ireland) and the APB Ethical Standards and acknowledges the considerable effort made by firms to respond to the challenges arising from these changes.

In relation to the implementation of IFRS, the AIU was satisfied with the audit work and accordingly has made no recommendations on this issue. In the AIU's view, this reflects both the significant level of resources allocated and the robustness of the approach taken by firms to the challenges presented by the implementation of IFRS.

The implementation and application of the ISAs (UK and Ireland) was a key area of focus of the AIU's inspection visits in 2006/7 and it has made recommendations in relation to both the firms' methodologies and systems as well as the training required for staff particularly in relation to the audit risk and fraud ISAs (UK and Ireland). These particular ISAs (UK and Ireland) contained a significant number of new requirements and the AIU considers further work is required by the firms to embed these requirements within their audits.

The AIU notes the significant progress made by all firms in addressing prior year recommendations. The AIU is pleased to note the positive response by all firms to their recommendations, with few instances being identified where no action has been taken to implement the recommendations.

However there is one area where the AIU considers there has been no clear progress from the prior year and that relates to the quality of documentation on file to support key audit judgments. The AIU stresses that if key judgments are not properly recorded then there is a substantial risk that the rationale may be incomplete. A focus on key audit judgments is central to the principles-based approach to auditing in the UK.

The AIU report contains 21 recommendations to the profession arising from the 2006/7 inspection visits across 18 areas as set out below. Recommendations relate to the principles underlying a particular standard as well as the specific requirements.

On 27 June 2007, the UK Financial Services Authority (FSA) published the first proposals for discussion from the Retail Distribution Review (RDR). The Discussion Paper (DP) represents ideas from the market and consumer representatives involved in the RDR and follows six months work to address the key causes of persistent problems in the retail investment market.

The ideas seek to improve the current standards of professionalism; find more cost-effective ways of making advice available to a wider range of consumers; and improve consumer understanding of what they are getting for their money.

To achieve this, the key proposal is that the regulated investment advice market could be divided into two parts giving choices to firms and greater clarity to the consumer. These could be summarised as:

During the DP's six month consultation period, which ends on 31 December 2007, the FSA will be actively seeking the views of industry, consumers, professional and trade bodies. As well as undertaking further research on the impact of the ideas in the DP. The FSA aims to publish a feedback statement in Q2 2008.

The discussion paper is available on the FSA website.

On 27 June 2007, the UK Financial Service Authority (FSA) published a Discussion Paper (DP07/2), on 'Platforms: the role of wraps and fund supermarkets'. Platforms are online services used by intermediaries (and sometimes consumers directly), to view and administer their investment portfolios. Significant growth in the use of platforms over the past year is one of the market developments considered by the FSA. The paper aims to stimulate industry debate about the standards firms should meet in offering and using platforms.

The paper is available on the FSA website.

On 26 June 2007, the European Central Bank (ECB) published a report entitled "The euro bonds and derivatives markets". The report describes major developments in markets for euro-denominated bonds and related derivatives over the past eight years. Like its predecessor, "The euro bond market study" of December 2004, it focuses on developments that are predominantly structural and, as such, of a longer-term nature.

The study shows that markets for euro-denominated bonds, although still young in terms of institutional arrangements, have already achieved a high level of efficiency. Private sector issuers are increasingly entering these markets as liquidity conditions improve. Electronic trading is advancing, and efficient derivatives markets complement bond trading. On a global level, the share of euro-denominated bonds in world bond markets is rising.

The report is available on the ECB's website.

On 25 June 2007, the European Financial Reporting Advisory Group (EFRAG), the Accounting Standards Board (ASB) and a number of other European accounting standard-setters published a paper discussing the rationale for including stewardship, or directors' accountability to shareholders, as a separate objective of financial reporting.

The IASB and FASB proposed in their July 2006 Discussion Paper "Preliminary Views on an Improved Conceptual Framework for Financial Reporting" that the converged framework should specify only one objective of financial reporting, that of 'decision-usefulness' for resource allocation. They argued that this objective 'encompasses providing information useful in assessing management's stewardship'.

The paper, prepared under EFRAG's Pro-active Accounting Activities in Europe (PAAinE) initiative, seeks to demonstrate that:

Although a majority of the IASB and FASB respondents were in favour of identifying stewardship as a separate objective of financial reporting, members of the two Boards were still left with some doubts about the strength of the case for a separate objective. One was that the comment letters contained a number of different interpretations of the term 'stewardship' which implied that there was no common understanding of the term among the respondent.

Another question was that the impact on financial reporting of specifying stewardship as a separate objective had not been demonstrated by the respondents through examples.

The paper attempts to respond to these challenges. A core part of the research was to conduct a detailed review of the comment letters received by the IASB and FASB to ascertain whether these questions could be answered by reference to the respondents' views.

The discussion paper is available on the FRC website.

1.22 BIS releases 77th annual report

On 24 June 2007, the Bank for International Settlements (BIS) released its 77th Annual Report. The report notes the performance of the global economy over the last few years has been extraordinary.

Real growth has been maintained around levels that are among the highest recorded in the post-war period, and many of the world's poorest countries have shared in this growing prosperity. Underlying inflation levels have generally remained subdued, despite significant upward shocks to most commodity prices. Real interest rates and risk premia have been uncharacteristically low across the board. Record global trade imbalances have been easily financed and exchange rates have been generally stable. According to the BIS Annual Report, "The combination of developments is so extraordinary that it must raise questions about the source and, closely related, the sustainability of all this good fortune."

BIS General Manager Malcolm Knight highlighted the uncertainties currently facing markets and policymakers. They include the possible resurgence of global inflation, the evolution of current account imbalances, and potential vulnerabilities in financial markets and financial institutions. He noted that behind each set of concerns lurks the common factor of highly accommodative financial conditions. A further tightening of monetary policy might then be needed, as well as action to reduce still high government deficits and debt in many countries. Countries that, in principle, have floating exchange rate regimes should allow their currencies to adjust more freely. Regarding financial sector developments, there could perhaps be more scepticism about the purported benefits of having new players, new instruments and new business models searching aggressively for increased yield.

The annual report is available on the BIS website.

1.23 Product rationalisation - issues paper

On 22 June 2007, the Parliamentary Secretary to the Australian Treasurer, the Honourable Chris Pearce MP, announced the publication of an issues paper to serve as the basis for consulting stakeholders about a product rationalisation mechanism in the managed funds sector. Product rationalisation refers to a mechanism for removing outdated managed funds products by transferring beneficiaries out of these products into new products with modern features.

The Regulation Taskforce (the Banks Committee), in its report of 31 January 2006 entitled "Rethinking Regulation", recommended that the Australian Government, state and territory governments, APRA and ASIC, should, in consultation with industry stakeholders, develop a mechanism for rationalising legacy financial products (Recommendation 5.19). The Australian Government response of 15 August 2006 indicated that it agreed to this recommendation.

The paper sets out, among other things, the main issues that are involved in the development of a product rationalisation mechanism. A description of each issue is provided, together with one or more questions to which responses are being sought. It also sets out for discussion purposes a number of possible product rationalisation mechanisms. Stakeholders are invited to submit comments on the options presented, or submit their own preferred options.

The discussion paper is available on the Treasury website. Submission closing date: 21 September 2007

Address written submissions to:

Product rationalisation project
Corporations and Financial Services Division
The Treasury
Langton Crescent
PARKES ACT 2600

Phone: 02 6263 3293
Fax: 02 6263 2770
Email: prodrationalisation@treasury.gov.au

2.1 ASIC seeks comments on competition for market services

On 23 July 2007 the Australian Securities and Investments Commission (ASIC) released a consultation package on competition for market services (trading in listed securities and market data).

ASIC is considering separate applications from AXE ECN Pty Ltd (AXE) and Liquidnet Australia Pty Ltd (Liquidnet) for Australian market licences.

The Minister - the Hon Chris Pearce, MP and Parliamentary Secretary to the Treasurer - is the decision maker in relation to market licence applications. ASIC's role is to provide advice to the Minister. In order to do that, ASIC is consulting publicly on the implications of the operation of these markets as part of the process of developing its advice to the Minister.

Both AXE and Liquidnet propose to operate markets for trading in securities listed on Australian Securities Exchange (ASX), operated by ASX Limited. AXE and Liquidnet also propose to sell data relating to trading activity on their respective markets.

Information about the consultation process

Respondents and interested parties should read the documents that make up the consultation package. They are:
1. ASIC consultation paper 86;
2. Economic assessment of competition for market services, prepared by CRA International; and
3. Brief overview of the AXE and Liquidnet markets.

The draft operating rules of AXE and the draft Australian operating rules of Liquidnet are available on ASIC's website. ASIC is not seeking comments on the draft rules as part of the consultation process, except where explicitly stated in the consultation paper.

The global operating rules that apply to Liquidnet markets around the world have not been made available on ASIC's website as they contain commercial-in-confidence information.

The ASIC consultation paper 86 is available here.

The economic assessment of competition for market services, prepared by CRA International is available here.

The brief overview of the AXE and Liquidnet markets is available here.

The AXE operating rules are available here.

The Liquidnet operating rules are available here.

The consultation period closes on Friday 17th August 2007.

Submissions should be sent to:
Tracey Lyons
Director, Markets Regulation
Australian Securities and Investments Commission
Level 18
No. 1 Martin Place
SYDNEY NSW 2000

On 23 July 2007, the Australian Securities and Investments Commission (ASIC) released a consultation paper inviting comment on its proposals for administering the new compensation and professional indemnity insurance requirements. These requirements apply to Australian financial services licensees who provide financial services to retail clients.

The new requirements were introduced by regulation 7.6.02AAA of the Corporations Regulations 2001 No. 193 (Cth) on 28 June 2007 and s912B of the Corporations Act 2001 No. 50 (Cth). They make professional indemnity insurance the main way licensees are to meet their compensation arrangement obligations. Licensees are responsible for assessing their business and ensuring they have adequate insurance cover.

The consultation paper seeks feedback on:

ASIC invites comments on the proposals set out in the consultation paper by 14 September 2007.

Background

The obligations under s912B and reg 7.6.02AAA will commence on 1 January 2008 for new licensees and 1 July 2008 for existing licensees.

Regulation 7.6.02AAA sets out the compensation arrangements under s912B and was introduced on 28 June 2007 by the Corporations Amendment Regulation 2007 (No 6) No. 197 (Cth). The regulation provides that the primary method of compliance with the obligation is for licensees to obtain professional indemnity insurance. It also provides that some licensees may rely on alternative arrangements or guarantees from a related company who is regulated by the Australian Prudential Regulation Authority (APRA).

To assist in developing its policy, ASIC commissioned a report into the market for professional indemnity insurance for AFS licensees: Compensation Arrangements for Financial Services Licensees - Research into the Professional Indemnity Insurance Market.

The consultation paper is available here.

The report into the PI insurance market: Compensation Arrangements for Financial Services Licensees - Research into the Professional Indemnity Insurance Market dated December 2006 is available here.

On 5 July 2007, the Australian Securities and Investments Commission (ASIC) launched new regulatory documents and a road map as part of its Better Regulation initiatives.

The launch of the new regulatory documents is marked by the release of the first documents in ASIC's new, user-friendly regulatory guide format - Regulatory Guide 36 Licensing: Financial Product Advice and Dealing (RG 36) and Regulatory Guide 110 Share buy-backs (RG 110).

(a) New regulatory documents

ASIC has rationalised and redesigned its regulatory documents. There will now only be four types of regulatory documents: consultation papers, regulatory guides, reports and information sheets. ASIC has made information more accessible by developing and user-testing new and simpler document layouts and templates.

RG 36 is an updated and re-formatted version of the ASIC Guide Licensing: Financial Product Advice and Dealing (the Advice and Deal Guide) and includes guidance previously in some ASIC frequently asked questions (labelled as 'QFS' on ASIC's website). RG 110 is an updated and re-formatted version of Policy Statement 110 Share buy-backs [PS 110].

ASIC will no longer produce guides or policy statements. Both these categories of documents have been replaced by the new regulatory guide category. The old Advice and Deal Guide and PS 110 have been rewritten in the new regulatory guide format. ASIC guides will now also be numbered.

The role of QFS and their connection with other ASIC publications (such as policy statements, guides and information releases) was not always clear. In some cases, this meant ASIC's policy and guidance on a particular topic was spread across several documents making it hard for users to find the information they wanted. Following the introduction of its new regulatory documents, ASIC will progressively remove QFSs from its website.

They will be:

ASIC has commenced this process with the release of RG 36.

(b) Road map

The regulatory road map is a web-based tool that helps people find class orders and regulatory documents on ASIC's website. It is a subject matter index that links to regulatory documents and class orders on both general and specific topics.

The road map is available on the ASIC website.

On 4 July 2007, the Australian Securities and Investments Commission (ASIC) released a consultation paper outlining a proposal for class order relief to facilitate the provision of certain share and unit sale facilities.

Share and unit sale facilities are facilities that some companies and managed investment product issuers offer to their members from time to time. These sale facilities are generally an easy and cheap way for their members (especially those with small holdings) to dispose of their holdings at or about their current market value.

The consultation paper proposes that ASIC will grant class order relief from a wide range of provisions of the law. This will allow companies and product issuers to offer certain sale facilities and related facilities for the purchase of shares or units, and reduce costs for those companies and product issuers by removing the need for them to apply to ASIC for individual relief before offering such facilities to their members.

The proposed relief will apply to facilities that are made available to members who have small holdings (i.e. less than $5,000 worth of shares or units) and where the shares or units are sold in the ordinary course of trading on a licensed market or approved foreign market. The proposed relief is also subject to other limitations and conditions. The details are set out in the consultation paper.

The class order relief that ASIC has proposed is consistent with individual relief it has granted regularly upon request over the past few years.

ASIC invites comments on the proposals in the consultation paper by 6 August 2007. ASIC plans to publish the final policy by December 2007 following consideration of comments received.

The consultation paper is available on the ASIC website.

On 3 July 2007, the Australian Securities and Investments Commission (ASIC) announced additional relief from the requirement to prepare and lodge financial reports for some companies.

ASIC Class Order [CO 07/505] Variation and revocation of financial reporting instruments amends existing ASIC relief to reflect recent changes in the 'large/small test'. The 'large/small test' is the basis for determining which proprietary companies are required to prepare and lodge financial reports under the Corporations Act 2001 No. 50 (Cth) (the Act).

The changes made by [CO 07/505] affect certain small proprietary companies controlled by foreign companies and registered foreign companies.

(a) Background

A proprietary company that is large for a financial year is generally required to prepare and lodge financial reports under Chapter 2M of the Act. Following amendments made by the Corporations Legislation Amendment (Simpler Regulatory System) Act 2007 No. 101 (Cth) (SRS Act), a company is large if it meets at least two of three criteria:

(a) consolidated revenue for the financial year of the company and the entities it controls (if any) is $25 million or more;
(b) the value of the consolidated gross assets at the end of the financial year of the company and the entities it controls (if any) is $12.5 million or more;
(c) the company and the entities it controls (if any) have 50 or more employees at the end of the financial year.

A proprietary company that doesn't meet at least two of these criteria is considered small. The company generally isn't required to prepare and lodge financial reports unless it is controlled by a foreign company.

The revenue and asset criteria were previously $10 million and $5 million, respectively. The increases in these criteria reduce the number of proprietary companies that are required to prepare and lodge financial reports.

(b) Small proprietary companies controlled by a foreign company

ASIC Class Order [CO 98/0098] "Small proprietary companies which are controlled by a foreign company but which are not part of a large group" relieves small proprietary companies that are controlled by a foreign company from the requirement to prepare and lodge a financial report provided that it is not part of a 'large group'.

The 'large group' test applies the amounts from the 'large/small test' to an aggregation of a proprietary company, its siblings in Australia and their controlled entities. Class Order [CO 07/0505] revises the amounts in the 'large group' test, consistent with the changes made to the 'large/small test' by the SRS Act.

Relief under [CO 98/0098] is normally only available where the directors have resolved to take advantage of the relief no more than three months before the commencement of the financial year and notice of that resolution has been lodged for the public record before the commencement of the financial year using Form 384. For financial years ending 28 June 2007 to 30 June 2008, Class Order [CO 07/0505] allows Form 384 to be lodged by four months after year end or 31 October 2007, whichever occurs first.

(c) Registered foreign companies

ASIC Declaration [CO 02/1432] "Registered foreign companies - financial reporting requirements" relieves a small registered foreign company that is subject to similar restrictions to an Australian proprietary company from the requirement to lodge financial statements with ASIC provided that:

(a) it isn't part of a large group; or
(b) it is controlled by a parent which consolidates the registered foreign company for the entire financial year and lodges its financial statements with ASIC.

Relief is only available if the registered foreign company is not required to prepare financial statements in its place of origin.

The 'large group' test is the same as the test in Class Order [CO 98/0098]. The test has been amended by Class Order [CO 07/0505], consistent with the corresponding changes in amounts under the SRS Act.

Declaration [CO 02/1432] contains no conditions concerning directors' resolutions or lodgement of a notice prior to commencement of the financial year. The amended relief will be available where a financial report has not yet been lodged for the 2007 calendar year and all of the conditions of [CO 02/1432] are met.

(d) Other consequential changes

With the change in the large/small test, some consequential amendments have also been to ASIC Class Order [CO 98/0096] "Synchronisation of financial year with foreign parent company".

Class Orders [CO 05/0083] "Timing of auditor's independence declaration" and [CO 05/0910] "Auditor's independence declaration - exemption" have been revoked as the relief they provided has been incorporated into the Act by the SRS Act.

Further information is available on the ASIC website.

On 3 July 2007, the Australian Securities and Investments Commission (ASIC) released a technical update to Policy Statement 72: Foreign securities prospectus relief [PS 72]. This policy statement describes how ASIC administers the prospectus provisions of the Corporations Act 2001 No. 50 (Cth) for offers of foreign securities and discusses prospectus relief for foreign companies making offers of securities in Australia.

The previous version of [PS 72] has been revised to update legislative references, remove references to outdated pro formas and update the list of 'approved foreign markets'.

Further information is available on the ASIC website or by calling the ASIC Infoline on 1300 300 630.

On 3 July 2007, the Australian Securities and Investments Commission (ASIC) released an updated Practice Note 55 Disclosure documents and PDS: consent to quote [PN 55]. The practice note deals with the requirement in the Corporations Act 2001 No. 50 (Cth) for an issuer to obtain the consent of a person to quote them in a prospectus or PDS (s716(2) and 1013K). Similar requirements apply to bidders' and targets' statements in takeovers.

ASIC has also given class order relief from the consent requirement:

The new class orders give relief to quote:

ASIC has finalised the updated PN 55 after public consultation on a draft.

ASIC's new class orders are in addition to existing ASIC class order relief to quote, for example, public officials and books and journals.

Further information is available on the ASIC website.

On 3 July 2007, the Australian Securities and Investments Commission (ASIC) released a consultation paper on managed investment scheme withdrawal rights and the management of related liquidity risks.

The paper outlines ASIC's proposed guidance and seeks feedback from industry about:

The proposed guidance will be particularly relevant to pooled mortgage schemes. A pooled mortgage scheme is a unit trust that pools investors' money and lends it to various borrowers, with loans secured by mortgages over real property. Investors do not have an interest in a particular loan but have an interest in scheme property as a whole.

ASIC has been prompted to release the consultation paper by its concerns about the risk of a mismatch between what investors are led to expect by disclosure documents and what can happen in practice.

The proposals identify issues that responsible entities may need to consider to make sure they are carrying out their duties properly. They deal particularly with the risk that a registered managed investment scheme might not have enough cash to meet members' expectations about withdrawal. The consultation paper proposes what ASIC thinks are minimum standards to ensure responsible entities appropriately disclose, monitor and manage this risk.

ASIC is seeking comments on the costs and benefits that would apply to ASIC giving guidance on those standards.

Part 5C.6 of the Corporations Act 2001 No. 50 (Cth) (the Act) contains some restrictions on allowing withdrawal from schemes that are not 'liquid' as defined in the Act. The consultation paper discusses certain legal issues raised by these provisions and seeks submissions on whether relief should be granted so that a scheme constitution may provide for more than one withdrawal period to apply at any one time.

ASIC invites comments on the proposals in the consultation paper by 21 August 2007.

Publication of the final policy is expected by December 2007.

The consultation paper is available on the ASIC website or call the ASIC Infoline on 1300 300 630

On 2 July 2007, the Australian Securities and Investments Commission (ASIC) clarified its auditor report requirements under its relief for investor directed portfolio services (IDPS), IDPS-like registered schemes (IDPS-like services) and managed discretionary accounts (MDAs).

The amendments to ASIC's relief clarifies the nature of the auditor report required of electronic transaction facilities made accessible to clients of these services.

The amendments to ASIC's policy were foreshadowed in ASIC's Information Release IR 07-27 "ASIC consults on proposals to review its policy on investor directed portfolio services".

The amendments mean that where electronic access to account information is given to clients of IDPS, IDPS-like and MDA services, auditors will only need to review the information that is displayed at the end of each quarter. The auditor's review is limited in this way provided that:

This relief also applies a materiality test to the auditor's opinion required about whether asset information in annual client statements reconciles with corresponding amounts in the service provider's records.

The changes to ASIC's relief responds to concerns raised by some auditors that the previous form of auditor's report might involve more work than was intended by ASIC's policy.

Background

As a condition of ASIC's current relief for IDPS, IDPS-like and MDA services, clients of these services must be given quarterly reports containing information about transactions, assets and values, revenues and expenses. Alternatively, if a client agrees, this information can be provided electronically on a substantially continuous basis.

Clients must also receive an annual report containing information about transactions, assets and values together with a report of the annual audit of this information. If detailed transactional information is provided via a continuous electronic access facility or in quarterly reports and is subject to an audit report, the information does not have to be repeated in the annual statement.

Where an IDPS or MDA operator or responsible entity of an IDPS-like scheme provides electronic access to information that would be contained in the quarterly report, the report by the auditor that accompanies the annual report must include a statement as to whether or not the auditor has any reason to believe the electronically accessible information was materially misstated.

Further information is available on the ASIC website.

On 27 June 2007, the Australian Securities and Investments Commission (ASIC) released updated Policy Statement 86: Tracing beneficial ownership [PS 86]. This statement provides guidance on how the agency will exercise its powers under the beneficial ownership tracing provisions (Pt 6C.2) of the Corporations Act 2001 No. 50 (Cth).

The previous version of [PS 86] has been revised to:

On 26 June 2007, the Australian Securities and Investments Commission (ASIC) announced the details of a national initiative to ensure that company officers disqualified from managing corporations are not continuing to be involved in the management of companies. The focus of the campaign is on company officers who have been disqualified by ASIC as a result of being involved in two or more failed companies within a seven year period.

Over the last six months, ASIC investigators have conducted assessments in Sydney, Melbourne, Brisbane, Adelaide, Canberra and Perth concerning 56 individuals disqualified by ASIC since 2003. Penalties for managing a corporation whilst disqualified can include fines and up to one year's imprisonment.

Under the Corporations Act 2001 No. 50 (Cth), ASIC can disqualify a person from managing corporations for up to five years provided they have been the director of two or more failed corporations within seven years. These failed entities must have been wound up with the liquidator lodging a report with ASIC regarding the corporation's inability to pay its debts. Since 1 July 2006, ASIC has banned 75 company officers using this power.

On 25 June 2007, the Australian Securities and Investments Commission (ASIC) ASIC released updated versions of Policy Statement 166 Licensing: Financial requirements [PS 166] and Pro Forma 209 Australian financial services licence conditions [PF 209]. ASIC has also withdrawn three guides for Australian financial services (AFS) licensees given clarifications to its policy and guidance.

The updates

The updated versions of [PS 166] and [PF 209] include a number of clarifications and additional illustrations consistent with existing policy.

There are two minor changes to ASIC's policy on financial requirements as follows:

The changes respond to industry related queries about the application of ASIC's financial requirements policy and some of the existing licence conditions. The amendments will help licensees and practitioners in applying ASIC's policy and complying with their licence conditions and effectively reflect the commercial circumstances of certain businesses.

The changes come into effect immediately. An AFS licensee who wishes to take advantage of the changes to PF 209 must apply for a variation to its AFS licence using ASIC form FS03, requesting that the revised versions of all of the conditions and definitions in PF 209 apply under their licence. For more information on how to apply for a licence variation, see Part 1 of the AFS Licensing Kit.

Copies of the updated publications are available on the ASIC website or by calling the ASIC Infoline on 1300 300 630.

On 20 June 2007, the Australian Securities and Investments Commission (ASIC) invited public comment on its proposals about the regulation of investor directed portfolio services (IDPS).

The proposals will be relevant to all operators of IDPS and IDPS-like registered schemes and to advisers who recommend IDPS to clients. Also included are a set of proposals relevant to trustees of superannuation funds about the delivery of product disclosure.

ASIC's proposals aim to:

In April 2006, the Parliamentary Secretary to the Treasurer published a Corporations and Financial Services Regulation Review Consultation Paper. One of the items in the paper sought comment on the need for a review of policy about IDPS. Following public comment suggesting some changes to regulation of IDPS, the Parliamentary Secretary asked ASIC to consider the matter.

This is the first time since its issue that ASIC has undertaken a broad policy review of Policy Statement 148: Investor directed portfolio services [PS 148]. This review is being undertaken in light of the reforms in the Financial Services Reform Act 2001 No. 122 (Cth), technological developments and expansion in the IDPS industry.

The proposals take into account submissions to the PST, ASIC's regulatory experience with IDPS and some preliminary industry consultation.

ASIC will also be amending Class Order [CO 02/294] Investor directed portfolio services and Class Order [CO 02/296] Investor directed portfolio-like services provided through a registered managed investment scheme to clarify what the report of an auditor concerning continuous electronic access must contain.

Submissions about the proposals should submitted via email. The closing date for submissions is 4 September 2007.

Background

IDPS are administration services that facilitate the acquisition and holding of assets by enabling investors to bundle or 'wrap' a number of services including custody of assets, execution and consolidated reporting.

IDPS operate through a technology interface and usually, but not always, through a financial adviser. A key feature of an IDPS is that the client makes all the investment decisions. A wide variety of investments can be accessed via an IDPS. These often include wholesale funds that would not otherwise be available to retail clients.

Where these services are provided as a registered scheme, they are classified by [PS 148] as IDPS-like schemes.

The consultation paper is available on the ASIC website.

The Australian Securities Exchange (ASX) will launch the world's first exchange-traded Contracts for Difference (CFDs) in September 2007.

In preparation for the launch, free public seminars are being held around Australia to introduce traders and investors to the features and benefits of the ASX CFD product range. The seminars will help participants get started in trading and provide the opportunity to meet some of the brokers who will offer ASX CFDs.

The seminars begin on 31 July in Adelaide and continue throughout August and September in Perth, Sydney, Brisbane and Melbourne.

Online registrations are now being taken. Numbers are limited and attendance is free.

In addition to the seminars, ASX is also offering other education programs to help participants understand both the upside benefits and downside risks of trading leveraged investments like ASX CFDs. These include:

ASX CFDs will be listed on the market operated by the Sydney Futures Exchange (SFE). They will initially include the top 50 stocks listed on ASX, key global equity indices, a range of major foreign currency exchange rates, and selected commodities.

Further information on the seminars is available on the ASX website.

(By Anita Siassios, DLA Phillips Fox)

Dennis Pethybridge v Stedikas Holdings Pty Ltd [2007] NSWCA 154, New South Wales Court of Appeal, Beazley JA, Basten JA and Campbell JA, 27 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/june/2007nswca154.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case concerned whether a building contract was made with a company or with an individual who owned the business name used by that company. Stedikas Holdings Pty Ltd (Respondent) argued that its appointed construction manager, Metro West Pty Ltd (Metro), had contracted with an individual who was the registered proprietor of 'C & D Asphalt Services' (C & D) (registered business name under the provisions of the now-repealed Business Names Act 1962 No. 11 (NSW)). The registered proprietor of the business name, Dennis Pethybridge (Appellant), argued that the building contract was made between Metro and Torpoint Investments Pty Ltd (Torpoint) (Torpoint carried on business under the C & D name). The Appellant was also a director of Torpoint.

In a judgment given in the District Court of New South Wales (District Court), the trial judge found that Metro had contracted with the Appellant, and not Torpoint. The Appellant appealed this decision in the New South Wales Court of Appeal (NSWCA), where in a unanimous joint judgment the court allowed the appeal and set aside the orders of the District Court.

(b) Facts

The Respondent was the owner of land on which a shopping centre had been constructed. The Respondent had engaged Metro to act as construction manager for various building works at the shopping centre, which included the construction and extension of new and existing car parks. Metro then engaged the Appellant to submit a lump sum fixed price tender to carry out the construction of a new car parking area and the reworking of the existing car park. John Watton, General Manager of Metro, was the key contact person between Metro and the Appellant.

Evidence was submitted at the trial that demonstrated the various correspondence that was found to amount to contract formation between Metro and either the Appellant or Torpoint. The correspondence was either between Watton and C & D, or Watton and the Appellant. On one occasion, correspondence from C & D to Watton had printed on it the Australian Company Number (ACN) of Torpoint. On another occasion, an invoice (which was sent after formation of the relevant contract) from C & D to Metro bore the C & D name and Torpoint ACN, however it also bore a stamp to the effect of "Torpoint trading as C & D".

The trial judge held that the inclusion of an unidentified ACN at the foot of two pieces of correspondence, together with the Torpoint name on one of those correspondence, was sufficient to displace the prima facie presumption that the Respondent, via Watton and Metro, was contracting with the Appellant, as owner of the registered business name C & D, particularly in view of the fact that the existence of Torpoint was not brought to Watton's attention until after the formation of the contract.

(c) Decision

(i) Identification of the parties

Campbell JA, in the leading joint judgment, concluded for a variety of reasons that it was not the Appellant who entered a contract with the Respondent. First, his Honour stated that identification of the parties to the contract must be made in accordance with the objective theory of contract. Accordingly, he found that Watton's belief of whom he was contracting with was of no significance to this matter, as Watton's belief was subjective. Rather, his Honour found that the correct conclusion to draw from the objective evidence is that a reasonable observer of the communications that led to the entering of the contract, together with the background facts known to the parties, would conclude that the parties intended that the contract would be with whomever it was that was carrying on business under the name C & D (i.e. Torpoint).

Secondly, his Honour found that in accordance with the objective theory of contract, save to the extent that the belief had manifested in his words and actions that were known to the other contracting party, any beliefs that were manifested by Watton in his communications could not be entered into any consideration of who the contracting parties were, when those communications with the Respondent were not themselves known to the other contracting party.

Thirdly, all written correspondence from 'C & D' all expressly bore an indication that it was a corporation, and bore no indication that it was the Appellant. It was also clear that the inclusion of the ACN on both the correspondence and invoice amounted to objective indications that the contract was one with a corporation. His Honour stated that it was irrelevant whether Watton actually observed the ACNs stated on the correspondence; rather, it was relevant that the ACNs were part of the communications that led to the contract.

Accordingly, his Honour found that Watton had sought out and communicated with the entity that carried on business under the name 'C & D', contrary to the trial judge's findings. This conclusion was supported by the principle that once it has been proved who is carrying on business under a particular business name, the evidence leading to that conclusion may overcome the prima facie evidence that arises from section 24, Business Names Act 1962 (NSW). Section 24 stated that if there had been no other evidence tendered, tender of the extract from the Business Names Register would have been sufficient to establish that it was the Appellant who was carrying on business under the name 'C & D'.

(ii) Is it permissible to have regard to subsequent communications for the purpose of deciding with whom the contract was entered?

Campbell JA also considered the issue of whether it is permissible to have regard to subsequent communications for the purpose of deciding with whom the contract was entered. His Honour stated that Australian law was not yet settled in regards to whether, and if so when, it was possible to use post-contractual conduct as an aid to construction of the contract. The more restrictive view, favoured by the NSWCA, is that subsequent communications cannot be looked to as an aid to construction of a contract, but can be looked to as an aid to deciding whether a contract has been entered into at all.

On the restrictive view, in this case his Honour decided that it was permissible to look to the subsequent communications, because the question of whether the contract was entered into with the Appellant, or with Torpoint, was in substance no different to a question of whether there was a contract entered into at all.

(By Rebecca Kovacs, DLA Phillips Fox)

EPAS Limited v AMP General Insurance Ltd [2007] QCA 212, Supreme Court of Queensland, Court of Appeal, Jerrard and Keane JJA and White J, 27 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/qld/2007/june/2007qca212.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

In this case AMP General Insurance Limited (AMP) applied to obtain an order to restrain solicitors and counsel acting for a trustee (EPAS), on the basis that the same solicitors and counsel were acting against the trustee in a closely related matter.

Jerrard and Keane JJA and White J upheld the decision of the primary judge finding that:

(b) Facts

EPAS Limited (EPAS) is the former trustee of The Employees Productivity Award Superannuation Fund (the Fund). At the time when EPAS was the trustee of the fund, individuals who were involved in the management of EPAS allegedly engaged in actions or omissions which depleted the fund.

Utilising its powers under section 50 of the Australian Securities and Investments Commission Act 2001 No. 51 (Cth), the Australian Securities and Investments Commission (ASIC) instituted two matters involving EPAS.

In the first matter (matter 1), EPAS is seeking orders against the individual officers involved in an attempt to restore the money to the Fund.

EPAS also admits that it is liable to make good the losses to the Fund suffered by reason of its own breaches of trust which resulted from the acts and omissions of its officers. However it argues that AMP General Insurance Limited (AMP) issued insurance policies to it and a number of the named defendants which cover them against liability for these losses.

In the second matter (matter 2) the plaintiff is Trust Company Superannuation Services Limited (TCSSL) which succeeded EPAS as trustee of the Fund. In this action TCSSL seeks the same relief from the same defendants as is sought by EPAS in matter 1, however EPAS is also named as a defendant.

The records reveal that the Statements of Claim in each proceeding were prepared by the same lawyers within ASIC. Therefore technically the same lawyers are acting for EPAS as the plaintiff in matter 1, and against EPAS as a defendant in matter 2.

AMP applied to the court for an order restraining the solicitors and counsel who represent EPAS in matter 1 from continuing to act. The main arguments put forward by AMP were that it would be a breach of the lawyer's fiduciary duties to act both for and against EPAS in closely related matters. Further, it was argued that a "fair minded and reasonably informed member of the public" would conclude that it was inconsistent with the proper administration of justice for the lawyers to continue to act for EPAS in matter 1 and against EPAS in matter 2.

(c) Decision

(i) Separate actions not a mere tactic

Keane JA, in his leading judgment, rejected AMP's argument that EPAS would appear as both plaintiff and defendant in the one proceeding if EPAS and TCSSL had not conspired to bring separate actions. Keane JA highlighted that ASIC caused each of the actions to be brought in the names of EPAS and TCSSL respectively, and AMP had made no suggestion that ASIC was not entitled to do so.

Further, the separate actions were required as TCSSL could not sue former officers of EPAS for loss suffered as a result of the breach of their duties owed to EPAS.

Finally, separate actions were required as AMP had issued separate insurance policies to EPAS and TCSSL.

(ii) AMP's arguments rejected

Keane JA noted that AMP could have made its application on a number of bases, including that the prosecution of two actions seeking essentially the same relief is vexatious or an abuse of the process of the court. However, AMP chose to base its argument on matters of procedure, rather than focus on the substantive rights of the parties.

Although it was argued that the lawyers for EPAS were acting in breach of their fiduciary duties, this argument was rejected as the lawyers who represent EPAS as plaintiff in matter 1 do not represent EPAS in matter 2. Therefore, Keane J held that they are not placed in the position of being obliged to serve two masters at the same time.

Keane JA also rejected AMP's argument that EPAS' admission in matter 1 that it was liable to repay money to the Fund demonstrated a willingness by its lawyers to sacrifice EPAS' interests. Keane JA observed that, as stated by the trial judge, there is no inherent vice in a corporate trustee acknowledging its own wrongdoing and then seeking to recover losses from directors and auditors who caused or contributed to the loss. Further, the admission was necessary in order to claim indemnity from AMP. Therefore, it was held that no evidence of misconduct on part of the lawyers for EPAS was proven.

Finally, AMP argued that a fair minded and reasonably informed member of the public would consider the continued representation of EPAS by lawyers who were also acting against them, as an affront to the due administration of justice.

Keane JA held that a fair-minded and reasonably informed member of the public would appreciate that both matters were being brought in the public interest of recovering money which had been lost as a result of wrongful actions. Such a person would also understand that the lawyers were engaged by ASIC to act on its behalf. The lawyers therefore took instructions solely from ASIC and were not acting on conflicting instructions by two masters.

(iii) Application for joinder

Keane JA also rejected AMP's application join EPAS' solicitors as parties to the appeal.

(By Svetlana Zarucki, Clayton Utz)

In the matter of Leonard Thomas Hinde [2007] NSWSC 640, New South Wales Supreme Court, Rein AJ, 22 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/june/2007nswsc640.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

On 12 October 2004, the Australian Photonics Staff Entitlements Trust ("APSET") was created by deed of settlement. The settlor of the trust was Australian Photonics Pty Limited ("APPL").

On 15 November 2004, Chris Palmer was appointed administrator of APPL. On 1 March 2005, APPL entered into a deed of company arrangement (DOCA) pursuant to section 444B of the Corporations Act 2001 No. 50 (Cth).

The trustee of APSET, Leonard Thomas Hinde (Plaintiff), sought to distribute funds held in trust to the eligible employees and all but one of those employees, Dr Angelika Koch, agreed to the proposed distribution and the amount which the trustee proposed to pay to each of them.
By way of summons dated 14 November 2006 the trustee sought judicial advice pursuant to section 63 of the Trustee Act 1925 No. 14 (NSW) ("Act") and orders pursuant to section 81 of the Act.

A notice of appearance was filed by Dr Koch and the Department of Employment and Workplace Relations ("DEWR"), which administered the General Employee Entitlement Redundancy Scheme ("GEERS"). An appearance was made on behalf of the administrator but no formal notice of appearance was filed.

Rein AJ, having regard to the terms of the trust deed, made the directions / orders sought by the trustee.

(b) Facts

The trustee sought judicial advice / orders as follows:

By consent, Dr Koch, DEWR and the administrator were ordered to file and serve evidence and submissions by 2 March 2007.

Whilst Dr Koch did not provide any affidavits to the solicitors for the trustee or the court and did not appear when the matter was listed for directions and hearing she did provide to the trustee's solicitors a document entitled "Statement of Facts of Dr Angelika Koch" dated 26 March 2007.

DEWR accepted that in determining entitlements to be paid to eligible employees the trustee is entitled to take into account GEERS payments and that DEWR did not intend to make any claim for recovery of GEERS payments from the employees to whom payments have been made or to assert a claim against APSET. However, DEWR reserved its position on the question of a claim on the fund established by the DOCA should the trustee pay any surplus over to APPL after payment of entitlements.

(c) Decision

As a preliminary matter, Rein AJ formed the view that it was appropriate for the court to give judicial advice in accordance with section 63 of the Act for the following reasons:

Rein AJ further found that, despite an attack by Dr Koch as to Mr Hinde's standing (on the basis that he was an employee of APPL (but not an eligible employee as defined under the trust deed) and was an unsecured creditor), Mr Hinde was the trustee and entitled to seek relief under section 63 of the Act.

In relation to the issues on which advice / orders were sought, Rein AJ held as follows:

(By Michael Capsalis, Mallesons Stephen Jaques)

Vines v Australian Securities and Investments Commission [2007] NSWCA 126, New South Wales Court of Appeal, Spigelman CJ, Santow JA and Ipp JA, 22 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/june/2007nswca126.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

The Court of Appeal was asked to reconsider the pecuniary penalty ordered against the Appellant due to a reduction (from a prior appeal to the Court of Appeal) of the number of contraventions of section 232(4) of the Corporations Law and their associated declarations.

The Respondent cross-appealed with respect to the initial disqualification period, which it considered inadequate. The Cross-Respondent argued that the trial judge, Austin J, should not have imposed the disqualification period at all because his Honour should have concluded that the Cross-Respondent was a fit and proper person to manage a corporation, the existence of which would have precluded Austin J from imposing a prohibition on the Appellant.

The Court of Appeal unanimously held that the disqualification period should not have been imposed at all, and by majority, reduced the pecuniary penalty from $100,000 to $50,000 to reflect the reduced number of contraventions from the prior appeal. Santow JA, in dissent on the penalty issue, argued that the contraventions did not amount to 'serious' contraventions (a threshold requirement, defined in section 1317EA(5), for the imposition of a pecuniary penalty) and should not have attracted any pecuniary penalty at all.

(b) Facts

This appeal was in relation to a number of breaches of section 232(4) of the Corporations Law, the previous equivalent to section 180(1) of the Corporations Act 2001 No. 50 (Cth), by the Appellant who was the Chief Financial Officer of GIO at the time of a hostile takeover bid by AMP Limited.

The trial judge, Austin J, made eleven declarations in respect to seven contraventions. A pecuniary penalty of $100,000 was imposed, equating to eleven separate penalties of $10,000 for each contravention, with a small discount applied for mitigating factors. His Honour had also made an order disqualifying the Appellant from managing a corporation for three years (which expired on 30 June 2007).

The Court of Appeal, in a previous appeal hearing, had dismissed four contraventions, leaving a total of three contraventions and six declarations.

The three remaining contraventions were the failure of the Appellant:

The Appellant sought to have the pecuniary penalty reduced to correspond to the reduction of the number of contraventions and associated declarations. The Respondent cross-appealed, seeking to have the disqualification period extended.

(c) Decision

(i) The pecuniary penalty and the interpretation of a 'serious' contravention

The majority (Spigelman CJ and Ipp JA) held that Austin J had erred by taking an irrelevant consideration into account when determining the pecuniary penalty, specifically the fact that his Honour had included the individual declarations that were successfully appealed from in the earlier Court of Appeal decision. The penalty was reduced to $50,000, representing the six remaining declarations, discounted by mitigating factors.

Furthermore, Ipp JA held that it was appropriate to determine the seriousness of each contravention separately and that the relevant factors included the degree by which the officer had departed from the requisite standard of care and the consequences, potential or actual, of the contraventions. The majority found that the consequences, especially to shareholders, of the breaches were serious and that therefore Austin J was correct in determining that the breaches were of a serious nature.

In dissent on this issue, Santow JA argued that it was only necessary to examine the circumstances surrounding the breach itself, and not the resulting or potential consequences of that breach when determining the question of seriousness. His Honour found limited support for this argument from previous judicial consideration of the term 'serious misconduct' from workers' compensation cases. However, Ipp JA countered this argument, stating that the interpretation given to the term 'serious' from case law emanating from other statutes was not relevant and that it should be given its plain and ordinary meaning within the context of the Corporations Law. His Honour also briefly pointed out that the knowledge that the DDC had or may have had at the time did not absolve the Appellant of his duty of care and diligence in any way.

In the alternative, Santow JA held that the contraventions arose essentially from only a single course of conduct and that only two declarations could have arisen from those breaches. His Honour therefore fixed the penalty amount to only $20,000.

(ii) The disqualification order and the meaning of a 'fit and proper person'

A unanimous court held that the Appellant was a 'fit and proper person' to manage a corporation and that therefore the trial judge was precluded, pursuant to the threshold requirement of section 1317EA(4) of the Corporations Law, from making an order under section 1317EA(3)(a) disqualifying the Appellant from managing a corporation. Spigelman CJ also found that the reliance upon all contraventions, including the rejected ones, amounted to Austin J taking into account irrelevant considerations when determining whether the Appellant was a fit and proper person.

The test that Spigelman CJ utilised for determining a 'fit and proper person' was broadly construed to include the Appellant's capacity to manage within any role of management and within any corporation. His Honour conceded that, when interpreted in such a broad manner, the provision appeared to create a very high threshold that would have been difficult to meet in most circumstances. Furthermore, when determining fitness, the court should take into account the whole of the Appellant's experience and range of qualifications. The strong evidence presented at trial with respect to the Appellant's exemplary work ethic and skill post-GIO was given substantial weight by the court and, even when balanced with the seriousness of the contraventions, still resulted in the conclusion that the Appellant was a fit and proper person to manage a corporation.

The Respondent's cross-appeal was dismissed, as they had provided no additional argument to support an extension of the disqualification order other than the initial reasoning of the trial judge.

(By Sabrina Ng and Felicity Harrison, Corrs Chambers Westgarth)

In the matter of Actew Corporation Ltd v Mihaljevic [2007] ACTSC 39, Supreme Court of the ACT, Master Harper, 22 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/act/2007/june/2007actsc39.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case addresses two separate issues regarding privilege claims during discovery. The first relates to a letter containing privileged material that mistakenly formed part of the plaintiff's list of discoverable documents and was subsequently disclosed to the first defendant. The second relates to various internal memoranda and correspondence over which the plaintiff claims privilege, on the basis that the documents were communications by the plaintiff and its legal counsel and board secretary, Mr Macara.

It was held that the plaintiff had waived privilege over the letter, however the waiver did not extend to the actual legal advice that was referred to in the letter.

With the various in-house documents, Master Harper considered each document individually and just over half of the documents were found to have privilege attached to them.

(b) Facts

The letter over which the plaintiff later claimed privilege in the application was written by a company manager to a CEO regarding a dispute the plaintiff was involved in. On page three, it outlined two legal options available to the plaintiff and also expressed Mr Macara's views on these options. The letter explained that the options set out were taken from a formal advice prepared by Minter Ellison to Mr Macara, and the author of the letter assumed the reader had perused this advice.

A solicitor of Minter Ellison, who was undertaking the preparation of the plaintiff's discovery in the dispute, reviewed a large number of documents and categorised them as relevant and discoverable or relevant and privileged. The letter formed part of the discoverable list, although the solicitor later gave evidence in the application that this was inadvertent as she had not picked up that the paragraphs on page 3 summarised legal advice.

The solicitor for the defendant was given access to and inspected the plaintiff's discoverable documents. The letter was tagged as relevant for copying and subsequently provided to the defendant. In this application, the plaintiff sought a declaration that the privileged portion of the letter was protected by client legal privilege and an order that the defendant deliver up any copies. The defendant claimed that privilege had been waived over the letter and that the plaintiff had also waived privilege over the Minter Ellison advice.

The second dispute (which was given less attention in the judgment) related to a number of documents over which the plaintiff claimed privilege. The documents were said to be confidential communications between the plaintiff and Mr Macara (as its in-house lawyer) or confidential documents prepared by Mr Macara or other staff for Mr Macara, for the dominant purpose of either legal advice or litigation. The defendants argued that client legal privilege was not available because Mr Macara was not acting as a lawyer but rather as a managerial executive of the plaintiff. The judgment notes that at all times Mr Macara's name was on the role of legal practitioners and he held an unrestricted practising certificate.

(c) Decision

In considering whether the plaintiff had waived privilege over the letter, Master Harper turned to relevant case law such as Sovereign Motor Inns Pty Ltd v Bevillesta Pty Ltd [2000] NSWSC 521, Meltend Pty Ltd v Restoration Clinics of Australia Pty Ltd (1997) 145 ALR 391 and Guiness Peat Properties Ltd v Fitzroy Robinson Partnership [1987] 1 WLR 1027. Master Harper considered that the letter was, on its face, not an obviously privileged document and acknowledged that solicitors often have extreme time pressures within which they must review documents and put on their client's discovery. As such, Master Harper adopted the principle from Guiness Peat and quoted in Meltend: where solicitors mistakenly include a document in respect of which privilege could properly have been claimed, the court will ordinarily permit the solicitors to amend the list of documents at any stage before inspection; but once inspection has taken place, the general rule is that it is too late to correct the mistake. Accordingly, Harper M found that privilege over the letter had been waived. However, as the Minter Ellison advice had not been inspected by the defendant, it was held that "it would be highly artificial to impute.an intention to waive privilege in that letter" over the advice and as such, the advice was still privileged.

With the documents relating to Mr Macara, Master Harper considered that within Mr Macara's duties for the plaintiff, half were clearly legal and the other half administrative and managerial. Adopting the principle regarding in-house communications set out in The Commonwealth of Australia v Vance (2005) 158 ACTR 47, Master Harper looked individually at each document to determine whether it fell within the category of confidential communications or documents prepared for the dominant purpose of either legal advice or professional legal services relating to a current or pending proceedings within sections 118 and 119 of the Evidence Act 1995 No. 2 (Cth).

Of the 15 documents, 7 were found to be privileged and a further 2 were found to contain privileged material which could be redacted.

(By Simon Pitt, Freehills)

Guiseppe v Registrar of Aboriginal Corporations [2007] FCAFC 91, Federal Court of Australia, Full Court, Gyles, Edmonds and Buchanan JJ, 15 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2007/june/2007fcafc91.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This was an appeal from the decision of a single judge of the Federal Court. The appeal was allowed, rendering invalid the appointment of an administrator to an Aboriginal corporation formed pursuant to the Aboriginal Councils and Associations Act 1976 No. 186 (Cth) (the Act). The reasoning of the joint majority judgment was premised on the unreasonably short period of time allowed for the preparation of a response to the notice regarding the appointment. Buchanan J would have also held that the appointment was invalid on the ground that there was no prior approval, as required by the Act.

(b) Facts

The Mutitjulu Community Aboriginal Corporation (the Corporation) was established south west of Alice Springs in the Northern Territory under the Act. Its objects revolved around improving the life and well being of the members of the community.

Section 71 of the Act empowered the Registrar of Aboriginal Corporations (the Registrar, constituted by Pt II of the Act) to appoint an administrator to an Aboriginal corporation if the Registrar 'considers that there may be reasonable grounds'. The Registrar is nonetheless obliged by that provision to provide the corporation with an opportunity to show cause why an administrator should not be appointed. The Registrar is further required to allow the corporation 'a reasonable period specified in the notice' to respond.

On 30 June 2006, the Commonwealth Department of Families and Community Services and Indigenous Affairs (the Department) informed the Registrar that it would be discontinuing funding to the Corporation from 1 July 2006 and asked for an administrator to be appointed. On 10 July 2006 the Department reaffirmed that funding would not be continued unless an administrator were appointed.

On 11 July 2006, the Registrar served a notice on the Corporation informing it that to avoid the appointment of an administrator it had to show cause why such appointment should not proceed before close of business on 12 July 2006. The governing committee of the Corporation faxed a response to the Registrar on the afternoon of 12 July. Four members of the committee were away from the community and the committee drafted the response without any substantive legal advice.

At approximately 12:30PM on 14 July 2006, the Minister responsible for the administration of the Act (The Hon Mal Brough MP) signed a minute agreeing to a recommendation that another minister be appointed. This was motivated by advice that Mr Brough may have been in a position of conflict regarding the appointment of an administrator in this case. The Hon Kevin Andrews MP was appointed. Mr Andrews signed a minute agreeing to the recommendation to approve the appointment of an administrator some time before 3:44PM on 14 July. It was not until 4:02PM, however, that Mr Brough signed the actual instrument of authorisation appointing Mr Andrews.

On 18 July the Registrar appointed an administrator. Legal action was quickly taken to challenge the appointment. Two main grounds were advanced by the plaintiffs in the course of the proceedings. The first related principally to the reasonableness of the period within which the Corporation had to respond to the notice (the reasonableness of notice issue) and procedural fairness (the fairness issue). The second related to whether the appointment was ultra vires on the basis that the Registrar did not technically obtain approval before appointing the administrator (the prior approval issue).

(c) Decision

The three judges who heard the appeal agreed on the orders to be granted. However, Buchanan J concurred with Gyles and Edmonds JJ on most issues, but his Honour did hand down a separate judgment which provided divergent analysis of the prior approval issue. This divergence did not affect the outcome of the case (and would not have, even if Buchanan J's view attracted majority support).

Due to the substantial agreement between the judges, it is convenient to discuss their Honours' judgments under the rubric of each of the issues introduced above.

(i) Reasonableness of notice

Gyles and Edmonds JJ (with whom Buchanan J agreed) decided that the reasonableness of the period of notice under section 71 of the Act is objectively determinable as a question of fact. This, it was said, was a result of simply construing the words of the section, 'within a reasonable period specified in the notice.' In reaching this conclusion, their Honours rejected the decision in Jameson v Guri Wa Ngundagar Aboriginal Corporation [2001] FCA 1104, where it was found that section 71 gave the Registrar the power to determine what a 'reasonable period should be'. Their Honours did, however, consider that there is a role for limited deference to administrative decisions pursuant to the principles discussed by the majority of the High Court in Corporation of the City of Enfield v Development Assessment Commission (2000) 199 CLR 135 at [39]-[50].

On the facts of the instant case, their Honours found that the one-day period afforded to the Corporation to respond to the notice was not objectively reasonable. This conclusion was reached primarily on the basis that the primary judge 'significantly overestimated' the urgency of ensuring that Commonwealth funding was not withheld. In so holding, their Honours placed particular emphasis on the fact that the Corporation was not responsible for the provision of Centrelink payments or the supply of essential services. Accordingly, their Honours found that urgency could not justify the extremely short notice period, which could not on any view be regarded as giving the Corporation an opportunity to fully consider and respond to the allegations against it. Their Honours also considered that the primary judge underestimated the difficulties faced by the Governing Committee in responding to the notice.

Their conclusion on this issue was sufficient to allow the appeal, however, their Honours also addressed the other issues that were argued.

(ii) Fairness

This ground was premised on two main submissions:

Notwithstanding their acceptance that the facts underlying these submissions were accurate, Gyles and Edmonds JJ (with whom Buchanan J agreed) were not persuaded that the primary judge erred by rejecting this ground because the notice was based on the Department's decision to suspend funding, and not the causes for that decision.

(iii) Prior approval

The final issue was whether the fact that Mr Brough signed the formal authorisation some 18 minutes after Mr Andrews signed the approval invalidated the appointment. Buchanan J disagreed with Giles and Edmonds JJ on this point, thus the positions expounded in the two judgments are examined separately below.

(iv) Gyles and Edmonds JJ

Gyles and Edmonds JJ considered that the appointment of the administrator was valid, and that there was prior approval in the sense required by the Act.

Their Honours were able to reach this conclusion because they considered that the inference that Mr Andrews' approval operated continuously from the signing of the minute to the appointment of the administrator was supported by (a) the presumption of continuance and (b) the presumption of regularity. They further considered that this inference is stronger in the case of a minister of a state than it would be in an ordinary private law context. Accordingly, their Honours held that there was, relevantly, approval before the appointment, which was ultimately not effected until 18 July.

(v) Buchanan J

In contrast with the joint majority, Buchanan J found that the appointment was invalidated by the fact that Mr Andrews' approval was given before he was in fact authorised to execute it.

Buchanan J found that the proper inference to be drawn from the facts as proven was that Mr Andrews thought that he was authorised when he signed the minute when in fact he was not. In so holding, Buchanan J rejected the view of the primary judge that Mr Andrews knew that he would be authorised and that upon authorisation his prior approval would be rendered effective.

(By Henrietta Jones, Freehills)

Aussie Vic Plant Hire Pty Ltd v Esanda Finance Corporation Limited [2007] VSCA 121, Supreme Court of Victoria, Court of Appeal, Maxwell P, Chernov, Nettle, Ashley and Neave JJA, 14 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/vic/2007/june/2007vsca121.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

Esanda Finance Corporation Limited ("Esanda") served a statutory demand on Aussie Vic Plant Hire Pty Ltd ("Aussie"). Aussie challenged the statutory demand at the first instance to a Master of the Supreme Court and then on appeal to a Trial Judge of the Supreme Court of Victoria, who dismissed the appeal (in accordance with previous case law) because the time for compliance with the statutory demand had expired. Aussie appealed again to the Court of Appeal which also dismissed the appeal, despite finding (four to one) that the Trial Judge was empowered to extend the period for compliance, even though the period had expired, under the ordinary meaning of section 429F(2)(a)(i) of the Corporations Act 2001 No. 50 (Cth) ("Act").

(b) Facts

Aussie, a company in the business of plant hire, was party to eleven hire contracts and chattel mortgages for earthmoving equipment with Esanda. During late 2006 Aussie became increasingly indebted to Esanda culminating in the latter serving a statutory demand on Aussie under section 459E of the Act.

Aussie applied to the Master of the Supreme Court of Victoria to have the demand set aside and although Master Efthim dismissed Aussie's application, he extended Aussie's time for compliance with the statutory demand as permitted under section 459F(2)(a)(i) of the Act. Aussie then appealed to Whelan J of the Supreme Court who, believing himself bound by previous case law, dismissed Aussie's appeal given that the time for compliance with the statutory demand (as earlier extended by Master Efthim) had expired. Aussie then appealed to the Court of Appeal.

Three issues arose for determination:

(i) Whether Aussie was required to seek leave from Whelan J to appeal Whelan J's order;
(ii) Whether Whelan J was bound by previous case law to dismiss Aussie's appeal merely because the time for compliance with the statutory demand had expired before the matter came on for hearing; and
(iii) If Whelan J was not bound per point (ii), whether the court had power to extend time for compliance with a statutory demand notwithstanding that the time for compliance had expired.

(c) Decision

(i) Leave to appeal

Section 17A(4)(b) of the Supreme Court Act 1986 No. 110 (Vic) stipulates that leave to appeal is required where the order sought to be appealed is "an order in an interlocutory application". All five judges held that Whelan J's decision to dismiss Aussie's application to set aside Esanda's statutory demand was an interlocutory order (as opposed to a final order) and therefore leave to appeal was required.

In support of their conclusion that Whelan J's order was interlocutory in character, the court distinguished A-Pak Plastics Pty Ltd v Merhone Pty Ltd (1995) 17 ACSR 176 ("A-Pak") and Asian Century Holdings Inc v Fleuris Pty Ltd [2000] WASCA 59 ("Asian Century") and instead relied heavily on Hayne J's reasoning in Mibor Investments Pty Ltd v Commonwealth Bank of Australia [1994] 2 VR 290, emphasizing that:

Therefore an order (such as Whelan J's) refusing to set aside a statutory demand is interlocutory, as it is still open to the debtor company to make a second application to set aside the statutory demand and thus there is no final determination of the parties' rights, whereas an order setting aside a statutory demand at first instance (as occurred in A-Pak and Asian Century) is a final order because the creditor can no longer rely on the demand to have the company wound up.

However, having decided leave to appeal was required, only Chernov J and Ashley J discussed the merits of granting Aussie leave to appeal, with the former in favour on the ground that the issue sought to be raised on appeal was of considerable public importance and the latter strongly opposed on the ground that Aussie was unable to prove one of the two key requirements for a grant of leave to appeal, namely that allowing Whelan J's order to stand would result in substantial injustice to Aussie.

(ii) Whether Whelan J was bound by earlier authority

Whelan J considered himself bound by the decision in Buckland Products Pty Ltd v Deputy Commissioner of Taxation [2003] VSCA 85 ("Buckland") which concerned very similar facts to the present. Buckland made an application, within time, to set aside a statutory demand served on it and, as in the present case, Buckland's application was dismissed by the Master. Buckland's appeal was also dismissed on the ground that, by the time the appeal came on for hearing, the time for compliance with the demand had expired. Crucially however Maxwell P, Neave J and Chernov J distinguish Buckland as, in contrast to the facts here, no order had been made extending Buckland's time for compliance under section 459F(2)(a)(i) and thus, despite the factual similarities, Buckland's case ultimately turned on the interpretation of a different section, namely section 459F(2)(a)(ii), and therefore could be distinguished.

(iii) Power to extend time for compliance after the period has expired

Section 459F(2)(a)(i) of the Act empowers the court to extend the time for compliance with a statutory demand whilst section 70 provides that where the Act confers power to extend the period for doing an act, such power may be exercised even if the period for doing the act has ended. Maxwell P, Neave J, Nettle J and Ashley J therefore characterised the issue of whether the court can extend the period for compliance with a statutory demand after it has expired as a straightforward matter of statutory construction. Not only is section 70 plainly capable of applying to section 459F(2)(a)(i), to read in words imposing a significant time limit on the power conferred in section 459F(2)(a)(i) is to rewrite the section and thereby exceed the proper bounds of statutory interpretation.

This finding seems to be a major departure from previous case law (including a High Court decision, David Grant & Co Pty Ltd v Westpac Banking Corporation (1995) 184 CLR 265) in which it has been held that the court has no jurisdiction to extend the period for compliance once it has expired. However all four judges distinguished the preceding authorities, whether for erroneous application of the Act or for irrelevancy to the present facts, eventually concluding that those authorities which are relevant are decisions of single judges only and involve departure from the language of the statute. Nonetheless, despite objecting to the past precedents, Nettle J and Ashley J eventually succumbed to their weight, applying the principle that if a particular judicial construction of a statute of doubtful meaning has been accepted for a long period of time it should not be overturned unless by the High Court or Parliament.

By way of contrast, Chernov J asserted in dissent that once the period specified in the statutory demand has expired, the court does not have power to extend it under section 459F(2)(a)(i). In coming to this conclusion, Chernov J relied on previous case law and also on the policy reasons behind the introduction of section 459F(2)(a)(i) and its contextual provisions, Part 5.4 (winding-up in insolvency). Part 5.4 was introduced in 1992 as a complete code governing the winding-up of companies with a stringent, self executing timetable specifying the period within which permitted steps can be taken to challenge a statutory demand. Therefore giving the court power to extend the period for compliance would defeat the principal policy aims of Part 5.4. Chernov J also rejected the application of section 70 to section 459F(2)(a)(i), asserting that as section 70 is of general application it does not affect the operation of the later, specific provisions of Part 5.4 which is a code as to the time limits within which the prescribed steps may be taken.

Thus, although Maxwell P and Neave J would have allowed Aussie's appeal and remitted the matter to Whelan J (and ordered that the time for compliance be extended until 21 days after the determination of Aussie's appeal), Nettle J and Ashley J dismissed Aussie's application holding that if the interpretation of section 459F(2)(a)(i) is to be revisited, it is a matter for the High Court or Parliament. Chernov J also dismissed Aussie's appeal albeit, as discussed above, on the ground that Whelan J did not have power to extend the period of compliance once the period had expired.

(By Stephen Magee)

Wambo Coal Pty Ltd v Stuart Karim Ariff [2007] NSWSC 589, Supreme Court of New South Wales, White J, 12 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/june/2007nswsc589.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary and facts

Wambo was indebted to Quensor. When Wambo purported to pay its debt to Quensor, it accidentally made two payments to Singleton Earthmoving Pty Ltd (which had no connection with Quensor). At the time of payment, Singleton was in liquidation and its liquidator was Mr Ariff.

Wambo had previously been a debtor of Singleton, but had already paid off that debt. However, Singleton's records were out of date and, on the basis of those records, Mr Ariff believed that Wambo's payment was the payment of a current debt.

Mr Ariff then directed a transfer of money from Singleton's bank account to his own firm (for disbursements).

When Wambo found out about the mistaken payments, it demanded the return of the money from Singleton. Mr Ariff claimed that Wambo was still a debtor. Singleton retained the money. Another transfer was made to Mr Ariff's firm's account.

The court held that, from the date when Mr Ariff became aware that the money had been paid by accident, Singleton held the money on trust for Wambo.

Mr Ariff was held liable to account as constructive trustee for the moneys received by his firm after he found out that the payments had been made by accident. Wambo was also entitled to personal remedies against Singleton, but as Singleton apparently had no assets, this was, in the court's words, academic.

(b) Decision

(i) Did Singleton hold the mistaken payments on trust for Wambo?

The court rejected Wambo's argument that the recipient of money paid without consideration holds the money on trust for the payer where there is no presumption of advancement.

However, there was an additional element which allowed the court to rule that Singleton held the money on trust: the fact that Singelton (through Mr Ariff) learned that the money had been paid by mistake:

The fact that the recipient of the money was insolvent did not affect this conclusion. It would be an unwarranted windfall for the company's creditors to share in the payment.

(ii) Did Singleton have the requisite knowledge?

Mr Ariff's mind was Singleton's mind. On the evidence, the court concluded that he had not known that the money had been paid by mistake when the first transfer was made to his firm. However, he had known by the time the second transfer was made.

The court said that, before authorising the first transfer, Mr Ariff had known that Singleton's records had not been updated. However, the issue was not whether he ought to have known that the payments were made in error, but whether he "did know that they had been paid by mistake, or whether he wilfully shut his eyes to that possibility, or wilfully and recklessly failed to make inquiries, or had actual knowledge of the circumstances which would indicate the facts to an honest and reasonable person." That moment arose when Wambo's solicitors informed him that the payment had been in error.

(iii) Mr Ariff's liability as a recipient of trust property

Wambo had taken recovery proceedings against Mr Ariff and Singleton. Mr Ariff argued that, since he was not a recipient of any money, he could not have any liability for the moneys that had been transferred from Singleton. He pointed out that the transfers had been made to his firm (S Ariff Nominees Pty Ltd), and that that firm was not a party to the proceedings.

The court dismissed this argument, on the grounds that the money had been transferred to Mr Ariff's firm at his direction and that the authority for that direction had come from Mr Ariff's status as liquidator of Singleton:

That left the issue of the basis (if any) upon which Mr Ariff might be liable as recipient of the payments.

The court held that he was liable under the first limb of Barnes v Addy, because he had knowledge of the facts constituting the relevant breach of trust (which constituted constructive notice of the breach of trust). The court dismissed Mr Ariff's argument that his only fiduciary duty was to Singleton: in this case, a separate fiduciary obligation arose from the circumstances in which the constructive trust arose.

(By Matthew Davis, Mallesons Stephen Jaques)

Fraser v Australian Securities and Investments Commission, In the Matter of Lanepoint Enterprises Pty Ltd (Receivers and Managers Appointed) [2007] FCAFC 85, Federal Court of Australia, Full Court, Ryan, Finkelstein and Gilmour JJ, 8 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2007/june/2007fcafc85.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case considers the powers of receivers to deal with assets surplus to their appointers' debts where there are second or subsequent mortgagees.

The sole (and common) director of two related companies, both under the control of receivers, sought the provision of funding, from the respective company's assets, to defend ASIC applications to have the two companies wound up. After being refused funding by the receivers, she brought an action under Corporations Act 2001 No. 50 (Cth) section 1321. The trial judge had - although refusing other applications - allowed the application for legal funding in relation to the parent company. The receivers' appeal, supported by ASIC, was unanimously upheld.

Receivers had been appointed to the property development company by the mortgagee. The receivers subsequently completed the relevant apartment development and sold off the properties.

Gilmour and Ryan JJ in their joint judgment assumed that a receiver may make a payment to the mortgagor company, provided that they will have a surplus of funds after their secured creditor has been paid in full and all the costs and expenses of the receivership have been met. This may not be the case, however, where there are other mortgages outstanding, as the receivers may owe a duty to second or subsequent mortgagees.

Finkelstein J looked at both the mortgage instrument and the relevant real property mortgage legislation in Western Australia (which stated the order in which mortgage sale proceeds payments ought be made) and held that the trial judge's order, requiring the receiver to make a payment out of the surplus produced by the sale of the apartments, was not an allowable payment. Accordingly, he ordered that the application under section 1321 could not be successful, and the order made by the judge was 'beyond power'.

The effect of both judgments was the same - the receivers were not permitted to make such a payment in the circumstances of the case. In particular, the presence of a second mortgage and Bowesco's right to any money being subject to a charge by Bowesco itself in favour of Suncorp, meant that the order requiring funds to be provided to Bowesco was 'an excess of power'.

The trial judge's orders had also directed that the funding be provided to Bowesco for the specified purpose of legal advice. Both the joint judgment and Finkelstein J's separate opinion accepted that this specificity was not allowable. Any money being given to Bowesco should fall under the control of its receivers (it too was in receivership), offsetting the debt to Bowesco; not as here, to be funnelled directly to the solicitors.

(b) Facts

In April 2005 Lanepoint Enterprises Pty Ltd ('Lanepoint') borrowed $5,875,900 from Suncorp-Metway Limited ('Suncorp') to develop 40 residential apartments in Western Australia. This money was secured by a real property mortgage over the land, a first debenture over Lanepoint's undertaking and a guarantee from Bowesco Pty Ltd ('Bowesco'), Lanepoint's parent company. In May 2005 Lanepoint granted a second debenture to Perpetual Nominees Limited ('Perpetual'), securing an amount in excess of $2.2 million. Lanepoint defaulted on its obligations to Suncorp. In March 2006, Suncorp appointed receivers to Lanepoint under both the mortgage and the debenture. The receivers were advanced money to complete the development and the apartments were then sold.

Bowesco was owed close to $1 million by Lanepoint. Bowesco's rights were subrogated to the rights of Suncorp as a result of a payment made by Bowesco as guarantor of Lanepoint's debt to Suncorp. Bowesco was placed under a separate receivership.

ASIC made applications to have Bowesco and Lanepoint wound up. The sole (and common) director of the two companies made applications to the receivers, on behalf of Lanepoint and Bowesco, for payments to defray various legal expenses - principally in defending ASIC applications for them to be wound up. These were refused on the grounds that to make such payments would be a breach of the receivers' duties to their appointor, Suncorp, and the debenture holder. The director took the matter to court, relying on section 1321 of the Corporations Act 2001 No. 50 (Cth), which provides that 'a person aggrieved by any act, omission or decision of a receiver . . . may appeal to the Court.'

(i) Trial judge

At trial, the director made applications for funding for the defence of the ASIC proceedings, along with other funding requests for legal and tax advices. French J refused funding for all these requests, except for the defence of the ASIC proceedings against Bowesco. This was the sole focus of attack by the appellants and ASIC in the present appeal. The contentious reasoning in the trial judgment was as follows:

The trial judge (French J) ordered that the receivers provide up to $50,000 to Bowesco; when the receivers failed to do so, in a separate hearing, Siopis J ordered that the receivers pay $20,524 directly to the Bowesco's solicitors on account of fees already incurred.

(ii) Receivers' appeal

The receivers, as appellants, argued that Bowesco's only claim to any money from Lanepoint's receivership was as a creditor of Lanepoint. Any entitlement as a creditor would arise only after payment of all expenses incurred in realising the assets of Lanepoint and payment of all moneys owing by Lanepoint to Suncorp. They felt that 'to make a payment to Bowesco to enable it to meet the identified legal expenses, would be in breach of their duty to Suncorp'.

(iii) ASIC's appeal

ASIC, the first respondent, supported the appeal. ASIC took issue with who the relevant 'aggrieved person' was for section 1321 purposes. ASIC argued that an 'aggrieved person' might include Suncorp, or Bowesco's receivers, but should not include Bowesco or the director, until the secured creditor's debt had been satisfied.

ASIC argued that central to the phrase 'any person aggrieved' is the notion that the behaviour complained of has, or will have, a negative impact on the applicant's property. In the present case, ASIC argued that because the right to which Bowesco had been subrogated was caught by Suncorp's floating charge, it is Suncorp, rather than Bowesco, which could claim to be aggrieved. Moreover, ASIC argued that the real 'aggrieved person' in this case was the receiver of Bowesco and not Bowesco itself.

(c) Decision

The court heard appeals from the two separate orders of single judges (French and Siopis JJ respectively). All 3 judges allowed the appeal, with Ryan and Gilmour JJ publishing a joint judgment and Finkelstein J a separate opinion.

(i) Receivers had no power to pay Bowesco at all

Ryan and Gilmour JJ's joint judgment noted that the principal duty of the receivers of Lanepoint was to apply the proceeds from the assets in discharge of the debt due from Lanepoint to their appointor, Suncorp. They were, however, 'prepared to assume, without deciding', that receivers 'may have a discretion once they are satisfied that they will have a surplus of funds after their secured creditor has been paid in full and after all the costs and expenses of the receivership have been met, to make a payment in advance of their retirement to the mortgagor company'. However, they qualified this by acknowledging that the receivers owed a duty to second or subsequent mortgagees. In the present case, while Bowesco was entitled to a sum approaching $1 million, the right to obtain that money, to which Bowesco was entitled by way of subrogation, was properly subject to a charge by Bowesco itself in favour of Suncorp. Moreover, a second mortgage was also in place to Perpetual. Therefore, in the present scenario, the order requiring funds to be provided to Bowesco's solicitors was 'an excess of power'.

Finkelstein J, in his separate judgment, looked at the relevant legislation dealing with the application of the proceeds of sale of mortgaged land in Western Australia, the Transfer of Land Act 1893 No. 14 (WA). Section 109 provides that mortgage sale proceeds are to be applied in the following order - to payment of expenses involved with the asset's sale, money due the mortgagee, money due on subsequent mortgages and charges and finally surplus paid to mortgagor.

Accordingly, Finkelstein J felt that French J's order - requiring the receivers to make a payment out the surplus produced by the sale of the apartments - would be inconsistent with both section 109 of the Transfer of Land Act 1893 No. 14 (WA) and the mortgage instrument. He stated that 'the receivers would not be permitted to make [the payment] even if they were of opinion that it was desirable to advance money to Bowesco to fund the defence of the winding up application'. He held that the case was one in which the judge was 'being asked to do something they were prohibited from doing by statute and were not authorised to do by the mortgage instrument under which they were appointed'. Accordingly, the application under section 1321 could not be successful, and the order made by the judge was 'beyond power'.

In a matter which was left undecided, Finkelstein J also questioned whether section 1321 - and Part 5.2 of the Corporations Act 2001 No. 50 (Cth) - applies to receivers appointed under real property mortgages; in the absence of argument before him, however, he did not decide the matter.

(ii) Receivers had no power to pay Bowesco on condition it use the money in certain ways

The joint judgment held that the receivers of Lanepoint had no power - as French J had ordered them - to make payments to Bowesco out of the proceeds from the sale of assets under their management, on condition that Bowesco apply the payment in defraying its costs in resisting its own winding up or other legal actions. They were unambiguous that 'the receivers would not be entitled to pay funds under their control to the mortgagor company on the condition that it apply those funds in a certain way or for some specified purpose. Such a condition could potentially cut down the rights of secured creditors of whom the receivers had no notice or of any unsecured creditors and might, if it matters, constitute a preference.'

Finkelstein J also took issue with the directions that money be paid to Bowesco for the specified purpose of defending the ASIC action, thus preventing the money being taken by the receivers of Bowesco. The second order, made by Siopis J, funnelled $20,524 directly to Bowesco's solicitors. Finkelstein J stated that money received by Bowesco should fall under the control of its receivers, not as here, where the effect of the order was 'to confiscate property' belonging to Bowesco's receiver's appointor (again Suncorp).

However, both the joint judgment and Finkelstein J's judgment accepted that the $20,524 paid directly to Bowesco's solicitors pursuant to Siopis J's order could not be re-couped from the director, as the receivers had requested, even though they accepted the payment to the solicitors should not have been ordered. Both judgments noted that she had not personally received the money nor could they seek damages from her suffered by an erroneous judgment.

(By Justin Fox and Agatha Moczulski, Corrs Chambers Westgarth)

Litmus Australia Pty Ltd (in liq) v Paul Brian Canty [2007] NSWSC 670, New South Wales Supreme Court, White J, 8 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/june/2007nswsc670.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case concerned an application by two defendants for security for costs in the amount of $577,077. The application was brought under section 1335 of the Corporations Act 2001 No. 50 (Cth) and rule 42.21(1)(d) of the Uniform Civil Procedure Rules 2005 No. 418 (NSW). The plaintiff company was in liquidation and insolvent.

The plaintiff advanced four grounds as to why security for costs should not be ordered. The plaintiff also contested the quantum of the security sought.

White J held that it was appropriate to make an order for security for costs. It was ordered that the plaintiff provide security in the sum of $260,000 for the costs of the two defendants up to the conclusion of the preparation of evidence for hearing, but not including security for costs of the hearing. His Honour gave liberty to the first and third defendants to apply for further security for costs of the hearing at the relevant time.

(b) Facts

The plaintiff was placed into voluntary administration and on 4 May 2001, a meeting of creditors resolved that it be wound up. The plaintiff sought declarations that the first defendant had breached various duties as a director or officer of the plaintiff by effecting, permitting, or failing to stop the transfer of the business operations and undertaking of the plaintiff to the third defendant. The plaintiff claimed that the third defendant had been involved or knowingly concerned in the first defendant's breaches of duty. It sought compensation under section 1317H of the Corporations Act 2001 No. 50 (Cth) or, alternatively, equitable compensation or, alternatively, damages pursuant to section 1324(10) of the Corporations Act.

The first and third defendants applied for security for costs under section 1335(1) of the Corporations Act.

The plaintiff relied on four grounds as to why the discretion to order security for costs should not be exercised.

The first ground relied on was delay. The plaintiff identified the relevant period of delay as being the period between 27 September 2006, when particulars were provided, and 15 February 2007.

The second ground relied on was that the claim was made bona fide and that the claim was apparently strong. It was undisputed that assets were transferred to the third defendant, and that the first defendant was the director of that company, at least at the time of the transfer. Whether the first defendant was a director of the plaintiff at the time was a matter of contest.

The third ground relied on was that to order security in the amount sought would be to stultify the litigation.

The fourth ground relied on was that the first and third defendants were the cause of the plaintiff's impecuniosities.

(c) Decision

His Honour did not accept that delay on behalf of the defendants in bringing the security for costs application was a reason for refusing the security sought. His Honour regarded the delay between 27 September 2006 and 15 February 2007 in filing an application for security for costs as being of little significance.

The plaintiff acknowledged that it could not point to prejudice arising from delay. To show prejudice it generally must appear that not only will the plaintiff be unable to provide the required security from its own resources, but also that those standing behind the plaintiff who could be expected to benefit from the litigation are unable to provide the required security (Rhema Ventures Pty Ltd v Stenders [1993] 2 Qd R 326 at 333; Rickard Constructions Pty Ltd v Allianz Australia Insurance [2002] NSWSC 1162 at [17]-[18]). His Honour considered that no prejudice could be established.

His Honour did not regard the claimed strength of the plaintiff's claim as a factor against ordering security. His Honour noted that it is not often that it a court is able to form any view as to the strengths of the respective parties' cases on an application for security for costs, so as to influence its discretion in ordering security for costs (Fiduciary Limited v Morningstar Research Pty Ltd (2004) 208 ALR 564 at 574 [37]-[39]). His Honour further noted that it was not possible to do so in this case as the plaintiff's claim was not articulated with precision.
His Honour rejected the contention that to order security for costs would stultify the litigation. His Honour held that as it was not established that Mrs Aitken (the party whom it appeared would primarily benefit from the plaintiff being successful in the litigation) was unable to provide security in the amount sought, or unwilling to provide such security as may be ordered.

His Honour held that the documents tendered did not establish that the first and third defendants were the cause of the plaintiff's impecuniosity. His Honour held that no conclusion as to the cause of the plaintiff's impecuniosity could be drawn in this case, as it could not be identified what assets were transferred, what their value was, and what was the value of the plaintiff's existing liabilities which the third defendant satisfied.

Finally, it was not accepted that security for costs ought be denied on the basis that the defendants were the cause of the plaintiff's impecuniosity. His Honour noted that it would be impossible to reach that conclusion without trying the case.
Accordingly, his Honour held that it was appropriate to make an order for security for costs.

His Honour calculated the quantum of security by reference to costs incurred, and anticipated to be incurred from the filing of the statement of claim. The amount of $260,000 for security was fixed, to cover the period up to the conclusion of the preparation of evidence. The first and third defendants were given the liberty to apply for further security for the hearing when the matter was ready to be fixed.

(By Kathryn Finlayson, Minter Ellison)

Toll (FHL) Pty Ltd v Prixcar Services Pty Ltd [2007] VSC 187, Supreme Court of Victoria, Hollingworth J, 8 June 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/vic/2007/june/2007vsc187.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

The determination by an expert of the value of the plaintiff's shares in accordance with clause 5.1 of the shareholder agreement was final and binding.

The existence of the general dispute resolution clauses did not entitle the plaintiff to have the value determined by arbitration in the event that it disagreed with the expert's determination.

(b) Facts

The plaintiff, Toll (FHL) Pty Ltd (Toll), was required to dispose of its shares in the first defendant, Prixcar Services Pty Ltd, to satisfy an undertaking provided to the Australian Competition and Consumer Commission as part of Toll and its associated companies' takeover of Patrick Corporation.

Relevantly, clause 5.1 of the shareholder agreement between Toll and the second, third and fourth defendants contained a specific procedure for the transfer of shares by a shareholder. The procedure required the 'Fair Value' of the shares to be established by the proposed transferor and the directors (other than the directors appointed by the proposed transferor) or, if agreement could not be reached within a nominated timeframe, the Fair Value was to be fixed by the first defendant's auditors upon the application of either the proposing transferor or the directors.

Clause 5.1(j)(ii) provided that the auditors would 'act as an expert and not as an arbitrator'.

The shareholder agreement also contained two general dispute resolution clauses, one of which provided that, if there was a substantial dispute between the shareholders relating to the interpretation or operation of the agreement, the dispute would be referred to appropriate professional advisers and then, if the shareholders were still unable to agree, to arbitration.

The Fair Value of Toll's shares was not agreed within the nominated timeframe and was ultimately determined by Deloitte Touche Tohmatsu (Deloitte) (who, although not the first defendant's auditors, were appointed by the parties for the purposes of the fulfilling the duties of the auditors in respect of clause 5.1).

Toll did not accept the determination and asserted that, for various reasons, Deloitte had not assessed the Fair Value of its shares in accordance with the shareholder agreement.

The first defendant gave notice to Toll that it intended to transfer Toll's shares to the second, third and fourth defendants on a pro-rata basis in accordance with the procedure set out in clause 5.1.

Toll commenced proceedings in the Supreme Court of Victoria for permanent injunctive relief preventing the first defendant from executing any transfer of shares pending the resolution of the 'dispute' by arbitration. It presented two alternative bases for the relief it claimed:

Accordingly, there were two main issues before the court:

(c) Decision

In relation to Toll's primary argument, Justice Hollingworth held that the determination of Fair Value under clause 5.1 was final and binding and that the general dispute resolution clauses did not permit Toll to have the Fair Value determined by arbitration.

In relation to Toll's alternative argument, her Honour held that Toll had not satisfactorily established the existence of an arbitrable dispute. Toll's criticisms were not that the determination of the Fair Value had not been made in accordance with the terms of the agreement but were essentially in relation to the weight to be given to various factors and the correctness of Deloitte's conclusion. In her Honour's opinion, those criticisms were not sufficient to establish the existence of an arbitrable dispute.

Justice Hollingworth also noted that, even if Toll's criticisms could be characterised in such a way that there could be a dispute which might lead to impeachment, it would be inappropriate in the circumstances to grant the injunctions sought as the injunctions would not settle the dispute between the parties.

(By Rebecca Young, Blake Dawson Waldron)

Hotien Holdings Pty Ltd v Frits Maré [2007] NSWSC 599, New South Wales Supreme Court, White J, 22 May 2007

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2007/may/2007nswsc599.htm
or
http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp

(a) Summary

This case considers facts arising from the terminal illness of Mr Raymond Lord and his interests and directorship in Hotien Holdings. In response to Raymond Lord's illness, another company director purported to appoint new directors and, later, to issue new shares to Raymond Lord's son.

Despite his illness, Raymond Lord remained a director of the company. This case considers whether the directors of Hotien Holdings reach the level of concurrence required to constitute an informal decision of directors related to the management of the company's affairs. Even considering the possibility of an informal "resolution" of directors, the appointment of new directors did not enjoy Raymond Lord's concurrence at the time it occurred, rendering it invalid. The subsequent issue of shares by the "new" directors was also invalid.

(b) Facts

Hotien Holdings Pty Ltd was established as an investment company with 500 shares. Coral Property Holdings Pty Ltd, a company controlled by Raymond Lord, held 498 shares. Raymond Lord also held one of the remaining shares and his ex-wife, Bevery Anne Lord, held the other. Raymond Lord and Frits Maré were the directors of Hotien Holdings.

Raymond Lord suffers from terminal cancer. The court accepted Mr Maré's evidence that, in September 2006, Raymond Lord gave instructions to him to appoint his son, Alan Lord, as a director of Hotien Holdings. On 1 December 2006, Mr Maré gave Raymond Lord a letter outlining their agreed plan to appoint Alan Lord as a director and indicating that a meeting to do so would occur on 31 December 2006.

Raymond Lord did not attend the meeting on 31 December 2006. In his absence, Mr Maré appointed Alan Lord and Mr Martyn Clapp ( a former acquaintance of Raymond Lord) as directors. Following this, Clapp, Maré and Alan Lord passed a resolution to issue 600 shares in the Company and allot them to Alan Lord.

Underlying this case is the fact that Raymond Lord transferred his interest in Coral Property Holdings to another son, Breck Lord. White J notes that "a strong undercurrent of this case is that Alan Lord believes that Beverly Anne Lord and perhaps Breck Lord are influencing Raymond Lord in relation to ... disposition of his assets".

Raymond Lord claims that he never gave instructions to Maré to appoint Alan Lord or Clapp as directors, nor did he receive notice of the meeting to approve the issue and allotment of additional shares. The defendants allege that Raymond Lord ceased to be a director due to mental capacity, thereby entitling Maré to increase the number of directors to the number necessary to reach quorum. They also argue that Raymond Lord's discussions with Maré about the appointment constitute an informal resolution of directors.

Raymond Lord sought a declaration that the appointment of the directors and the issue and allotment of shares were invalid. Alan Lord, in turn, asked the court to appoint a receiver or, alternatively, an accountant to investigate the affairs of the company under section 241 of the Corporations Act.

(c) Decision

(i) Cessation of directorship for reason of mental capacity

Hotien Holdings' Articles of Association provide for the cessation of a directorship due to mental incapacity. The court found that, despite his physically weakened state, there was little evidence that Raymond Lord's mental capacity had been affected.

(ii) Validity of appointment of new directors

The Articles provide that quorum for a meeting of directors is two. They also provide that, where the number of directors is insufficient to constitute a quorum, the remaining director can act to increase the number of directors to a sufficient number. Given that Raymond Lord had not ceased to be a director, there was still the sufficient number of directors to constitute a quorum and Maré could not increase the number of directors on this basis.

The court then considered whether previous conversations between Maré and Raymond Lord about the appointment of Alan Lord constitute an informal appointment. The Articles confer power on a director at any time to appoint a director to either fill a casual vacancy or in addition to the existing directors.

The court first pointed out that there was no evidence at all of Raymond Lord, formally or informally, appointing Clapp as a director.

In relation to the appointment of Alan Lord, the court considered a number of cases where decisions relating to the management of the business of a company have been taken on an informal basis including Swiss Screens (Australia) Pty Ltd v Burgess (1987) 11 ACLR 756, Roden v International Gas Applications (1995) 18 ACSR 454, Polikwa v Heven Holdings Pty Ltd (1993) 8 ACSR 747 and Re Great Salt and Chemical Works; Ex parte Kennedy [1890] 44 Ch D 472. Based on this authority, the court emphasised that it was possible for directors to communicate with each other informally and thus express their concurrence in a decision about the management of the business of the company. It was emphasised, however, that "there must still be a concurrence in doing things in their capacity as directors and in the management of the company's affairs".

The discussions between Maré and Raymond Lord in September about appointing Alan Lord as director were discussions which proceeded on the basis that further steps (eg arrangement of proper resolutions) had to occur prior to the appointment. Raymond Lord was free to change his mind any time up until the appointment took place. Raymond Lord's concurrence at the time of the appointment was necessary and this did not occur. On 31 December 2006, when the appointment was purportedly affected, Maré and Raymond Lord did not concur in reaching a business decision in their capacity of directors.

No formal or informal resolution to appoint Alan Lord as a director had occurred. The court declared the appointment of both new directors on 31 December 2006 to be invalid.

(iii) Validity of issue of shares

It follows that the resolution to issue 600 shares and allot them to Alan Lord was also invalid. It was passed at a meeting of Maré, Alan Lord and Clapp. Maré, the only validly appointed director at the meeting, was unable pass such a resolution himself.

Moreover, even if the resolution has been validly passed, it would not be a valid issue or allotment of shares. The Articles provide that no further shares could be issued or allotted without the consent of each person who was a member of the company. Raymond Lord gave no consent.

The court also considered the resolution oppressive as its purpose was securing majority voting power for Alan Lord, thereby prevent existing members from exercising voting powers (Whitehouse v Carlton Hotel Pty Ltd (1987) 162 CLR 285).

(iv) Standing to bring a claim under section 241 of the Corporations Act

The second defendant, Alan Lord, asked the court to order either the appointment of a receiver or an independent person to investigate the financial affairs of the company under section 241 of the Corporations Act. The court found that he had no standing to request such order, given that he was neither a director, member or creditor of Hotien Holdings.

In addition, the court pointed out that the purpose of section 241 is to allow for interim orders in aid of the principal proceedings and that no relief under the section was necessary to resolve an issue in question in the proceedings.

Finally, the court pointed out that Alan Lord's concern about his father and the state of the business is a matter properly for the Guardianship Tribunal and that these procedures should not be bypassed by an application under section 241.

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