1.1 Guidance on audit committees

On 15 October 2008, the UK Financial Reporting Council published updated Guidance on Audit Committees. The revised guidance encourages audit committees to consider the risks associated with their external auditor leaving the market and to disclose more information about the process by which the auditor was selected in the company's annual report, and provides guidance on the factors to be considered if a group is considering engaging firms from more than one network to work on the audit.

These changes have been made in response to the recommendations of the Market Participants Group's report on promoting choice in the audit market, published in October 2007.

The Guidance on Audit Committees (formerly known as the Smith Guidance) was first published in 2003 and provides guidance to listed companies on the composition, role and responsibilities of the audit committee. Boards are not required to follow the guidance, but it is intended to assist them when implementing the relevant provisions of the Combined Code on Corporate Governance.

The audit committee guidance is available on the FRC website.

1.2 CESR and CEBS publish their advice on the European Commission's review of commodities business
 
On 15 October 2008, the Committee of European Securities Regulators (CESR) and the Committee of European Banking Supervisors (CEBS) published their advice in response to the Joint Call for Technical Advice issued by the European Commission in December 2007 concerning the regulatory treatment of firms that provide investment services in relation to commodity and exotic derivatives.
 
Following up on previous work, as well as industry input provided during a public consultation and two public hearings which took place during May to September 2008, CESR and CEBS have analysed whether the Markets in Financial Instruments Directive (MiFID) and the Capital Adequacy Directive (CRD) treatments of specialist commodity derivatives firms continue to support the intended aims of market and prudential regulation.
 
CESR and CEBS have identified potential for market and regulatory failures with regard to commodity derivatives markets. Market failures may in particular result from asymmetric information and negative externalities. Potential regulatory failures may arise where regulation is not sufficiently adapted to the specificities of the commodity derivatives market or due to different regulatory treatments across the EU.
 
The advice concludes with recommendations with regard to the future scope of the exemptions which exist in MiFID and the prudential treatment of specialist commodity derivatives firms. In relation to MiFID, CESR and CEBS see a case for revising the exemptions in Article 2(1)(i) and (k) of MiFID and to provide a very narrow exemption for the incidental provision of investment services related to commodity derivatives and an exemption for primarily non-financial firms which trade on their own account with sophisticated clients and to ensure a level playing field. Furthermore, CESR and CEBS recommend that the Commission consider whether an additional Article should be included into MiFID which would clarify that firms covered by the exemptions relating to commodity derivatives in Article 2 should not be prevented from being authorised as investment firms.
 
Regarding the prudential treatment of specialist commodity derivatives firms, CESR and CEBS offer two options in their advice. One option would be to require specialist commodity derivatives firms to meet a high-level requirement to have adequate financial resources and qualitative risk management requirements. The second option proposes the full application of CRD to specialist commodity derivatives firms with an exemption from any prudential requirements for firms where this would not impede the overall aims of prudential regulation.
 
The advice is available at on the CESR website.

1.3 Australian government guarantee of deposits and wholesale funding
 
On 15 October 2008, the Australian Government introduced into Parliament several Bills that have the effect of guaranteeing deposits in authorised financial institutions. The government has also announced that it will guarantee wholesale funding by authorised financial institutions.
 
The Financial System Legislation Amendment (Financial Claims Scheme and Other Measures) Bill 2008 (Cth) introduces measures to implement a Financial Claims Scheme (FCS), including a three-year 100 per cent guarantee of deposits in authorised deposit-taking institutions (ADIs), and other arrangements to deal with distressed or failing financial institutions.
 
Schedule 1 of the Bill amends the Banking Act 1959 No. 6 (Cth), the Insurance Act 1973 No. 76 (Cth) and other Acts to establish an FCS, administered by the Australian Prudential Regulation Authority (APRA), to provide depositors in authorised deposit taking institutions a full guarantee of their depositors for a period of three years. After three years the general provisions of the FCS will come into operation, limiting its operation to Australian denominated currency deposits. The Bill includes a mechanism to impose a cap on deposit coverage at that time. The Government has indicated that it will consider this issue at that stage.
 
In addition, the FCS provides compensation to eligible policyholders with claims against a failed general insurer in the event of a general insurer failure.

Schedule 1 of the Bill also includes:

• appropriation arrangements for the FCS's administration and the advancing of funds to depositors and policyholders under the deposit guarantee and FCS; and
• arrangements for the recovery of funds advanced by the FCS and of administration costs through the sale of the closed institution's assets (see also recovery of funds via industry levies under the Financial Claims Scheme (ADIs) Levy Act 2008 and Financial Claim Scheme (General Insurers) Levy Act 2008.

Schedule 2 of the Bill amends the Banking Act 1959 to establish arrangements to improve statutory management of ADIs and the recapitalisation of an ADI. Schedule 3 of the Bill amends the Insurance Act 1973 to establish arrangements to provide for the judicial management of general insurers and facilitate the recapitalisation of a general insurer. Schedule 4 of the Bill amends the Life Insurance Act 1995 to establish arrangements to improve judicial management of life insurers and facilitate the recapitalisation of a life insurer. Schedule 5 of the Bill amends the Financial Sector (Business Transfer and Group Restructure) Act 1999 to establish enhanced arrangements to facilitate the transfer of assets and liabilities between institutions.
 
The Bills are available on the Parliament of Australia website.

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1.4 Principles and practices for sovereign wealth funds
 
On 11 October 2008, the International Working Group of Sovereign Wealth Funds (IWG) published its 'Generally Accepted Principles and Practices for Sovereign Wealth Funds'.
 
According to the IWG, the principles respond to key macroeconomic, financial market, and investment issues raised by the rapid growth in the size and number of sovereign wealth funds globally. Implementation of the Principles by sovereign wealth funds will promote a better understanding of their institutional and operational practices. There are 24 principles which deal with matters such as the legal framework for these funds and their disclosure practices.

The principles are available on the IWG website.

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1.5 Economic survey of Australia 2008
 
On 10 October 2008, the Organisation for Economic Co-Operation and Development (OECD) published the 2008 Economic Survey of Australia.

Major topics dealt with in the report are:

• key challenges;
• raising labour supply;
• enhancing educational performance;
• enhancing the functioning of product and labour markets; and
• improving water management.

The next Economic survey of Australia will be prepared for 2010.
 
The 2008 survey is available on the OECD website.

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1.6 Report of the Financial Stability Forum on enhancing market and institutional resilience
 
On 10 October 2008, the Financial Stability Forum (FSF) published its 'Report on Enhancing Market and Institutional Resilience'. The report builds on the recommendations submitted by the FSF in April 2008 to G7 Finance Ministers and Central Bank Governors for addressing the weaknesses that have produced the present crisis and for strengthening the financial system going forward.
 
The actions endorsed by the G7 for implementation by end-2008 include, as detailed in the report, further measures to strengthen standards and oversight of bank capital and liquidity, risk management standards in financial institutions, valuation practices and accounting standards.
 
Alongside this, the FSF will address additional issues, building on the work of its member authorities and international bodies. It will:

• Monitor and address the international interaction and consistency of emergency arrangements and responses being put in place to address the current financial crisis.
• Work to mitigate sources of pro-cyclicality in the financial system. Work has been set in train on the scope for improvements to the capital regime, loan-loss provisioning practices, compensation arrangements, and the management of interactions between valuation and leverage.
• Reassess the scope of financial regulation, with a special emphasis on institutions, instruments and markets that are currently unregulated.
• Work to better integrate macroeconomic oversight and prudential supervision, to help translate more effectively systemic concerns into concrete supervisory and regulatory responses.

The FSF states that in view of market developments, implementation of certain of the recommendations needs to accelerate:

• Market participants need to move ahead urgently to put in place central counterparty clearing for over-the-counter (OTC) credit derivatives and achieve more robust operational processes in OTC derivatives markets.
• Accounting standards setters must conclude their work promptly to enhance and converge guidance on valuation of instruments in inactive markets, and accounting and disclosure standards for off-balance sheet activities and related risks.

In addition, the FSF calls on:

• Credit rating agencies (CRAs) to enhance their efforts to comply with the FSF recommendations, including by making industry-wide proposals for providing differentiated information or ratings for structured products.
• Private sector organisations that have recommended improvements to industry practices to establish frameworks for rigorously monitoring and reporting on their timely implementation.

The report is available on the FSF website.

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1.7 Report on banks' transparency
 
On 9 October 2008, the Committee of European Banking Supervisors (CEBS) published the findings of an analysis following up on the application of its recommendations in the 'Report on banks' transparency on activities and products affected by the recent market turmoil' published on 18 June 2008.

In the follow-up report, CEBS compares the disclosures by the 22 banks covered in the analysis (19 of which are from the EU) in their 2008 second quarter results with the good practices CEBS identified in the June report, which were endorsed at the July ECOFIN meeting. These good practices cover disclosures on the impact of the market turmoil on results and on exposure levels - which are in line with the recommendations of the Financial Stability Forum (FSF) - as well as information on business models, risk management practices, and accounting and valuation practices.

The main findings of the follow-up report are:

• Around 80% of the banks provide detailed disclosures on the impact of the market turmoil and on exposure levels. For about half of the banks this is an improvement in comparison to the last assessment, especially in terms of granularity. CEBS is of the view that for these areas the disclosures are moving towards the good practices identified in the June report.
• Disclosures on business models and to a lesser extent on risk management practices as well as accounting and valuation practices are less detailed. Most institutions included in the sample still have to improve their disclosures in these areas, although CEBS realises that the timing of the June report may not have allowed all institutions to take the CEBS good practices wholly into account.

The report conveys the following main messages:

• Institutions need to make further efforts to bring their disclosures into line with the good practices identified in the June report. This includes making explicit statements when the exposures and the impact of the market turmoil are very small or zero. These efforts should lead to satisfactory results in forthcoming disclosures.
• The good practices continue to be particularly relevant and helpful in contributing to restoring confidence, especially in the current market conditions, and should be further promoted by CEBS's members.

The report is available on the CEBS website.

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1.8 Global competitiveness rankings

On 8 October 2008, the World Economic Forum published the Global Competitiveness Report 2008-2009. The United States is ranked first, Switzerland is in second position followed by Denmark, Sweden and Singapore. European economies continue to prevail in the top 10 with Finland, Germany and the Netherlands following suit. The United Kingdom, while remaining very competitive, has dropped by three places and out of the top 10, mainly attributable to a weakening of its financial markets. The People's Republic of China continues to lead the way among large developing economies, improving by four places this year and joining the top 30. All of the BRIC economies figure in the top half of the ranking, with China followed by India, Russia and Brazil. Several Asian economies perform strongly with Japan, Hong Kong SAR, Republic of Korea and Taiwan, China in the top 20. In Latin America, Chile is the highest ranked country, followed by Panama, Costa Rica and Mexico.
 
A number of countries in the Middle East and North Africa region are in the upper half of the rankings, led by Israel, Qatar, Saudi Arabia, United Arab Emirates, Kuwait and Tunisia, with particular improvements noted in the Gulf States since last year. In sub-Saharan Africa, South Africa, Botswana and Mauritius feature in the top half of the rankings, with several countries from the region measurably improving their competitiveness.
 
The rankings are calculated from both publicly available data and the Executive Opinion Survey, an annual survey conducted by the World Economic Forum together with its network of Partner Institutes (leading research institutes and business organizations) in the countries covered by the report. This year, over 12,000 business leaders were polled in a record 134 global economies. The survey is designed to capture a broad range of factors affecting an economy's business climate. The report also includes comprehensive listings of the main strengths and weaknesses of countries, making it possible to identify key priorities for policy reform.
 
The Global Competitiveness Report's main competitiveness ranking is the Global Competitiveness Index (GCI), developed for the World Economic Forum by Xavier Sala-i-Martin and originally introduced in 2004. The GCI is based on 12 pillars of competitiveness, providing a comprehensive picture of the competitiveness landscape in countries around the world at all stages of development. The pillars include: Institutions, Infrastructure, Macroeconomic Stability, Health and Primary Education, Higher Education and Training, Goods Market Efficiency, Labour Market Efficiency, Financial Market Sophistication, Technological Readiness, Market Size, Business Sophistication and Innovation.
 
The highlights of the report are available on the World Economic Forum website.
 
The full report is available on the World Economic Forum website.

The full Global Competitiveness Rankings are available on the World Economic Forum website.

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1.9 IMF predicts major global slowdown amid financial crisis
 
The world economy is decelerating quickly buffeted by an extraordinary financial shock and by still-high energy and commodity prices and many advanced economies are close to or moving into recession, the IMF says in its latest World Economic Outlook (WEO) published on 8 October 2008.
 
The world economy is entering a major downturn in the face of the most dangerous financial shock in mature financial markets since the 1930s, according to the WEO, which now expects world growth to slow to 3.0 percent in 2009-0.9 percentage point lower than forecast in the July 2008 WEO Update.
 
Following sluggish growth through the remainder of 2008 and early 2009, the anticipated recovery later in 2009 will be exceptionally gradual by past standards. This is because financial conditions are expected to remain very difficult, even assuming that actions by the US and European authorities succeed in stabilizing financial conditions and in avoiding further systemic events.
 
The 2008 October Report is available on the IMF website.

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1.10 Financial literacy survey
 
On 8 October 2008, the Australia and New Zealand Banking Group Limited (ANZ) released findings of its latest survey of financial literacy showing that young people, seniors, women, particularly older women, those with low levels of formal education and low income earners are significantly behind the rest of the community in financial literacy.
 
The 2008 quantitative study into financial literacy surveyed about 3,500 adult Australians representative of the whole population.
 
The 2008 survey shows:

• financial literacy is strongly related to demographic and socio-economic characteristics;/li>
• those with below average Financial Literacy Scores include:
  • 18-24-year-olds; people aged 70 years and over;
  • women, particularly those aged 70 and over;
  • those whose formal education finished at Year 10;
  • those who are unemployed; and
  • those living on Government benefits or allowances; and
• there is a marked difference in the knowledge and behaviours of those in the lowest 20 per cent of the population (Quintile 1) for financial literacy and those in the highest 20 per cent of the population (Quintile 5).

The survey is available on the ANZ website. 

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1.11 SEC commences work on congressionally mandated study on accounting standards
 
On 7 October 2008, the US Securities and Exchange Commission (SEC) announced additional details on the process and initial steps that the SEC has undertaken to conduct a study on "mark-to-market" accounting, as authorized by section 133 of the Emergency Economic Stabilization Act of 2008, signed into law by President Bush on 3 October 2008.
 
Under legislation enacted this month to help stabilize financial markets, the SEC is required to conduct a study of "mark-to-market" accounting. The study is to be completed by 2 January 2009, in consultation with the Secretary of the Treasury and the Board of Governors of the Federal Reserve System. Under the terms of the EESA, the study will focus on:

1. The effects of such accounting standards on a financial institution's balance sheet./li>
2.  The impacts of such accounting on bank failures in 2008.
3.  The impact of such standards on the quality of financial information available to investors.
4.  The process used by the Financial Accounting Standards Board in developing accounting standards.
5.  The advisability and feasibility of modifications to such standards.
6.  Alternative accounting standards to those provided in [Financial Accounting Standards Board] Statement Number 157.

Further information about the study is available on the SEC website.

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1.12 IOSCO consults on regulatory standards for funds of hedge funds
 
On 6 October 2008, the International Organization of Securities Commissions (IOSCO) published a report for public consultation titled 'Proposed Elements of International Regulatory Standards on Funds of Hedge Funds Related Issues Based on Best Market Practice'. The report is aimed at funds of hedge funds' managers to address regulatory issues of investor protection in light of the increased involvement of retail investors in hedge funds through funds of hedge funds.
 
These proposals were developed following IOSCO's June 2008 'Report on Funds of Hedge Funds,' which identified the issues in the two following areas:

• the methods by which funds of hedge funds' managers deal with liquidity risk; and/li>
• the due diligence processes undertaken by managers prior to and during the life of an investment.

The proposed international regulatory standards would cover the following areas:
 
(a) Liquidity risk

In dealing with liquidity risk the fund of hedge funds' manager should:

• make reasonable enquiries in order to be in a position to consider if the fund of hedge funds' liquidity is consistent with that of the underlying hedge funds, particularly in order to meet redemptions;
• prior to investing, and during the investments' lifetime, consider the liquidity of the types of the financial instruments held by the underlying hedge funds;
• if introducing limited redemption arrangements, consider whether these are consistent with the fund of hedge funds' aims and objectives. Moreover, their operation should comply with the conditions defined in the proposals; and
• before and during any investment, consider whether conflicts of interest may arise between any underlying hedge fund and any other relevant parties.

(b) Due diligence processes
 
These should be carried out prior to any investment being entered into and on a continuous basis following the commitment. They can be divided up into the following areas:

• Elements requiring constant monitoring and analysis by the funds of hedge funds' managers:
  • establishing and implementing appropriate due diligence procedures;
  • assessing the specific legal and regulatory requirements applicable in the hedge fund's jurisdiction; and
  • carrying out appropriate due diligence on the underlying hedge fund whenever it is considered necessary;
• Adequate resources, procedures and organizational structures:
  • documented and traceable procedure for selecting hedge funds;
  • appropriately skilled staff and adequate technical resources to implement the due diligence procedures;
  • capability within the organization to deal with any anomalies identified by due diligence system;
• Regularly assess if selection procedures have been properly met; and
• Outsourcing due diligence:
  • If a fund of hedge funds' manager wishes to outsource any aspect of its due diligence it should (a) ensure that any conflicts of interest are adequately addressed; and (b) assess the extent that outsourcing of due diligence is consistent with the IOSCO Principles on Outsourcing of Financial Services for Market Intermediaries.

The deadline for responses to this consultation paper is 5 January 2009.
 
The consultation report is available on the IOSCO website.

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1.13 Report on causes of the financial crisis
 
The principal source of the financial crisis is a failure in corporate governance at banks, which encouraged excessive short-term thinking and a blindness to risk, says the Association of Chartered Certified Accountants (ACCA) in its policy paper about the year-long financial crisis, published in on 6 October 2008.

The report examines five key areas - corporate governance, remuneration and incentives, risk identification and management, accounting and financial reporting and regulation - and recommends that accepted practices in all these areas need to change to avoid future failures.
 
Key recommendations in the report are:

• Risk management failures need to be addressed. Weaknesses in these areas meant risk management departments in banks did not have sufficient influence, status or power./li>
•  Clearer rather than heavier regulation is required. In the UK, there is confusion about what the Financial Services Authority (FSA) is trying to achieve and the extent to which it is committed to protecting the interests of customers. It is vital that the public know what they are putting their money into.
• Lack of training to enable management to understand complex products and the underlying business models has to be addressed.

The report is available on the ACCA website.

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1.14 New measures for Australian financial services

On 3 October 2008, the Council of Australian Governments (COAG), representing the Federal, State and Territory Governments, announced the timetable for a new structure for national consumer credit regulation. The agreement is to be implemented in two phases.

(a) Phase one

Key elements of phase one include:

• enacting the existing State legislation, the Uniform Consumer Credit Code (UCCC), into Commonwealth legislation;/li>
• establishing a national licensing regime to require providers of consumer credit and credit-related brokering services and advice to obtain a licence from the Australian Securities and Investments Commission (ASIC);
• extending the powers of ASIC to be the sole regulator of the new national credit framework with enhanced enforcement powers;
• requiring licensees to observe a number of general conduct requirements including responsible lending practices;
• requiring mandatory membership of an external dispute resolution (EDR) body by all providers of consumer credit and credit-related brokering services and advice;
• extending the scope of credit products covered by the UCCC to regulate the provision of consumer mortgages over residential investment properties;
• extending the operation of the Corporations Act to regulate margin lending; and
• regulation of trustee corporations.

Phase one legislation to be in place by mid 2009.
 
(b) Phase two
 
Key elements of phase two include:

• enhancements to specific conduct obligations to stem unfavourable lending practices, such as a review of credit card limit extension offers, an examination of State approaches to interest rate caps; and other fringe lending issues as they arise;
• regulation of the provision of credit for small businesses;
• regulation of investment loans other than margin loans and mortgages for residential investment properties;
• reform of mandatory comparison rates and default notices;
• enhancements to the regulation and tailored disclosure of reverse mortgages; and
• examination of remaining existing State and Territory reform projects.

PPhase two legislation to be in place by mid 2010.

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1.15 Two reports on Australian financial services
 
On 2 October 2008, two new reports were published on Australian financial services. 
 
(a) Austrade 2008 benchmark report
 
Austrade, an Australian government agency which facilitates trade and investment, published its 2008 Benchmark Report: 'Australia: a Global Financial Services Centre' on 2 October 2008.
 
According to the report, Australia has the fourth largest pool of contestable investment fund assets and the 7th largest stock market in the world. Finance and insurance is the third largest sector in Australia's economy, generating 8.4 per cent or $78 billion of real gross value added in 2007.
 
The topics dealt with in the report include:

• the world's 20 largest economies;/li>
• resilience of the economy to economic cycles;
• economic growth averages, real GDP;
• Australia's real gross value added by industry
• inward foreign direct investment;
• company gross operating profits;
• percentage of non performing bank loans to total bank loans;
• Australia's exports of goods and services;
• Asia-Pacific exports of commercial services; and
• Australia's exports of education services.

The report is available on the Austrade website.

(b) AFMA 2008 financial markets report
 
Also on 2 October 2008, the Australian Financial Markets Association (AFMA) published its '2008 Australian Financial Markets Report'. The 2008 Australian Financial Markets Report shows a 3.1% increase in overall financial markets turnover. The issues dealt with in the report include the credit crisis and the Australian economy; government debt securities; non-government debt securities; negotiable and transferable instruments; swaps & forward rate agreements; interest rate options; equity and credit derivatives; foreign exchange & currency options; and exchange traded market data.
 
The report is available on the AFMA website.

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1.16 European Commission proposes improved depositor protection and revision of bank capital requirements rules to reinforce financial stability

(a) Commission sets out proposal to increase minimum protection for bank deposits to ?100,000
 
On 15 October 2008, the European Commission forward a revision of EU rules on deposit guarantee schemes that puts into action the commitments made by EU Finance Ministers on 7 October 2008. The new rules are designed to improve depositor protection and to maintain the confidence of depositors in the financial safety net. Under the new rules, the minimum level of coverage for deposits will be increased within one year from ?20,000 to ?100,000, and initially to ?50,000 in the intervening period. Individual Member States can choose to add to these minimum levels. In addition, the payout period in the event of bank failure will be reduced from three months to three days. The proposal now passes to the European Parliament and the Council of Ministers for consideration.
 
The proposal is available on the European Commission website.
 
(b) Proposed revision of bank capital requirements

On 1 October 2008, the European Commission put forward a revision of EU rules on capital requirements for banks that are designed to reinforce the stability of the financial system, reduce risk exposure and improve supervision of banks that operate in more than one EU country. Under the new rules, banks will be restricted in lending beyond a certain limit to any one party, while national supervisory authorities will have a better overview of the activities of cross-border banking groups. The proposal, which amends the existing Capital Requirements Directives, reflects extensive consultation with international partners, Member States and industry. It now passes to the European Parliament and the Council of Ministers for consideration.

The purpose of the Capital Requirements Directives (2006/48/EC and 2006/49/EC) is to ensure the financial soundness of banks and investment firms.

Together they stipulate how much of their own financial resources banks and investment firms must have in order to cover their risks and protect their depositors. This legal framework needs to be regularly updated and refined to respond to the needs of the financial system as a whole. The main changes proposed are as follows:/p>

• Improving the management of large exposures: banks will be restricted in lending beyond a certain limit to any one party. As a result, in the inter-bank market, banks will not be able to lend or place money with other banks beyond a certain amount, while borrowing banks will effectively be restricted in how much and from whom they can borrow.
•  Improving supervision of cross-border banking groups: 'colleges of supervisors' will be established for banking groups that operate in multiple EU countries. The rights and responsibilities of the respective national supervisory authorities will be made clearer and their cooperation will become more effective.
•  Improving the quality of banks' capital: there will be clear EU-wide criteria for assessing whether 'hybrid' capital, i.e. including both equity and debt, is eligible to be counted as part of a bank's overall capital - the amount of which determines how much the bank can lend.
• Improving liquidity risk management: for banking groups that operate in multiple EU countries, their liquidity risk management - i.e. how they fund their operations on a day-to-day basis - will also be discussed and coordinated within 'colleges of supervisors'. These provisions reflect the on-going work at the Basel Committee on Banking Supervision and the Committee of European Banking Supervisors.
• Improving risk management for securitised products: rules on securitised debt - the repayment of which depends on the performance of a dedicated pool of loans - will be tightened. Firms (known as 'originators') that re-package loans into tradable securities will be required to retain some risk exposure to these securities, while firms that invest in the securities will be allowed to make their decisions only after conducting comprehensive due diligence. If they fail to do so, they will be subject to heavy capital penalties.

The proposal is available on the European Commission website. 

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1.17 Pensions: conflicts of interest guidance for trustees and employers

On 1 October 2008, the UK Pensions Regulator published guidance to help trustees of occupational pension schemes and employers identify, monitor and manage conflicts of interest. Conflicts arise in the trustee governance model because many trustees have a stake in the scheme or its sponsoring employer. If not managed effectively, decisions may be taken that put the interests of the beneficiaries at risk, or subsequently prove to be invalid. The regulator's aim is to help trustees identify, monitor and manage conflicts to avoid such consequences.

The guidance includes five high-level principles which will assist trustees with conflicts management arrangements:/p>

• understanding the importance of conflicts of interest;
• identifying conflicts of interest;
• evaluation, management or avoidance of conflicts;
• managing adviser conflicts; and
• conflicts of interest policy.

Alongside the full guidance, the regulator has also produced a summary guidance document to convey key messages regarding the governance of conflicts of interest.
 
The guidance is available on the Pensions Regulator website.

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1.18 Report on consumer outcomes in the retail investment products market
 
On 30 September 2008 the United Kingdom Financial Services Authority (FSA) published a report titled "Towards evaluating consumer outcomes in the retail investment products market: A methodology". The report was prepared by Oxera which was commissioned by the FSA to develop a methodology to assess the extent to which the outcomes for consumers in the retail investment products market have been improving over time.
 
The report summarises the analysis undertaken and methodology developed, and in particular:

• defines the 'quality' of consumer outcomes in the retail investment products market and how these are measured;/li>
• sets out the methodology for the analysis of charges, both of how charges have developed over time and the determinants of charges (including regulation); and
• describes the methodology for the analysis of the link between product charges and performance.

The report is available on the FSA website.

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1.19 Report on the auditing profession
 
On 26 September 2008, the US Treasury Department's Advisory Committee on the Auditing Profession voted to adopt its Final Report containing more than 30 recommendations to improve the sustainability of the public company auditing profession.

Recommendations focused on three specific areas: improving accounting education and strengthening human capital; enhancing auditing firm governance, transparency, responsibility, communications, and audit quality; and increasing audit market competition and auditor choice.

Further information is available on the Treasury website.

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1.20 Global bank supervisors endorse strengthened sound practice standards for liquidity risk management and supervision

On 25 September 2008, bank supervisors from central banks and supervisory agencies endorsed the Basel Committee's Principles for Sound Liquidity Risk Management and Supervision. The principles underscore the importance of establishing a robust liquidity risk management framework that is well integrated into the bank-wide risk management process. Key elements of a bank's governance of its liquidity risk management are also emphasized. The document also sets out the principles to strengthen the measurement and management of their liquidity risk. Among other things, a bank should:

• conduct regular stress tests for a variety of short-term and protracted institution-specific and market-wide stress scenarios and use the outcomes to develop robust and operational contingency funding plans;/li>
• ensure the alignment of risk-taking incentives of individual business lines with the liquidity risk exposures the activities create;
• actively manage its intraday liquidity positions and risks to meet payment and settlement obligations on a timely basis under both normal and stressed conditions, and thus contribute to the smooth functioning of payment and settlement systems; and
• maintain a cushion of unencumbered, high quality liquid assets as insurance against a range of stress scenarios.

The principles discuss the key role of regular public disclosure that enables market participants to make an informed judgment about the soundness of a bank's liquidity risk management framework and liquidity position. The role of supervisors is also highlighted, including the responsibility to intervene to require effective and timely remedial action by a bank to address liquidity risk management deficiencies. The principles also stress the need for regular communication with other supervisors and public authorities, both within and across national borders.

The guidance focuses on liquidity risk management at medium and large complex banks, but the principles have broad applicability to all types of bank. The document notes that implementation of the principles by both banks and supervisors should be tailored to the size, nature of business and complexity of a bank's activities. Other factors that a bank and its supervisors should consider include the bank's role and systemic importance in the financial sectors of the jurisdictions in which it operates.

The principles deliver a significant enhancement to the Basel Committee's liquidity guidance that was published in 2000.

The Committee has also begun a review of ways to promote more consistency in the implementation of global liquidity supervision for cross border banks as a way to enhance resiliency to financial market stress.

The 'Principles for Sound Liquidity Risk Management and Supervision' are available on the BIS website.
 
The 'Report of the Financial Stability Forum on Enhancing Market and Institutional Resilience' is available on the BIS website. 

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1.21 Proposed further simplification of EU rules on mergers and divisions

On 25 September 2008, the European Commission put forward a proposal for a directive that will further reduce the administrative burdens on European public limited liability companies in the area of mergers and divisions. Under the proposal, companies would benefit from simplified requirements on reporting and on publication of draft terms. The proposal complements the two packages of "fast track" measures that were put forward by the Commission in March 2007 (IP/07/1087) and April 2008 (IP/08/598).

The proposal aims to:

• reduce the reporting requirements of companies in the case of mergers and divisions, in particular where shareholders decide that certain reports are not needed and in the context of so-called "simplified" mergers and divisions between parent companies and their subsidiaries;/li>
• avoid double reporting where reporting requirements also result from other EU rules; and
• introduce the possibility for companies to use the Internet and electronic mail in order to publish the draft terms of a merger or division and to provide shareholders with the documentation required.

Further information is available on the European Commission website.

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1.22 Superannuation assets grow in June 2008 quarter
 
On 25 September 2008, the Australian Prudential Regulation Authority (APRA) released its June 2008 Quarterly Superannuation Performance publication. It shows total assets increased over the June 2008 quarter by $7.4 billion, or 0.6 per cent, to a total of $1.17 trillion.
 
The publication shows that over the June quarter, industry funds' assets increased by 0.9 per cent ($1.8 billion) to $199.3 billion. Public sector funds' assets remained steady at $170.2 billion. Retail funds' assets fell by 0.7 per cent ($2.3 billion) to $341.5 billion and corporate funds' assets fell by 4.1 per cent ($2.6 billion) to $61.5 billion over the quarter.

Contributions to funds with at least $50 million in assets over the June quarter were $25.1 billion, with employers contributing $17.5 billion and members contributing $7.5 billion. Other contributions, including spouse contributions and government co-contributions, totalled $211 million.

Retail funds received 44.1 per cent ($11.1 billion) of total contributions during the June quarter, while industry funds received 28.5 per cent ($7.2 billion), public sector funds received 23.2 per cent ($5.8 billion) and corporate funds 4.1 per cent ($1 billion)./p>

The combined return on assets was -1.5 per cent for the June 2008 quarter. The return for industry funds was - 0.9 per cent, public sector funds was - 1.1 per cent, corporate funds - 1.4 per cent and retail funds - 2.0 per cent.

APRA's 'Celebrating Ten Years of Superannuation Data Collection' showed that total superannuation assets in Australia over the 10-year period 1997-2006 grew at an average annual growth rate of 14.3 per cent, and almost quadrupled from $245.3 billion in June 1996 to $912.0 billion in June 2006. The 2007 edition of APRA's Annual Superannuation Bulletin showed that total superannuation assets rose in the 12 months to June 2007 by $225.4 billion, or 24.6 per cent.

Copies of the June Quarterly Superannuation Performance publication are available on the APRA website.

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1.23 European Parliament adopts resolutions on hedge funds and related transparency issues
 
On 24 September 2008, the European Parliament adopted two resolutions asking the European Commission to propose legislation to improve regulation of the financial markets regarding hedge funds and private equity and transparency of institutional investors.
 
Further information regarding the hedge funds and private equity resolution is available on the European Parliament website.

Further information regarding the transparency of institutional investors resolution is available on the European Parliament website.

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1.24 Report on private equity and leveraged buyouts
 
The US Government Accountability Office (GAO) has published a report titled 'Private Equity: Recent Growth in Leveraged Buyouts Exposed Risks That Warrant Continued Attention'. According to the GAO, the increase in leveraged buyouts (LBO) of US companies by private equity funds prior to the slowdown in mid-2007 has raised questions about the potential impact of these deals. Some praise LBOs for creating new governance structures for companies and providing longer term investment opportunities for investors. Others criticize LBOs for causing job losses and burdening companies with too much debt.
 
The report addresses the (1) effect of recent private equity LBOs on acquired companies and employment, (2) impact of LBOs jointly undertaken by two or more private equity funds on competition, (3) US Securities and Exchange Commission's (SEC) oversight of private equity funds and their advisers, and (4) regulatory oversight of commercial and investment banks that have financed recent LBOs.
 
Academic research that GAO reviewed generally suggests that recent private equity LBOs have had a positive impact on the financial performance of the acquired companies, but determining whether the impact resulted from the actions taken by the private equity firms versus other factors is difficult. The research also indicates that private equity LBOs are associated with lower employment growth than comparable companies. However, uncertainty remains about the employment effect in part because, as one study found, target companies had lower employment growth before being acquired. Further research may shed light on the causal relationship between private equity and employment growth, if any. Private equity firms have increasingly joined together to acquire target companies (called "club deals").
 
In 2007, there were 28 club deals, totalling about US$217 billion in value. Club deals could reduce or increase the number of firms bidding on a target company and, thus, affect competition. In analyzing 325 public-to-private LBOs done from 1998 through 2007, GAO generally found no statistical indication that club deals, in aggregate, were associated with lower or higher prices paid for the target companies, after controlling for differences in the targets. However, the results do not rule out the possibility of parties engaging in illegal behaviour in any particular LBO. Indeed, according to securities filings and media reports, some large club deals have led to lawsuits and an inquiry into the practice by the US Department of Justice. Because private equity funds and their advisers typically claim an exemption from registration as an investment company or investment adviser, respectively, the SEC exercises limited oversight of these entities. However, in examining some registered advisers to private equity funds, the SEC has found some control weaknesses but generally has not found such funds to pose significant concerns for fund investors.
 
The growth in LBOs has led to greater regulatory scrutiny. The SEC, along with other regulators, has identified conflicts of interest arising in LBOs as a potential concern and is analyzing the issue. Before 2007, federal financial regulators generally found that the major institutions that financed LBOs were managing the associated risks. However, after problems with subprime mortgages spilled over to other markets in mid-2007, the institutions were being exposed to greater-than-expected risk. As a result, the regulators reassessed the institutions' risk-management practices and identified some weaknesses.
 
The regulators are monitoring efforts being taken to address weaknesses and considering the need to issue related guidance. While the institutions have taken steps to decrease their risk exposures, the spillover effects from the subprime mortgage problems to leveraged loans illustrate the importance of understanding and monitoring conditions in the broader markets, including connections between them. Failure to do so could limit the effectiveness and ability of regulators to address issues when they occur.
 
The GAO has made the following recommendation. Given that the financial markets are increasingly interconnected and in light of the risks that have been highlighted by the financial market turmoil of the last year, the heads of the US Federal Reserve, Office of the Comptroller of the Currency, and the SEC should give increased attention to ensuring that their oversight of leveraged lending at their regulated institutions takes into consideration systemic risk implications raised by changes in the broader financial markets, as a whole.

The report is available on the GAO website.

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1.25 Report on sovereign wealth funds

The US Government Accountability Office (GAO) has published a report titled 'Sovereign Wealth Funds: Publicly Available Data on Sizes and Investments for Some Funds are Limited'.  Sovereign wealth funds (SWF) are government-controlled funds that seek to invest in other countries. With new funds being created and many growing rapidly, some see these funds providing valuable capital to world markets, but others are concerned that the funds are not transparent and could be used to further national goals and potentially harm the countries where they invest. GAO plans to issue a series of reports on various aspects of SWFs.
 
This first report analyzed (1) the availability of publicly reported data from SWFs and others on their sizes and holdings internationally, and (2) the availability of publicly reported data from the US government and other sources on SWFs' US investments. GAO reviewed foreign government disclosures, Department of the Treasury (Treasury) and Department of Commerce (Commerce) reporting, and private researcher data to identify SWFs and their activities. GAO also analyzed information from international organizations and securities filings.
 
Future GAO reports will address laws affecting SWF investments, SWF governance practices, and the potential impact of SWFs and US options for addressing them.
 
Limited information is publicly available from official government sources for some SWFs. While some have existed for decades, 28 of the 48 SWFs that GAO identified have been created since 2000, primarily in countries whose foreign exchange reserves are growing through oil revenues or trade export surpluses. GAO analysis showed that about 60 percent of these 48 SWFs publicly disclosed information about the size of their assets since the beginning of 2007, but only about 4 funds published detailed information about all their investments and some countries specifically prohibit any disclosure of their SWF activities. Although the International Monetary Fund (IMF) currently collects data on countries' international financial flows, GAO found that only 13 countries separately reported their SWF holdings in public IMF documents.
 
IMF plans to issue new reporting guidance in 2009 that asks countries to voluntarily report the size of their SWF holdings in their international statistics. While this could increase the transparency of SWFs, its success depends on the extent to which countries participate. In the absence of official national or international public reporting, much of the available information about the value of holdings for many SWFs is from estimates by private researchers who project funds sizes by adjusting any reported amounts to reflect likely reserve growth and asset market returns. For the funds GAO identified, officially reported data and researcher estimates indicated that the size of these 48 funds' total assets was from US$2.7 trillion to US$3.2 trillion. Some researchers expect these assets to continue to grow significantly. US government agencies and others collect and publicly report information on foreign investments in the United States, but these sources have limitations and the overall level of US investments by SWFs cannot be specially identified.
 
From surveys of US financial institutions and others, Treasury and Commerce reported that foreign investors, including governments, private entities, and individuals, owned over US$20 trillion of US assets in 2007, but the amounts held by SWFs cannot be specifically identified from the reported data because either the agencies do not obtain specific investor identities or the agencies are precluded from disclosing individual investor information. GAO found that as many as 16 of the 48 SWFs reported some information on their US investments. One reported all US holdings, but others only identified a few specific investments or indicated that some of their total assets were invested in the United States.
 
Some SWF investments can be identified in US securities filings, under a requirement for disclosure of investments that result in aggregate beneficial ownership of greater than 5 percent of a voting class of certain equity securities.

At least 8 SWFs have disclosed such investments since 1990. GAO analysis of a private financial research database identified SWF investments in US companies totalling over US$43 billion from January 2007 through June 2008, including SWF investments in US financial institutions needing capital as a result of the 2007 subprime mortgage crisis. Additional US reporting requirements would yield additional information for monitoring the US activities of SWFs, although some US officials have expressed concerns that they could also increase compliance costs for US financial institutions and agencies and could potentially discourage SWFs from making investments in US assets.
 
The report is available on the GAO website.

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1.26 Report on the regulation of Islamic securities products
 
In September 2008, the International Organization of Securities Commissions (IOSCO) published a report titled 'Analysis of the Application of IOSCO's Objectives and Principles of Securities Regulation for Islamic Securities Products'.
 
The market for Islamic capital securities and in particular Shariah-compliant funds and bonds (Sukuk) has grown rapidly in recent years. There has been a wider geographical expansion of these markets beyond the traditional spheres of activity in the Middle East and East Asia. Although the IOSCO Core Principles were designed to be flexible enough to accommodate variations in the conventional securities markets, there has been a degree of uncertainty as to how the IOSCO Core Principles are applicable to the Islamic securities market. IOSCO thus set a mandate to assess the compatibility of IOSCO's core principles with the products and practices of Islamic finance. This report principally deals with this mandate and builds on the initial report from the IOSCO Islamic Capital Market Task Force (ICMTF) in 2004.
 
The analysis has not identified any concerns with respect to the compatibility of the IOSCO Core Principles with the Islamic securities market. However, whilst the applicability of the IOSCO Core Principles has been confirmed by this analysis, it has also been found that the implementation of the principles may benefit from further consideration in some specific areas. This report seeks to highlight these areas and the associated issues.
 
The overall findings are broadly consistent with the findings of the ICMTF report which notes that: "[there is] ... no need to formulate separate regulatory principles [as] IOSCO's objectives and principles of securities regulation can be applied to Islamic capital markets."
 
However, the report does contain a series of recommendations dealing with:

• co-operation and information sharing;/li>
• accounting standards;
• Profit Sharing Investment Accounts; and
• general recommendations for securities regulators.

The report is available on the IOSCO website.

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1.27 IMF study of banking crises

In September 2008 the International Monetary Fund released a new study titled "Systematic Banking Crises: A New Database". Financial crises can be damaging and contagious, prompting calls for swift policy responses. The financial crises of the past have led affected economies into deep recessions and sharp current account reversals. Some crises turned out to be contagious, rapidly spreading to countries with no apparent vulnerabilities.

Among the many causes of financial crises have been a combination of unsustainable macroeconomic policies (including large current account deficits and unsustainable public debt), excessive credit booms, large capital inflows, and balance sheet fragilities, combined with policy paralysis due to a variety of political and economic constraints. In many financial crises currency and maturity mismatches were a salient feature, while in others off-balance sheet operations of the banking sector were prominent.

Choosing the best way of resolving a financial crisis and accelerating economic recovery is far from unproblematic. There has been little agreement on what constitutes best practice or even good practice. Many approaches have been proposed and tried to resolve systemic crises more efficiently. Part of these differences may arise because objectives of the policy advice have varied. Some have focused on reducing the fiscal costs of financial crises, others on limiting the economic costs in terms of lost output and on accelerating restructuring,
whereas again others have focused on achieving long-term, structural reforms.

Trade-offs are likely to arise between these objectives. Governments may, for example, through certain policies consciously incur large fiscal outlays in resolving a banking crisis, with the objective to accelerate recovery. Or structural reforms may only be politically feasible in the context of a severe crisis with large output losses and high fiscal costs.

The study introduces and describes a new dataset on banking crises, with detailed information about the type of policy responses employed to resolve crises in different countries. The emphasis is on policy responses to restore the banking system to health. The database covers all systemically important banking crises for the period 1970 to 2007, and has detailed information on crisis management strategies for 42 systemic banking crises from 37 countries.

Governments have employed a broad range of policies to deal with financial crises. Central to identifying sound policy approaches to financial crises is the recognition that policy responses that reallocate wealth toward banks and debtors and away from taxpayers face a key trade-off. Such reallocations of wealth can help to restart productive investment, but they have large costs. These costs include taxpayers' wealth that is spent on financial assistance and indirect costs from misallocations of capital and distortions to incentives that may result from encouraging banks and firms to abuse government protections. Those distortions may worsen capital allocation and risk management after the resolution of the crisis.
 
Institutional weaknesses typically aggravate the crisis and complicate crisis resolution. Bankruptcy and restructuring frameworks are often deficient. Disclosure and accounting rules for financial institutions and corporations may be weak. Equity and creditor rights may be poorly defined or weakly enforced. And the judiciary system is often inefficient.
 
Many financial crises, especially those in countries with fixed exchange rates, turn out to be twin crises with currency depreciation exacerbating banking sector problems through foreign currency exposures of borrowers or banks themselves. In such cases, another complicating factor is the conflicting objectives of the desire to maintain currency pegs and the need to provide liquidity support to the banking system.

Existing empirical research has shown that providing assistance to banks and their borrowers can be counterproductive, resulting in increased losses to banks, which often abuse forbearance to take unproductive risks at government expense.

The typical result of forbearance is a deeper hole in the net worth of banks, crippling tax burdens to finance bank bailouts, and even more severe credit supply contraction and economic decline than would have occurred in the absence of forbearance.
 
Cross-country analysis to date also shows that accommodative policy measures (such as substantial liquidity support, explicit government guarantee on financial institutions' liabilities and forbearance from prudential regulations) tend to be fiscally costly and that these particular policies do not necessarily accelerate the speed of economic recovery. Of course, the caveat to these findings is that a counterfactual to the crisis resolution cannot be observed and therefore it is difficult to speculate how a crisis would unfold in absence of such policies. Better institutions are, however, uniformly positively associated with faster recovery.
 
The study is available on the IMF website.

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1.28 Cross-border corporate insolvency: Update

By Oren Bigos, Barrister
Lonsdale Chambers, Melbourne

In these times of global financial turmoil, there is an increasing incidence of foreign corporate failures that have an impact on Australia. In some circumstances, an Australian court (the Federal Court or a Supreme Court) may become involved.
 
If the foreign company operates in Australia through a subsidiary company which is incorporated under the Corporations Act 2001 No. 50 (Cth), then the subsidiary may have administrators appointed to it, or be wound up, in the ordinary way.

If the foreign company itself 'carries on business in Australia' (as relevantly defined in s 21; see eg Re New Cap Reinsurance (1999) 32 ACSR 324), then it needs to be registered in Australia under the Corporations Act, Pt 5B.2, div 2: section 601CD. It can be the subject of a scheme of arrangement under Pt 5.1 (as it is a 'Part 5.1 body'), but apparently not the subject of administration or a deed of company arrangement under Pt 5.3A (as it is not a company registered under the Corporations Act).
 
If the registered foreign company commences to be wound up, or is dissolved or deregistered, in its home country, its Australian local agent must lodge a notice with ASIC, and on an application by the company's foreign liquidator or by ASIC the court must appoint an Australian liquidator: s 601CL(14). This type of winding-up is sometimes known as 'ancillary winding up'. The ancillary liquidator must invite creditors to prove their debts and claims and recover and realise any Australian property of the foreign company and pay the net amount to the foreign liquidator: s 601CL(15). The English position, recently stated by the House of Lords, is that the court has jurisdiction to order that an ancillary liquidator remit the proceeds of realisations of the assets to a foreign liquidator even if the foreign liquidation will result in an order of distribution to creditors which does not replicate the English order of distribution, though the court might decline to direct the remittal in the exercise of the court's discretion: McGrath v Riddell [2008] UKHL 21.br>  
Even if the registered foreign company is not wound up, dissolved or deregistered, in its home country, as it is a 'Part 5.7 body', the Australian court may order that it be wound up 'independently' if, relevantly, it is unable to pay its debts, has been dissolved or deregistered, or has ceased to carry on business in Australia: s 583(c). The ordinary provisions on winding up by the court (including as regards proof and ranking of claims) apply, with some adaptations. There are specific presumptions of insolvency, one of which (similarly to the well-known statutory demand procedure) is the failure of the body to comply with a demand under s 585(a). In theory an independent winding up order can be made even if the body has been wound up or ceased to exist in its home jurisdiction: s 582(3). However, in practice, if foreign liquidation proceedings have been commenced in the home jurisdiction, ancillary winding up is likely to be more appropriate.

An Australian court has other powers apart from winding up the foreign company, whether it is registered in Australia or not.
 
Since July 2008, a foreign liquidator (or other insolvency 'representative') has a right to apply to the Australian court for recognition of the foreign insolvency proceeding in respect of the debtor (and his status as liquidator of the foreign company): Art 15.1, UNCITRAL Model Law on Cross-Border Insolvency (which forms sch 1 to the Cross-Border Insolvency Act 2008 (Cth)). The Model Law does not apply to ADIs, general insurers and life insurers: Cross-Border Insolvency Regulations 2008 (Cth), reg 4. It applies in respect of foreign insolvency proceedings even if they take place in a country which has not adopted the Model Law.
 
If the foreign proceeding takes place in the country where the debtor has 'the centre of its main interests' (for example, where it has its registered office: Art 16.3) it is recognised as a 'foreign main proceeding': Art 17.2. In such case, the effect of recognition is an automatic stay on individual actions or execution against the debtor or its property in Australia, and an automatic suspension of the right to transfer, encumber or otherwise dispose of the debtor's assets: Art 20.1.
 
The stay and suspension operate as if they arise under the Corporations Act, Ch 5. In addition, the court may, in its discretion, grant various forms of relief, whether the proceeding is a 'foreign main proceeding' or a 'foreign non-main proceeding' (one that takes place in the country where the debtor has an 'establishment'): Art 21. Also the foreign liquidator has standing to commence proceedings in respect of voidable transactions under the Corporations Act, Pt 5.7B, div 2: Art 23. Relief in respect of a recognised foreign proceeding must be consistent with a local ancillary winding up in respect of the same debtor: Art 29.
 
The foreign liquidator may file, in the Australian court, a letter of request from a foreign court. The Australian court may then exercise such powers with respect to the matter as it could exercise if the matter had arisen in Australia: Corporations Act, section 581(3). An Australian court is required to cooperate to the maximum extent possible with foreign courts or foreign representatives in relation to foreign proceedings: Model Law, Art 25. This might subsume the Corporations Act, section 581(2), under which an Australian court is either required (in the case of courts of prescribed countries under Corporations Regulations 2001 (Cth), reg 5.6.74, such as US, UK, NZ), or has a discretion (in the case of courts of non-prescribed countries), to act in aid of, and be auxiliary to, foreign courts in 'external administration matters' (ie those relating to winding up or insolvency: s 580). For example, the court may comply with a request to compel a local examinee to respond to a summons for examination in respect of a foreign liquidation, just as, in respect of a local liquidation, it may issue an examination summons to be served on an examinee abroad: McGrath; Re HIH Insurance Ltd [2008] NSWSC 780 and [2008] NSWSC 881.

There are specialised texts on the many interesting legal issues which arise in international insolvencies, including Philip Smart, Cross-Border Insolvency, (2nd ed, 1998) and Ian Fletcher, Insolvency in Private International Law,, (2nd ed, 2005).

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3.1 New ASX market service for exchange traded funds, managed funds and structured products
 
The ASX Market Rules, Procedures and Guidance Note 16 have been amended to introduce a new market service for Exchange Traded Funds (ETFs), Managed Funds and Structured Products.  The effective date for the amendments was 15 September 2008.
 
The new market service provides a rules framework specifically designed for the quotation ETFs, Managed Funds and Structured Products (as defined in the rules).  The common feature of these products is that the capital value or distributions of the products is linked to liquid underlying instruments which have a robust and transparent pricing mechanism. 

The underlying instruments are:

• securities traded on an exchange which is a member of the World Federation of Exchanges;
• commodities and currencies traded on a recognised market with post trade transparency or for which there is a regulated derivatives market which controls price discovery; and
•  indices over the above underlying products.

Under the new rules framework, products may be quoted on either the Trading Market or the Quote Display Board.
 
The Trading Market provides a trading platform for these products.  On ITS the Trading Market is the Funds, Warrants and Structured Products market.  In operational terms, this section operates in the same way that it does for other traded products with continuous matching of bids and offers and an opening and closing auction.  Broker-IDs are disclosed.
 
The Quote Display Board provides a facility whereby Participants (on behalf of the product issuers) may advertise indicative prices for these products.  Other Participants who wish to enter into transactions for these products contact the Participant that advertised the price and enter into an agreement.  This facility is used for products where the issuer does not require on-market trading of the product but where CHESS settlement of the product may be attractive for commercial or operational reasons.
 
The ASX Market Rule amendments introduce new sections 10A and 10B.  Section 10A deals with the admission of product issuers and products, and the operation of the Trading Market.  Section 10B deals with the operation of the Quote Display Board.
 
Minor consequential amendments have also been made to section 2 (Definitions) and section 31 (Trading Platform). 
 
There are corresponding amendments to the ASX Market Rule Procedures for Sections 2, 10A, 10B and 31.  Further, ASX Market Rule Guidance Note 16 (Waivers of ASX Market Rules - Warrant-Issuers) has been amended so that it also applies to issuers of products on the new market service.
 
Further information about the new market service is available on the ASX website.

4.1 Takeovers Panel publishes revised Guidance Notes 2, 4 and 5
 
On 7 October 2008, the Takeovers Panel announced that it has published revised versions of its Guidance Notes 2 (Reviewing Decisions), 4 (Remedies General), and 5 (Specific remedies - Information deficiencies). Because of consolidation, former Guidance Notes 9 (Costs Order) and 16 (Correction of Takeover Documents) have been withdrawn.
 
The Panel did not publish drafts of the Guidance Notes for comment because the changes involve no major changes of policy. Rather they are part of the Panel's planned process of reviewing the currency and consistency of its Guidance Notes. The main changes to the Guidance Notes involve simplification of the drafting and correction of inconsistencies and errors that have crept in over time.  
 
Some of the more important changes are identified below:
 
(a) Guidance Note 2 (Reviewing decisions)
 
Guidance Note 2 deals with the Panel reviewing decisions - either on review of an initial Panel decision or of an ASIC decision regarding modification of chapters 6 or 6C.
 
In relation to reviews of ASIC decisions, the Panel has decided that it will not publicise receipt of an application for review until an appropriate time. This recognises that applications to ASIC may have been made on a confidential basis. ASIC does not publish the fact of an application and, under s 655A(5), an exemption or modification is Gazetted, but not a refusal.
 
In relation to reviews of Panel decisions, the Panel has clarified that these reviews, which are a rehearing on the merits, must follow the usual rules as to timing and withdrawing.
 
The Panel has clarified that it considers a decision is made when it is communicated to the parties.
 
(b) Guidance Note 4 (Remedies general)
 
Guidance Note 4 provides guidance on remedies available to the Panel and the types of orders and undertakings that might be made. The current Guidance Note includes a cross reference to Guidance Note 9 on costs orders. The revised version incorporates Guidance Note 9.
 
(c) Guidance Note 5 (Specific remedies - Information deficiencies)
 
Guidance Note 5 provides guidance on circumstances in which the Panel is likely to consider restraining dispatch of a document, such as a bidder's statement or target's statement, claimed to have information deficiencies.
 
The revised Guidance Note deals with specific remedies for information deficiency, and complements Guidance Note 4 on remedies in general. Revised Guidance Note 5 incorporates Guidance Note 16 on correction of takeover documents, as the topics are related.
 
The revised guidance no longer suggests that parties should copy the Panel executive into correspondence regarding negotiations, although they may do so if they think it is necessary. This reinforces the Panel's approach that parties should seek to negotiate satisfactory corrections to documents before involving the Panel.
 
The revised guidance continues to refer to the Panel's practice that, once proceedings have been commenced, a statement should be included in any corrective disclosure that the corrective disclosure was required by the Panel. However, it softens the need to state that it corrects false, misleading, confusing or inadequate information.
 
The revised Guidance Note also makes it clear that Panel applications should focus on the key issues for shareholders. This means that applications should be succinct and on point, and not make numerous allegations in the hope that some will stick. The Guidance Note suggests a page limit on applications to support this.
 
While they were not published as drafts, the Panel still welcomes comments on the revised Guidance Notes.
 
The revised Guidance Notes are available on the Panel website.

5.1 Administrators 'just' estimate and terminating deeds of company arrangement
 
(By Trent Duffield, DLA Phillips Fox)
 
Maylord Equity Management Pty Ltd v ReelTime Media Ltd [2008] NSWSC 1045, New South Wales Supreme Court, Palmer J, 3 October 2008

The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2008/october/2008nswsc1045.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
The Plaintiff ('Maylord') claimed to be a creditor of the Defendant ('ReelTime'), a public company listed on the Australian Stock Exchange. On 6 March 2008, ReelTime was placed in voluntary administration and a majority of its creditors resolved to approve a Deed of Company Arrangement ('DOCA') which was executed on 30 May 2008. Some two months later on 28 July 2008, Maylord (who had voted against the resolution) commenced proceedings seeking the termination of the DOCA under section 445D of the Corporations Act 2001 (Cth) ('the Act').  The court found that, but for a miscarriage in the voting process at the creditors meeting, the DOCA would not have been approved. Further, that it was not in the public interest to permit a DOCA to be forced upon ReelTime's largest creditor in circumstances where approval of the DOCA resulted from a manifest error by the chairperson conducting the creditors meeting. 
 
Accordingly, Palmer J ordered the termination of the DOCA pursuant to section 445D of the Act.
 
(b) Facts
 
In June 2007, ReelTime issued a convertible note to Maylord in consideration for a $1 million loan. In October 2007, Maylord exercised its option to convert the note and received 40 million shares in ReelTime. ReelTime was placed into voluntary administration on 6 March 2008.
 
Maylord's solicitors had written to the directors of ReelTime on 5 March 2008 (the day before the Administrators were appointed) expressing concern over the loan and its conversion (collectively 'the Transaction') claiming that Maylord had been induced into the Transaction by misrepresentations about the nature and state of ReelTime's affairs. The letter further alleged that at the time of the Transaction, ReelTime had been trading whilst insolvent. Following the entry into voluntary administration, Maylord asserted that in light of its claim it would be appropriate for the Administrator to treat the $1 million as a debt owed by ReelTime, and Maylord as a 'secured/priority creditor'. In support of its claim Maylord's solicitors provided a detailed summary of the allegations, including a detailed statement from the managing director of Maylord containing full particulars of the alleged misrepresentations, including the participants at relevant meetings and the substance of the words used when the alleged misrepresentations were made. It was noted by Palmer J in the judgment that this statement was effectively in the form of an affidavit and had been prepared with 'care and attention to detail'.
 
Despite this, the Administrators responded to Maylord's solicitors asserting that there was no evidence in support of the representations, and that accordingly Maylord's claim was valued at nil or a nominal value of $10,000. The letter and accompanying statement would later prove central in determining whether or not the Administrators had wrongly estimated the value of Maylord's claim at the meeting of creditors on 9 May 2008.
 
(i) The creditors meeting - Proxy's right to vote
 
At a meeting of creditors on 9 May 2008, Maylord's representative sought to have the meeting adjourned. The chair of the meeting accepted the motion but ruled that representatives holding a special proxy from a creditor (as opposed to a general proxy) were disqualified from voting on the basis that the holders of a special proxy were only entitled to vote on the specific items raised in that proxy. As Maylord's representative held a special proxy, he was denied from voting on the adjournment motion (which was defeated) and the creditors meeting was held. Importantly, if Maylord's representative had been allowed to participate in the vote, the motion would have carried and the meeting would have been adjourned.
 
In his judgment, Palmer J considered that the chairperson's ruling (that Maylord's representative was not entitled to vote on the adjournment resolution) was clearly wrong. The court held that regulation 5.6.30 of the Corporations Regulations 2001 (Cth) ('CR') only restricts a proxy's right to vote in respect of the particular resolution specified in the proxy form.Where a resolution is moved at a meeting which is not one of those specified in the proxy form, CR 5.6.28(2) gives the proxy the same right to vote on that resolution as his or her appointor. In this regard, the Corporations Regulations merely reflect the general law of agency.
 
Given that there was no specification in Maylord's proxy as to how a vote on an motion for adjournment, Palmer J held that Maylord's representative had, by virtue of CR 5.6.28(2), the same entitlement to vote on the adjournment resolution as Maylord itself. 
 
(ii) Estimation of Maylord's claim by the Administrators
 
Following the failure of the adjournment motion, a majority of creditors voted in favour of the DOCA. In the proceedings before Palmer J, Maylord asserted that the Administrators erroneously estimated the value of its claim as nil or a nominal amount of $10,000, and this error was sufficient for the Court to terminate the DOCA under section 455D of the Act. Maylord also asserted that had its debt been 'justly' estimated as required by section 445D of the Act, the revised weight attaching to its vote at the meeting would have been sufficient to defeat the DOCA motion.
 
Palmer J held that given the letter and statement provided by Maylord's solicitors on 6 May 2008, it was not reasonable for the Administrators to assert that no evidence had been provided to substantial Maylord's claim, and to use this as a basis for assessing the value of Maylord's claim at nil or a nominal $10,000.
 
Accordingly, the estimate was not 'just' as required by CR 5.6.23(2). Further, as a matter of principle, and subject to any discretionary facts, where a resolution approving a DOCA could not have been passed under section 439C of the Act but for the chairperson having made an 'unjust' estimation of the value of a creditor's claim, a strong prima facie basis is made out for the termination of the relevant DOCA on the ground that effect could not be given to it without injustice. On the facts before the Court, Palmer J considered that in this instance there were no such discretionary facts detracting from the 'unjust estimation'.
 
Palmer J concluded that if the chair of the meeting had not prevented Maylord's proxy from voting on the adjournment motion at the creditors' meeting of 9 May, and Maylord were permitted to vote on that motion in respect of a claim for $1 million, the motion for adjournment would have been carried. Accordingly, any business conducted after the adjournment motion (had any such motion been carried) would have also been invalid under CR 5.6.18(18)(a), irrespective of any 'unjust estimation'.
 
(c) Decision 
 
Palmer J ordered the termination of the DOCA pursuant to s. 445D of the Act.

5.2 A reinsurer's liability under a contract of reinsurance: debt or unliquidated damages?

(By James Davies, Mallesons Stephen Jaques)
 
New Cap Reinsurance Corporation Ltd (in liq) v A E Grant [2008] NSWSC 1015, New South Wales Supreme Court (Equity Division), White J, 30 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2008/september/2008nswsc1015.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
Under a contract of reinsurance, where the reinsurer has an obligation to indemnify the assured for losses already incurred, the correct characterisation of the insurer's liability is as a debt rather than unliquidated damages.
 
(b) Facts
 
The purpose of this case was to determine whether the plaintiff, New Cap Reinsurance Corporation Ltd ('NCRC'), which carried on business as a reinsurer, was insolvent from January 1999.  The second plaintiff, Mr Gibbons, was appointed administrator of NCRC on 21 April 1999 pursuant to a resolution of its directors, and later liquidator on 16 September 1999 following a resolution of creditors.
 
In 2002, Mr Gibbons instituted 17 proceedings for orders under section 588FF of the Corporations Act 2001 (Cth) ('Act'), alleging that in the 6 months to 21 April 1999, NCRC had entered into voidable transactions by making payments when the company was insolvent, constituting unfair preferences or uncommercial transactions, or both.  This case specifically concerned Mr Gibbons seeking relief under section 588FF in respect of these payments which amounted to US$5.4 million.
 
Evidence before the court demonstrated, with the benefit of hindsight and the expertise of an experienced actuary, that the outstanding claims resulted in net liabilities as at 31 December 1998 of $415 million rather than the surplus of net assets of $48 million that NCRC actually reported to be its position at the time.
 
The question of whether NCRC was insolvent before or at the time the relevant payments were made was dependent on section 95A of the Act which states:
"(1) A person is solvent if, and only if, the person is able to pay all the person's debts, as and when they become due and payable.
(2) A person who is not solvent is insolvent."
 
Importantly, the word 'debts' in section 95A is not defined.  Previous judicial consideration of section 95A in other respects had held that this provision directs attention to cashflow, rather than just a simple balance sheet assessment of assets and liabilities. However, White J makes it clear that a company's liabilities remain relevant, as does the company's capacity to obtain credit.  The application of section 95A, and particularly, the reference to 'when' a debt becomes due and payable involves looking to the reasonably immediate future. 
 
Exactly how far into the future depends on the circumstances, including the nature of the company's business and its future liabilities, and will often be measured in years when an occurrence based insurance policy is involved, due to the nature of the tailing liability which often arises long after the revenue is received.
 
(c) Decision
 
In reasoning, White J considered that three issues required addressing before a decision could be rendered.
 
(i) Is it legitimate to use a hindsight valuation to determine the extent of liabilities in assessing solvency for the purposes of section 95A, even if the full extent of the entity's financial position was not known at the relevant time?
 
His Honour held that the question is not whether someone should have reasonably suspected that the company was insolvent (as is the requirement of section 588G(1)(c) of the Act), but whether in fact that this was the case.  It follows that liabilities as they are now known may be used to calculate whether this was the case.  This view eliminated the need to consider which evidence to accept in assessing solvency, and that the later and more accurate actuarial reports with the additional benefit of hindsight were to be preferred and accepted over the contemporaneous, and less accurate, accounts of NCRC.
 
(ii) Do 'debts' in s. 95A include a liability to pay unliquidated damages?
 
Given that 'debts' is not defined in section 95A, White J drew a distinction between two lines of authority as to how the word may be interpreted.
 
On the one hand is the leading High Court decision in Bank of Australasia v Hall (1907) 4 CLR 1514 ('Hall').  In Hall, the court considered the meaning of 'debts' in the Insolvency Act 1874 (Qld), holding that it included any liability of the debtor provable on their bankruptcy.  This meant that the court was obliged to take into account the debtor's liability to pay unliquidated damages for breach of warranty and fraudulent misrepresentation.  On this authority, it would be irrelevant whether NCRC's liabilities were characterised as liabilities in damages or in debt because both would fall under the definition of debt for the purposes of section 95A.
 
The other interpretation is that found in Box Valley Pty Ltd v Kidd [2006] NSWCA 26 ('Box Valley'), where the New South Wales Court of Appeal held that in determining whether a company was unable to pay its debts as and when they became due and payable within the meaning of section 95A, regard could not be had to a potential, but highly probable, liability to pay damages which the company would incur under an existing contract.  In this case there was no doubt that the company had a contingent liability to pay damages which would have been admissible to proof in its winding up (under section 553(1) of the Act), however, it was held that such a liability was not a debt for the purposes of section 95A.  It is important to note that the Court of Appeal in Box Valley did not refer to Hall, nor does it appear that they were referred to it by counsel.
 
In Box Valley, at the relevant time for assessing solvency, the company was not under an existing contractual obligation to pay damages as the time to perform contractual obligations had not yet arrived, so no breach was possible.  This was clearly a contingent liability as it was highly likely that it would occur, and the court took the view that this liability would have been admissible to proof in a winding-up.  However, the court held that the 'debts' referred to in section 95A are only a subset of the broader notion of those debts or claims provable under section 553(1), and, consequently, the section 95A notion of a debt is more narrowly defined.  It followed that this contingent liability did not amount to a debt for the purposes of section 95A.
 
Counsel for NCRC submitted that the ratio of Box Valley be interpreted broadly, though his Honour disagreed finding that the essential reasoning of the decision was that 'even if the potential liability had been realised, a liability to pay unliquidated damages for breach of contract was not such a debt'. 
 
White J then moved to the question of which authority is to be followed when decisions from two different courts are inconsistent.  He stated that it is his duty to follow the later decision of the Court of Appeal, citing Lord Simon of Glaisdale in Miliangos v George Frank (Textiles) Ltd [1976] AC 443 ('Miliangos') to the effect that it is the duty of a subordinate court to follow the immediately superior court, notwithstanding that the superior court's decision may conflict with a still higher court.  The decision of the immediately higher court must be assumed to be correct (and to have correctly distinguished or otherwise interpreted the decision of the higher court).  Arguably, however, this instance is distinguishable from Miliangos, as the lower court in Miliangos was aware of the higher judicial authority.  Here, however, the Court of Appeal was ostensibly unaware of the earlier High Court decision in Hall.
 
Regardless, his Honour followed Box Valley, holding that a liability to pay unliquidated damages for breach of contract is not a debt under s. 95A.
 
(iii) Were NCRC's liabilities under the policies of reinsurance, liabilities to pay unliquidated damages or debts?
 
His Honour noted that the liability of an insurer under a policy of insurance is usually a liability to pay unliquidated damages, and is not a liability in debt. However, White J stated that there is no reason to assume that this must always to be the case, making an important distinction between (i) insured losses where the insured has not already paid in respect of the loss; and (ii) where they have paid.  White J established that the four main reasons which the authorities cite for classifying an insurer's liability as unliquidated damages rather than debt, did not apply in this case. These four reasons are as follows:

• Where an insured has not had to pay in respect of the subject matter of the indemnity, the insurer's obligation can be met by making a payment directly to a third party. White J states that this reasoning clearly did not apply as in this case the loss had already been paid for by the assured.
•  It is necessary for the insured to prove the quantum of the loss. Once again, White J excluded this reasoning here as the indemnity provided by NCRC was for losses which had already been paid (and were thus quantifiable) by the assured.
• Prior to the introduction of the UK Judicature Acts, a claim for an indemnity under an insurance policy was in assumpsit alleging a breach of contract for non-payment.  This was because, under the contracts in use at this time, there was no provision requiring the indemnifier to pay the assured, so the assured had to discharge their liability first, before suing the indemnifier for breach of contract. White J noted that the position here was different, as the contract for reinsurance contained an express provision which obligated NCRC to pay, making this situation distinguishable from the pre-Judicature cases.
• The insurer is entering into a secondary obligation to pay damages. However, White J stated that this is not always the case and a distinction must be drawn between a contract where the party to be indemnified shall never be called upon to pay, on the one hand, and a promise to compensate the indemnified party from losses sustained as a result of that party having to pay initially themselves.  In the former, the insurer will be liable in damages for breach of contract for not preventing the loss, while in the latter, the insurer may be sued in debt for the recovery of what they have failed to pay.  Even though the relevant reinsurance policies in this case were not tendered to the court, White found that it was clear that the policies were those in which the assured had already paid out, and thus were akin to the latter example, making NCRC liable in debt

(d) Conclusion
 
In applying the above criteria, his Honour held that the liability to pay under the policies of reinsurance were in fact debts, given that the present case was, in White J's opinion, distinguishable from those found in the bulk of the authorities.

5.3 Share placement not for the illegitimate purpose of keeping directors in office
 
(By Sabrina Ng and Katrina Sleiman, Corrs Chambers Westgarth)
 
Bell IXL Investments Ltd v Therapeutics Ltd [2008] FCA 1457, Federal Court of Australia, Middleton J, 26 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2008/september/2008fca1457.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
Bell IXL Investments Limited (Bell IXL), a substantial shareholder of Life Therapeutics Limited (LFE), challenged a placement of shares by LFE to Bell Potter Nominees Limited (Bell Potter) on the ground that the power to allot shares was not exercised bona fide in the interests in LFE but for the illegitimate purpose of keeping the directors of LFE in office.
 
The court found that the placement of shares by LFE was not made for the alleged ulterior purpose.
 
(b) Facts
 
This case was remitted to the Federal Court following the judgment of the Full Federal Court in Bell IXL Investments Ltd v Therapeutics Ltd [2008] FCA 1081.
 
LFE is a public company whose shares are listed on the Australian Securities Exchange (ASX).  LFE's operations became unprofitable during 2006 and 2007, and in the early part of 2008 its financial position was precarious. In or about March 2008 LFE entered into an arrangement with its largest customer, Octapharma AG (Octapharma) consisting of a management agreement, a loan agreement, and a put and call option which, subject to shareholder approval, gave Octapharma the option to purchase the shares in LFE's US subsidiaries at an exercise price of US$47.1 million. Octapharma exercised its call option on 11 April 2008 which required LFE to convene a meeting of shareholders to consider whether they would approve the sale. That meeting has not yet been held.
 
Bell IXL held the largest parcel of shares in LFE, having acquired those shares on the ASX between 14 May and 4 June 2008.  Bell IXL's shares together with those of its associate represented about 10.17 per cent of the issued capital. 
 
On 23 May 2008 Bell IXL requisitioned LFE to convene an extraordinary general meeting of shareholders to consider resolutions to remove the current board and replace it with three persons nominated by Bell IXL. On 12 June 2008 LFE convened that meeting for 23 July 2008, which was later adjourned by Court order.
 
Before the month of May 2008 the directors of LFE had considered a capital raising by the company for a sum between $5 million and $20 million. On a date which was contested between the parties, two of LFE's directors, Messrs Bellman and Milne, met with Mr Booth of Asandas, a licensed stockbroker, to discuss a capital raising by LFE. 
 
On 3 June 2008 Booth approached Mr Waller of Aegis Partners Limited (Aegis) as a potential investor in LFE. The email from Booth to Waller stated "The directors have few shares and want to do a placement to hold on, 15%.  They have a group who has bought 7% and obviously want the shell.  We could do this 15%, they said board seat no problem and change of activity no problem, they don't want to lose their shell".  Waller replied to Booth within three hours stating: "Let's do it boss".
 
On 9 June 2008 Aegis agreed to accept a placement of 15% of LFE's issued shares. On 4 July 2008 LFE received the subscription amount for the shares. The shares were not allotted to Aegis but were allotted to Bell Potter who allocated them to various nominee account holders. This allotment represented approximately 13.04% of the voting shares in LFE and reduced Bell IXL's interest in LFE's capital to approximately 8.85%.
 
(c) Decision
 
Middleton J canvassed the applicable law concerning the exercise of the power to allot shares and accepted that even an honest and good faith exercise of power by directors may nevertheless be improper. In relation to the factual enquiry necessary in identifying the purpose for which a power may be exercised, his Honour noted that it may be possible to conclude on a collective reason or purposes of a board comprising multiple directors, even though each statement by a director of his or her reasons or purposes may differ. This is not to say that each director's position must not be analysed separately; however, the court must determine the substantial purpose of the directors (if necessary the majority of directors) which is causative of the decision being made to allot the shares.

 The court must have regard to the circumstances surrounding the decision in question, as well as the evidence of the directors themselves. Nevertheless, his Honour cautioned that the court should be aware not to substitute its own commercial judgment for that of the directors.
 
Bell IXL made a number of attacks on the credibility of each of the directors, Mr Milne and Mr Waller. However, his Honour ultimately accepted their evidence, finding that there was a commercial basis for the allotment and that it was appropriate as a matter of business judgment for the directors in view of the history of LFE and potential future activities.
 
One attack upon the credibility of the directors was based upon the lack of any proper board papers and lack of documents evidencing any real search for the placement of the shares. Bell IXL's contention was that the lack of any proper board papers and the lack of documents evidencing any real search for a placement was the best evidence of the improprieties of the directors.  However, his Honour was satisfied that it was not the practice of these directors to record in writing, whether by diary note or otherwise, the content of ongoing discussions amongst themselves or with third parties.
 
In relation to Mr Waller, his Honour found that he demonstrated that he acted as an investor who was prepared to take some risk, although perhaps not always acting prudently. His Honour accepted that he considered an investment in LFE to have great potential if the Octapharma transaction were completed, and to be an opportunity for further investment. 
 
Middleton J found that the discussion in relation to seeking capital raising by share allotment prior to May 2008 gave an insight into the directors' approach to or philosophy about capital raising, and could be viewed to determine whether the allotment was consistent with such a view or philosophy, or a completely new concept for the directors. Whilst the amounts involved were substantially different, the earlier discussions on capital raising did have at least two important similarities with the allotment in issue:  the acceptance of the desire for some capital, and the finding of a person to assist later with an injection of capital. 
 
The email from Mr Booth to Mr Waller was an important part of Bell IXL's case. His Honour found that the email merely contained Mr Booth's opinion that the placement was being done to assist the directors to 'hold on' and because they did not want to 'lose their shell'. He was not told these matters by any director. The email was not seen by the directors of LFE, nor in any way adopted by them. 
 
Middleton J considered it significant that the Booth email did not state that it would be a condition of taking a placement that Aegis would vote in favour of the current board. If the alleged improper purpose had existed, his Honour found that it would have been prudent for the LFE board to obtain some comfort that they were placing shares with an ally, rather than an unknown party.  Further, the subscription agreement gave Aegis the opportunity to place the shares to a nominee, without requiring LFE's prior approval. If LFE's purpose had been to 'hold on', this critical detail would have been attended to and the recipient's voting intentions confirmed, and this would have needed to be addressed in the Booth email.
 
In relation to LFE's explanations as to the purpose for the allotment, his Honour found that the important theme through the evidence was that the directors were looking for future additional capital funding, not just an immediate need. His Honour concluded that once it is accepted that the strategy of the directors was that of a two-tiered approach, the contentions made by Bell IXL had insufficient impact to establish that the placement was in the circumstances irrational or for an ulterior purpose.

5.4 Statutory demand signed by only one joint creditor
 
(By Ron Schaffer, Clayton Utz)
 
115 Constitution Road Pty Ltd v Alan Downey as Trustee for NBD Systems [2008] NSWSC 997, Supreme Court of New South Wales, Rein J, 23 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2008/september/2008nswsc997.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
A statutory demand and affidavit signed by only one of two trustees was set aside under section 459J(1)(b). There was no evidence that the other trustee had given authority for the demand.
 
(b) Facts  
 
A company allegedly owed money to a trust. The trust had two trustees, Downey and Patrick. Downey signed and served a statutory demand on the company. The accompanying affidavit stated that the signatory was "trustee of the creditor".
 
The company applied to have the demand set aside under s.  459J(1)(b). It had two arguments:

• the signing of the demand by one trustee (rather than two) was more than a "mere defect" - it was a fundamental flaw which justified setting aside the demand; and
• the affidavit was defective because it incorrectly stated that the signatory was the trustee, when in fact he was only one of the trustees.

(c) Decision 
 
As a preliminary matter, the court had to determine whether one trustee (of a two-trustee trust) could sign a statutory demand. It noted old High Court authority that a bankruptcy notice based on a judgment debt in favour of a number of creditors cannot be authorised by only some of the judgment creditors (Australian Workers Union v Bowen [No 2] (1948) 77 CLR 601).  However, there were later obiter comments by the NSW Supreme Court that suggested that one joint creditor could demand payment of the debt (on the basis that a joint debt can be validly discharged by payment to one of the joint creditors).
 
After considering other authorities, the court concluded that a statutory demand based on a joint debt had to be signed by all the joint creditors (although it could be signed by one creditor if he was authorised by the others).
 
The next issue was the perennial problem of whether section 459J(1)(b) can be used to set aside a demand on the basis of a problem with the demand (such as a defect which was more than "mere" defect). The court expressed the obiter view that all issues about defects in demands have to be dealt with under section 459J(1)(a) (which only allows setting-aside if the defect causes substantial injustice).
 
That would have killed off the company's argument based on the signing of the demand. However, there was still the problem that the affidavit incorrectly stated the signatory's authority. That, in the court's view, justified setting aside the demand:
 
"[T]he absence of any power given to Downey in the trust deed to act alone, and the absence of any evidence of authorisation, either prospective or retrospective, coupled with allied defects in the affidavit, leading to at least uncertainty about whether the demand was made with Patrick's authority and the importance of affidavits in the scheme of the statutory demand lead me to conclude that it is appropriate to set aside the demand ... ".
 
(d) Comment
 
In a subsequent decision (Riverlands Club Holdings Ltd v Suzy David trading as David Legal [2008] NSWSC 1065, 9 October 2008), Barrett J of the NSW Supreme Court faced what appeared to be a similar fact situation.
 
In Riverlands, the relevant debt was a judgment debt owed to "Suzy David & Fred David T/as David Legal". Suzy David signed and served a statutory demand demanding payment of a debt owed to "Suzy David T/as David Legal".
 
Barrett J set aside the demand on the grounds that there was a genuine dispute about the debt (section 459H(1)(a)).
 
This is interesting, given that:

• there was clearly a judgment debt;
• debt owed to joint creditors can be satisfied by payment to one of the creditors; and
• demands cannot be set aside on the basis of mere defects.

Barrett J approached the problem by saying that the debt was genuinely disputed because there was a dispute about its very existence:
 
"The statutory demand is predicated on the existence of a debt owing, due and payable by the plaintiff to [Suzy David] alone.  The only debt that appears, in reality, to be owing, due and payable by the plaintiff is a debt owing, due and payable to two persons of whom [Suzy David] is one.  And, as I have said, it is sufficiently clear that it is owing, due and payable to the two persons jointly. 
...
It is to my mind clear that the plaintiff has, to the standard required by Eyota Pty Ltd v Hanave Pty Ltd (1994) 12 ACSR 785, shown that there is, at the very least, a plausible contention requiring further investigation as to whether a debt as described in the demand (and therefore the debt to which the demand relates) is in existence; and this is so even though a debt of corresponding amount owing, due and payable to the defendant and another person jointly may be taken to exist. There is therefore a genuine dispute as to the existence of the debt to which the statutory demand relates. "
 
Not unexpectedly, his Honour was taken to Rein J's decision in 115 Constitution Road. He distinguished that case on the basis that, although the 115 Constitution Road statutory demand was also signed by one of two joint creditors, the demand had demanded payment of a debt which was stated to be owing to both creditors ("The Company owes ALAN DOWNEY [one trustee] DEBRA PATRICK [the other trustee] AS TRUSTEE OF THE NBD SYSTEMS SUPER FUND"). In Riverlands, by contrast, the demand had stated that the debt was owed to only one of the joint creditors ("The company owes Suzy David t/as David Legal ... ('the creditor'), the amount of $2,204.78"). From this, Barrett J concluded that:
 
"The lack of correspondence with which Rein J had to deal therefore does not arise in this case."
 
At the end of the day, of course, the result was the same in both cases: the demand was set aside. Nevertheless, both decisions illustrate the parlous state in which the law of statutory demands now finds itself, 15 years after the "Harmer amendments". At an administrative level, it is notorious that the frequency of court disputes concerning statutory demands far exceeds that which preceded the amendments. At a legal level, courts find themselves between the Scylla and Charybdis of the High Court decision in David Grant and the low level of dispute required to invoke section 459H(1). The former visits dire consequences upon companies which - even innocently - fail the hair-trigger test of section 459G(2), while the latter arguably and anomalously (given the intent behind the "Harmer amendments")  allows companies to delay winding up on the basis of technical arguments rather than commercial reality. It is also undoubtedly also the case that the guillotine effect of section 459G(2) has meant that considerable court time has been devoted to disputes about the service of documents (a process which has not necessarily led to any clarity about the relevant principles of law in that area).

5.5 Successful application by a shareholder for leave under s. 236 of the Corporations Act to bring derivative proceedings against a director of the company
 
(By Gabrielle Hirsch and Charles Slattery, DLA Phillips Fox)
 
Denis Cassegrain v Gerard Cassegrain & Co Pty Ltd [2008] NSWSC 976, New South Wales Supreme Court, Sackville AJ, 23 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2008/september/2008nswsc976.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
This decision concerned a successful application by Denis Cassegrain for leave to bring derivative proceedings in the name of Gerard Cassegrain & Co Pty Ltd (the 'Company') against Claude Cassegrain, another director of the Company pursuant to sections 236 and 237 of the Corporations Act 2001 (Cth) ('the Act').The claims arose from an alleged breach of Claude Cassegrain's fiduciary duties to the Company.
 
Sackville AJ, in the NSW Supreme Court, held that the plaintiff had satisfied the requirements of section 237 of the Act and granted leave to bring proceedings on behalf of the company pursuant to section 236 of the Act.
 
(b) Facts
 
Denis Cassegrain (the plaintiff) and Claude Cassegrain (second defendant) are brothers. Both Denis and Clause are shareholders in Gerard Cassegrain & Co Pty Ltd although Claude, as director and majority shareholder, effectively controlled the Company.
 
In 1987 the Company entered into a Collaborative Research Agreement with the CSIRO to develop soil slotting technology on the Company's land. By 1992, the commercial relationship between the Company and the CSIRO had broken down and the Company initiated legal proceedings alleging damages to the Company and personal damages to Claude Cassegrain. The matter was eventually settled with CSIRO and the Company entered into a deed of settlement under which the Company received $9.5 million in settlement of all liabilities.
 
Sometime before November 1993, a loan account was created in the books of the Company. This showed that $4.25 million of the settlement monies received by the Company from CSIRO had been received on behalf of Claude and lent by him to the Company. Claude subsequently commenced drawing upon the funds for regular living and other personal expenses.
 
By 1996, the relationship between the shareholders had deteriorated. Denis and three siblings commenced proceedings in the Federal Court before Davies J seeking a declaration that the affairs of the various "Cassegrain Companies" were being conducted in an oppressive manner (the "oppression proceedings") and appropriate compensation. Davies J granted the declaration but otherwise dismissed the proceedings.
 
On 18 December 2007, Denis brought an application for leave to commence a derivative action pursuant to section 236(1)(a) of the Corporations Act 2001 (Cth). This section relevantly provides that a member or officer or a former member or officer may bring proceedings on behalf of a company if the person is acting with leave pursuant to section 237. Section 236(2) provides that proceedings brought on behalf of the Company must be brought in the Company's name.
 
Section 237(2) specifies five criteria, all of which must be satisfied if the court is to grant an application for leave. The five criteria are as follows:

1. It is probable that the company will not itself bring the proceedings, or properly take responsibility for them, or for the steps in them;
2. The applicant is acting in good faith;
3. It is in the best interests of the company that the applicant be granted leave;
4. There is a serious question to be tried; and
5. Appropriate notice has been given or it is appropriate to grant leave.

The Company resisted the application on the basis that several of the statutory criteria governing the grant of leave had not been satisfied. Specifically, the Company contended that:

• Denis was not acting in good faith as he was pursuing an ongoing family vendetta against Claude;
• A derivative action was not in the best interests of the Company as Denis could not demonstrate that a reversal of the transaction would result in an improvement to the Company's commercial position; and
• Denis had not established that there was a serious question to be tried.

(c) Decision
 
Sackville AJ held that Denis had satisfied the criteria specified in section 237(2) of the Act and granted him leave to bring proceedings in the name of the Company. In reaching this decision, Sackville AJ considered the requirements of best interests of the Company, good faith and serious issue to be tried. He also discussed whether an indemnity had been proffered by Denis to protect the Company against any adverse costs orders.
 
(i) Indemnity
 
The Company submitted that Denis had not proffered an indemnity for the costs that would be incurred by the Company in pursuing the derivative proceedings, should leave be granted by the court. In the absence of such an undertaking, section 242 of the Act would empower the court to make an order requiring Denis to indemnify the Company against any adverse costs order. On the evidence before the court, Sackville J held that Denis had proffered an adequate indemnity (bolstered by a costs agreement between Denis's siblings) to protect the Company against any adverse costs orders made against it in the derivative proceedings.
 
(ii) Best interests of the company
 
Section 237(2)(c) requires that the court be satisfied that the proposed derivative action is in the best interests of the Company. According to Sackville AJ, this provision imposes a far higher threshold requirement than a test which merely requires that the proposed derivative action appear to be in the best interest of the Company.
 
Neither party adduced any expert evidence as to the Company's true financial position.  The Company argued that on the evidence presented by Denis, if the allegedly fraudulent transactions in question were reversed, the Company would not be in a better commercial position than at present and the Company's solvency would not necessarily have been assured.
 
However, Sackville AJ was satisfied that it was in the best interests of the Company that Denis be granted leave to institute proceedings in the name of the Company. His Honour considered that if the derivative action was eventually successful, and the fraudulent transactions were reversed, the Company's assets would increase substantially and its liabilities would decrease substantially.
 
(iii) Good faith
 
His Honour identified two interrelated factors to which the courts will always have regard when determining whether an applicant is acting in good faith. The first is whether the applicant honestly believes that a good course of action exists and has a reasonable prospect of success and secondly, whether the applicant is seeking to bring the derivative proceedings for such a collateral purposes as would amount to an abuse of process.
 
The Company submitted that Denis, in seeking to bring proceedings against Claude and his wife, Felicity, did not satisfy the requirements of good faith under section 237(2)(b) of the Act. It contended that Denis was actually a nominee of his three siblings who were co-applicants in an earlier oppression proceeding against the Company. Further, the Company submitted that the real purpose of the proceedings was to pursue an 'ongoing family vendetta against Claude'.
 
The court accepted Denis's evidence that he honestly believed the Company had a basis for pursuing claims against Claude and Felicity and that he wished the Company to benefit from the relief sought.
 
Although there was a long history of bitter disputes in the family, Sackville AJ did not accept the arguments put forward by the Company. The mere fact that Denis was receiving support from family members with a common interest in the proceedings did not establish that he was acting as their 'nominee' or that he was not acting in good faith. Nor did Sackville JA accept that Denis was motivated by a desire to pursue a vendetta against Claude. Accordingly, the court was satisfied that Denis was acting in good faith in bringing the proceeding.
 
(iv) Serious issue to be tried
 
The Company contended that the evidence in the proceedings was insufficient to show that there was a serious issue to be tried in the proposed derivative action. Sackville J disagreed, opining that the material before him suggested that there was a serious issue to be tried on the allegations of breach of fiduciary duty and fraudulent conduct by Claude. Further, his Honour held that the likelihood that Claude and Felicity would rely on limitation defences did not detract from the conclusion that the proposed derivative action gave rise to a serious issue to be tried. The possibility that the derivative action could be met with pleas based on res judicata or issue estoppel did not detract from this conclusion.
 
(d) Conclusion
 
Sackville AJ held that Denis had satisfied the criteria specified in section 237(2) of the Act and granted him leave to bring proceedings in the name of the Company. This grant of leave was, however, subject to an undertaking by Denis to indemnify the Company against any adverse costs orders.
 
In concluding, Sackville AJ made the following comment: "This is the latest episode in a long-running dispute between factions of the Cassegrain family.  It is a matter for them to decide how long and at what cost the disputation continues. As long ago as 13 October 1997, on the first day of the hearing of the oppression proceedings, Davies J pointed out to the parties that the problems faced by the family cannot be resolved by the law.  His Honour observed that the court could not do: 'anything nearly as useful as your getting together and working this out for yourselves.'
 
Eleven years later, the truth of his Honour's observation has been amply borne out."

5.6 Determination of "fair value" of shares

(By Justin Fox and Kate Houghton, Corrs Chambers Westgarth)
 
Candoora No 19 Pty Ltd v Freixenet Australasia Pty Ltd [2008] VSC 367, Supreme Court of Victoria, Hargrave J, 19 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/vic/2008/september/2008vsc367.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
The plaintiff in this case sought a declaration that a valuation report determining the value of shares to be sold under a put option, should be set aside, on the basis that the report was not prepared in accordance with the put option deed. 

The court found that the expert had not considered whether the value was "fair" and, accordingly, the valuation should be set aside.
 
(b) Facts  
 
Candoora No 19 Pty Ltd ("Candoora") and Freixenet Australasia Pty Ltd ("Freixenet") were the only shareholders in Wingara Wine Group Pty Ltd ("Wingara").  Candoora owned 25% of the issued shares in Wingara and Freixenet owned 75%.
 
The relationship between Candoora and Freixenet as shareholders in Wingara was governed by a shareholders deed ("the shareholders deed"), which annexed a put option deed ("put option deed"). 
 
Candoora exercised its rights under the put option deed, to require Freixenet to purchase Candoora's 25% shareholding in Wingara.  The parties could not agree on the put option price.  Pursuant to the terms of the put option deed, a valuer was then appointed to determine the put option price.
 
The put option deed required the valuer to determine the "fair value" of Candoora's shares in Wingara. In reaching a determination of fair value, the valuer was required to value Wingara as an undivided whole, on a going concern basis, and without giving any regard to whether Candoora's shares constitute a controlling interest or a minority interest. 
 
Both parties engaged their own expert to make submissions to the valuer.  Freixenet's expert submitted that the valuer should value Candoora's shareholding by the method of capitalising the future maintainable earnings of Wingara (in which case the value of Candoora's shares would be nil). Candoora's expert submitted that the valuer should value Candoora's shareholding by the method of valuing the net assets of Wingara (in which case the value of Candoora's shares would be $9.65m). The valuer adopted a discounted cash flow methodology. 
 
In issuing a valuation certificate, the valuer certified the "value" of the shares, rather than the "fair value". In a report attached to the valuation certificate, the valuer made no reference to "fair value" but instead refered to the task of determining the "fair market value" of Candoora's shares in Wingara. Candoora submitted that in these circumstances, the valuer had failed to conduct the valuation in the manner required by the put option deed.
 
(c) Decision 
 
Justice Hargrave noted that the court will only set aside an otherwise binding determination by an expert where the expert's determination is not made in accordance with the contract.  Therefore, the key issue for his Honour to consider was whether the valuation was determined in accordance with the put option deed.
 
In this regard, Freixenet sought to rely upon expert evidence to the effect that there is essentially no difference between the terms Fair Value, Fair Market Value and Market Value in an accounting sense.
 
Justice Hargrave rejected the argument that the parties intended the valuer to determine "fair value" in accordance with the special or technical meaning of those words in accounting practice, as described by the expert. Instead, his Honour found that the parties intended the words to have their ordinary meaning.
 
In coming to that conclusion Justice Hargrave looked to certain provisions in the shareholders deed. The court took note, in particular, of a drag along provision that allowed the majority shareholder to force the minority shareholder to sell its shares to the third party, provided that the minority shareholder receives the same price that the majority shareholder receives, which may include a premium above ordinary market value. His Honour was further directed to the pre-emptive rights provisions which required an acquiring shareholder to pay "fair value" for the other parties' shares. His Honour concluded that these provisions demonstrated that the parties intended that any compulsory expropriation of a shareholder's interest in the company would be at a price which demonstrates a degree of fairness.
 
His Honour found that for the valuer to determine the "fair value of Wingara as a going concern", the valuer was required to consider whether the determined value of Wingara as a going concern was, in all the relevant circumstances, a fair value. This required a separate determination of whether the recommended value was in fact fair.
 
This would involve the valuer considering the circumstances of the particular case and, where those circumstances reveal one or more factors which may affect the fairness of a valuation arising from a particular valuation method, determining whether that method should be modified or abandoned in favour of another method (or combination of methods) which is more likely to result in a fair valuation. His Honour identified a broad range of factors which have been identified in the case law as informing the criterion of fairness in the circumstances of those cases, but noted that each case must depend on its own facts. These factors included assets, market value, dividends, and the nature of the corporation and its likely future.
 
His Honour found that a reading of the valuation as a whole demonstrated that it contained no reference to the need for the valuer to ensure that the value which was determined was a "fair value". His Honour rejected submissions on behalf of Freixenet that the valuer did give consideration to the criterion of fairness by making certain adjustments in determining the value, as there was no mention in the report of these adjustments having been made to ensure fairness.
 
His Honour also found that the valuer did not consider any of the factors which the case law indicates may be relevant to the determination of fair value. By way of example, his Honour noted that the valuer did not consider the relationship between Candoora and Freixenet under the shareholders deed and, in particular, the possibility of a sale of Wingara as a going concern to a third party who may be willing to pay a special value attaching to that party. His Honour found that the failure of the valuer to consider any of those factors reinforced the conclusion that the valuer did not give any separate consideration in the course of the valuation process to the governing criterion of fairness.
 
Justice Hargrave found that the valuation was not made in accordance with the put option deed and should be set aside.
 

5.7 Stock lending agreements not closed out by voluntary administration or receivership
 
(By Stephen Magee)
 
Lindholm, in the matter of Opes Prime Stockbroking Limited (Administrators appointed) (Receivers and Managers appointed) [2008] FCA 1425, Federal Court of Australia, Finkelstein J, 17 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2008/september/2008fca1425.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
Stock lending agreements were not automatically closed out when the borrower of the stock went into voluntary administration and receivership.
 
(b) Facts  
 
Opes Prime Stockbroking Ltd borrowed stock, effectively as security for loans. The relevant contracts (based on the Australian Master Securities Lending Agreement) provided that the contracts would be closed out and the claims of the borrowers and Opes netted out if there were an Event of Default. Default occurred automatically if "a liquidator or analogous officer" was appointed. Voluntary administrators and receivers and managers were appointed to Opes Prime.
 
The administrators of Opes Prime were preparing for the second creditors' meeting. For that, they needed to know how to estimate the creditors' claims for voting purposes. A group of creditors had not taken any steps to close out their contracts. The question for the administrators was whether the appointment of the administrators or receivers had triggered the automatic close-out provision: in other words, was an administrator or a receiver "analagous" to a liquidator?
 
The practical importance of this lay in the fact that, on close-out, Opes' liability was to return the borrowed shares or pay their value. The value of some of the shares had fallen since the appointment of the administrators and receivers. If the appointments had triggered automatic default, Opes' monetary liability would be higher than if default occurred at a later time. The administrators needed to know how to estimate the value of those creditors' claims for voting purposes.
 
There was also the possibility that, if automatic default had not yet happened, someone could manipulate the price of the relevant shares, to change the size of Opes' liability.
 
A preliminary issue was whether the stock lending agreement was a "close-out netting contract" under section 5 of the Payment Systems and Netting Act 1998 (Cth). Section 14 of that Act preserves the effectiveness of certain netting agreements notwithstanding the application of the pari passu rule under Chapter 5 of the Corporations Act.
 
Finally, the administrators asked the court how they should advise the creditors, in their section 439A report, about how their proofs would be dealt with in a liquidation. The administrators intended to state that, in liquidation, the shares would be valued as at the date of the appointment of the administrators. This was because, if creditors under a voluntary administration vote to wind up the company, sections 513A and 513C deem the winding up to have begun on the date of the appointment of the administrators. Section 554(1) requires the amount of any debt or claim against the company to be computed from that relevant date. From this, the administrators concluded that the positions of Opes and the share lenders would be netted out on that date.
 
(c) Decision 
 
The court held that the stock lending agreement was covered by the Payment Systems and Netting Act.
 
However, the court then held that the agreement had not been automatically closed out by the appointment of administrators and receivers. Administrators and receivers were not "analogous" to liquidators:
 
"In my view, whether the issue of `analogy' is approached from the perspective of the nature of the appointee or from the principal consequence of the appointment, the result must be the same: a liquidator is not analogous to either an administrator or a receiver appointed by a secured creditor. The function of a liquidator - whether called a liquidator, a trustee, a receiver, a curator or a syndic - is to preside over the death of a company. An administrator appointed in rescue proceedings strives for the opposite result (even though the company may yet in the end die). A receiver appointed by a secured creditor does neither of those things, being largely unconcerned about the fate of the company. From any perspective, the offices are poles apart."
 
This meant that, apart from the case of those counterparties who had already taken steps to close out their contracts, the automatic close-out provision had not been triggered for many counterparties.
 
How were the administrators to estimate the value of the claims of those counterparties?
 
The court agreed with the administrators that the preferable course would be for the administrators to estimate the lenders' claims for voting purposes as if default had occurred immediately before the second creditors' meeting. It opined, however, that it might be necessary to obtain an order under section 447A to set the appropriate date.
 
The court then disagreed with the administrators' conclusion that, if the creditors voted for a winding up, the stock lending agreements would be netted out as at the date of the administrators' appointment.
 
It was true that that would be the date for assessment of the stock lenders' claims, but that did not necessarily mean that the stock lending agreements would be netted out as at that date. When the administrators were appointed, the stock lending agreements were still on foot: all that the stock lenders had at the point were contingent or future claims against Opes. The liquidator's job was to put a value on those claims as at the date of appointment of the administrators. However, that valuation had to take into account subsequent events - including the actual loss that would be suffered: "the amount to be admitted to proof will be the debt due on the day the claims are in fact closed out".
 

5.8 Effect of errors in material relied upon to found ASIC's jurisdiction under s. 206F(1)
 
(By Kathryn Finlayson, Minter Ellison)
 
Australian Securities and Investments Commission v Murdaca [2008] FCA 1399, Federal Court of Australia, Gordon J, 16 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2008/september/2008fca1399.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
Section 206F permits ASIC to disqualify a person from managing corporations for up to five years if certain conditions were met. The two criteria in section 206F(1)(a) are preconditions to the operation of section 206F(1). Once the preconditions are factually met, the Australian Securities and Investments Commission's jurisdiction under that section is enlivened regardless of whether some or all of the material supporting the preconditions are erroneous. 

(b) Facts  

The respondent, Mr Murdaca, was an officer of three corporations to which liquidators had been appointed (two of which were subsequently deregistered) - Australian Automotive Motor Inspection Centre Pty Ltd (in liquidation) (AAMIC), Amalgamated Motor Industries Pty Ltd (deregistered) (AMI) and Market Place Properties Pty Ltd (deregistered) (MPP). 
 
The respondent had previously been a director of Delitat Pty Ltd (deregistered) (Delitat) and Total Motor Vehicle Protection Pty Ltd (deregistered) (TMVP).

On 10 July 2006, the applicant, the Australian Securities and Investments Commission (ASIC) issued a notice to the respondent pursuant to section 206F(1)(b) of the Corporations Act 2001 (Cth) requiring him to demonstrate why he should not be disqualified from managing corporations.
 
Section 206F is entitled 'ASIC's power of disqualification' and permits ASIC to disqualify a person from managing corporations for up to five years if certain conditions were met. Of particular relevance was section 206F(1)(a) which provides that, within seven years immediately before ASIC gave a notice under paragraph (b), the person had been an officer of two or more corporations and while the person was an officer, or within 12 months after the person ceased to be an officer, each of the corporations was wound up and a liquidator lodged a report under subsection 533(1) about the corporation's inability to pay its debts. 
 
After conducting a hearing and receiving written submissions, on 29 September 2006, ASIC disqualified the respondent from managing corporations for two years pursuant to section 206F(1).
 
On 20 February 2007, the respondent appealed to the Administrative Appeals Tribunal (AAT) for a review of the disqualification.  The AAT set aside the disqualification on 18 March 2008.
 
ASIC appealed to the Federal Court alleging four errors of law:

1. the determination by the AAT that it was not necessary to consider matters relating to AAMIC as the requirements of section 206F(1)(a) had not been met, namely that although the relevant section 533 reports had been filed, at least one of the reports may have been filed erroneously;
2. the determination by the AAT that MPP was not a company that fell within section 206F(1)(a)(ii) because the section 533 report lodged in respect of it was erroneous in a material respect;
3. the determination by the AAT that it was not necessary to consider Delitat and TMVP as those companies were not listed in the section 206F notice; and
4. the determination by the AAT that it was not necessary to consider the totality of the evidence concerning the respondent's conduct in relation to the management of corporations.

(c) Decision 
 
Justice Gordon allowed the appeal, set aside the AAT's decision and remitted the matter for hearing and determination according to law.
 
In relation to the first two grounds of appeal, her Honour held that the two criteria in section 206F(1)(a) are preconditions to the operation of the section and that once the preconditions were met, ASIC's jurisdiction was enlivened.  ASIC's jurisdiction was enlivened regardless of whether some or all of the materials in support of the factual preconditions were erroneous.  The merits of the materials in support of the preconditions were properly to be considered by ASIC under section 206F(1)(c) and (2) when deciding whether it should make a disqualification order. 
 
In relation to the third ground of appeal, Justice Gordon held that the AAT could and should have considered the other two corporations of which the respondent had been an officer and which had been deregistered, Delitat and TMVP. 
 
Provided proper notice and an opportunity to be heard are given, the fact that a matter was not stated in the initial notice did not provide a basis for excluding the matter from consideration. 
 
As the fourth ground of appeal was wholly dependent on the first and third grounds in respect of which her Honour found in favour of ASIC,  her Honour also upheld ASIC's appeal in respect of the fourth ground. 
 
Before making her orders, Justice Gordon discussed the role of the AAT in dealing with applications for review as she considered that the respondent's submissions 'reflected a fundamental misunderstanding' as to the role of the AAT in such proceedings.

5.9 Breach and repudiation of a partly written and partly oral contract

(By Rebecca Tsang, Blake Dawson)
 
Fraser v The Irish Restaurant & Bar Company Pty Ltd [2008] QCA 270, Supreme Court of Queensland, Court of Appeal, McMurdo P, Muir JA and Wilson J, 12 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/qld/2008/september/2008qca270.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
This case concerns an appeal against the decision of the primary judge who:

• held that the respondent's obligation to pay the balance of the purchase price under a partly written and partly oral contract for the sale and purchase of shares was contingent upon the applicant rendering an invoice for that amount; and
• ordered the applicant to pay the respondent's costs of the proceedings.

McMurdo P, Muir JA and Wilson J gave separate reasons for judgment but concurred as to the orders made.  The court ordered that:

• in each application, leave to appeal be granted and the appeal be allowed;
• in each appeal, the orders at first instance be set aside;
• the respondent pay the applicant the balance of the purchase price together with interest;
• the respondent pay two-thirds of the applicant's costs of the proceedings at first instance, including reserved costs, if any, on the standard basis; and
• the respondent pay the applicant's costs of and incidental to the applications for leave to appeal and the appeals, to be assessed on the standard basis.

(b) Facts  
 
The applicant was employed by the respondent as general manager of two of the respondent's restaurants.  The applicant acquired 4.5 per cent of the issued shares in the capital of one of the respondent's restaurant companies, American Pie Restaurant Pty Ltd (American Pie).  Mr Mulhern, a director of the respondent offered to purchase the applicant's shares in the company for $110,000.
 
The contract for the sale and purchase of the shares was partly written and partly oral (Contract).  It consisted of conversations on an occasion in mid February 2004 between the applicant and Mr Mulhern.  These conversations included discussion of making one payment of $70,000 to the applicant, and one payment of $40,000 to Civic Steel Construction (or any other construction company engaged by the applicant) on presentation of an invoice for that amount to Mr Mulhern's construction company (Mulhern Constructions Pty Ltd).
 
The written components of the contract comprised:

• a document entitled "proposed share redistribution" dated 23 February 2004 which did not mention any provision for payment of the purchase price in two instalments;
• a letter from American Pie to the applicant dated 5 March 2004 noting that $70,000 would be re-paid to the applicant for its interest in American Pie; and
• a letter from the applicant dated 5 March 2004 requesting an invoice from Civic Steel Constructions for $40,000.

There was also evidence of another letter dated 16 April 2004 signed by the applicant and provided to the respondent which requested that $40,000 be paid to Civic Steel Construction.
 
On 16 April 2004 there was a meeting between the applicant and the respondent which turned into a confrontation.  Although the applicant worked the next day, his employment was terminated with effect from 19 April 2004.  By this time the $70,000 had been paid and the shares transferred to the respondent.  An invoice for $40,000 was never tendered.  The respondent made it clear to the applicant before the end of 2004 and, perhaps not long after 16 April 2004, that it would not pay the balance of $40,000.
 
(c) Decision 
 
(i) Repudiation
 
Muir JA held that the applicant could not avoid the consequences of not having submitted the invoice to Mulhern Constructions by contending that on or about 16 April 2004 the respondent repudiated the Contract and the applicant accepted the repudiation. The repudiation allegation was inconsistent with the applicant's case as the applicant sued on the Contract.  Accordingly, if there was a repudiation it was not accepted by the applicant.
 
The respondent argued that it was denied the opportunity of addressing the repudiation argument in evidence as it had not been raised at first instance and it would not accord with principle for the applicant to be permitted to mount such a case now.  Muir JA held that there would be more force in the submission if the alleged repudiation had not been pleaded expressly.  In the present case, acceptance of the alleged repudiation was not pleaded, but Muir JA doubted what further or different evidence the respondent might have called at trial had the applicant argued at first instance that the Contract had been terminated.  Wilson J agreed generally with Muir JA's reasoning and made some additional observations in relation to the applicant's repudiation argument.
 
Muir JA held that there was a separate basis on which the $40,000 was recoverable.  The general principle is that a party to a contract must perform exactly what he undertook to do.  As a general rule, where payment is due on demand or upon the performance of some other act by the creditor, the creditor cannot sue before making demand or performing the act.  Muir JA held that it would be a surprising result if the respondent was able to keep the shares without paying the full purchase price merely because the applicant had demanded payment to him of the balance purchase price instead of presenting an invoice for payment on his behalf.
 
(ii) Deed of compromise
 
The respondent alleged that the agreed consideration payable under the Contract was $70,000.  In the alternative, the respondent alleged that the Contract fell within clause 6.1 of a deed of compromise entered into between the applicant and the respondent on 6 September 2004 which released the respondent from all claims and liabilities "arising out of or in any way connected" with the applicant's employment or termination of employment (Deed), including under the Contract.
 
The respondent submitted that the applicant's relationship with the respondent, being the applicant's employment by the respondent and their common status as shareholders of American Pie, depended on the applicant's employment by the respondent.  The respondent submitted that at the time of the execution of the deed, both parties were well aware of the existence of the share purchase agreement which had been concluded, at the latest, in February 2004 and the applicant was aware of his potential claim for $40,000.
 
Muir JA cited Elderslie Property Investments No 2 Pty Ltd v Dunn [2008] QCA 158.  Applying the principles of the construction of commercial contracts, the phrase "in connection with" is capable of having a wide meaning but as with expressions such as "relating to" and "in respect of", its meaning must be derived from the context in which it was used.  Muir JA also held that the views expressed in Hatfield v Health Insurance Commission (1987) 15 FCR 487 and R v Orcher (1999) 48 NSWLR 273, although directed to questions of statutory construction, are equally applicable to contractual construction.
 
Muir JA held that for a "claim" or "liability" to fall within clause 6.1 of the Deed, there must be a sufficient nexus between it and the applicant's employment or the termination of his employment.  The recitals to the Deed suggested that in negotiating its terms the parties were concerned to resolve any issues between them or which may arise subsequently in relation to the employer/employee relationship which existed between them. The backdrop to the Deed was the proceedings in the Industrial Relations Commission instigated by the applicant against the respondent. There was no suggestion in the evidence that negotiations concerning the Deed made reference to or were concerned in any way with the Contract.
 
Muir JA held that the applicant's claim for payment of the balance of the purchase price for his shares in American Pie was not relevantly connected with his employment or its termination.  Even though, but for his employment, he would not have had the opportunity of acquiring the shares, his interest in the shares, once acquired, was in no way dependent on his continued employment. His rights in respect of the shares arose from his title to the shares and had no connection, however remote, with his status as an employee.  Muir JA noted that:

• the sale of the applicant's shares was not part of an agreement or transaction entered into consequent upon or relating to the termination of his employment; and
• the entering into of the Contract was remote in time from the termination of the applicant's employment.

Muir JA held that the result would be the same if the principle in Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112, that "the general words of a release will, in an appropriate case, be read down to conform to the contemplation of the parties at the time the release was executed" was applied.
 
Wilson J agreed generally with Muir JA's reasoning and made some additional observations in relation to the scope of the Deed and application of the principle in Grant v John Grant & Sons Pty Ltd (1954) 91 CLR 112.
 
(iii) Costs
 
Muir JA held that it was inappropriate that the respondent pay all of the applicant's costs of the proceedings in the first instance given the respondent's success in resisting a second claim by the applicant (for a deposit and a share of profits).  It was also relevant that the applicant's appeal succeeded on a ground not argued at first instance.

5.10 Adjournment of winding-up application

(By Michael Watts, Blake Dawson)
 
Re Octaviar Limited (Formerly MFS Limited) [2008] QSC 216, Supreme Court of Queensland, McMurdo J, 12 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/qld/2008/september/2008qsc216.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
The Public Trustee of Queensland (PTQ) sought orders from the court to appoint a liquidator to wind up Octaviar Limited (ACN 107 863 436) and three of its subsidiaries (the Group). The Group owed approximately $350 million to more than 500 noteholders represented by the PTQ.
 
McMurdo J held that in the short term, the interests of creditors would be best served by the Group being given a limited opportunity of an administration regime.  Consequently, upon certain undertakings provided by the respondent Group, McMurdo J favoured the appointment of administrators and the adjournment of the winding-up applications.
 
McMurdo J made a number of orders, however on request from the PTQ, he adjourned the decision until 9:30am on Monday, September 15 to allow the PTQ to consult with noteholders.
 
(b) Facts
 
In January 2008, Octaviar announced plans to separate the Stella business from the Group's financial services businesses.  Immediately, Octaviar's shares fell by more than two-thirds, and a few days later the shares were suspended from trading and remain so. Octaviar had a severe shortage of cash and took steps to sell a 65% interest in the Stella Group. The sale yielded approximately $400 million, of which about $190 million was used to repay a secured debt to Fortress Credit Corporation (Australia) II Pty Limited.
 
The Group's financial position as at 31 May 2008 was stated as having total assets of $590 million (including $169 million in cash and $215 million interest in the Stella Group). There were total liabilities of $1,026 million resulting in net liabilities of $436 million. In addition there were contingent liabilities totalling about $600 million.
 
When the hearing of the applications commenced, the substantial contest was whether the applications should be adjourned in order for the Group to continue to pursue a proposal for compromises with its large creditors. The Group had been endeavouring to reach an agreement for some months.
 
The Group first proposed that provided large creditors agreed to take no recovery or enforcement proceedings for a standstill period, the Group would make some initial pro rata distribution and continue to realise assets "as and when appropriate" with further distributions as funds became available. This proposal was not accepted.
 
Under the revised proposal, the creditors were to be offered a choice between an immediate cash payment for the discharge of the debt or agreeing to wait for an expected higher payment after the realisation of assets (in particular the remaining assets of the Stella Group). It was anticipated that $120 - $130 million of the Group's cash would be used for those who opted for the immediate payment.  Those who chose to be paid immediately were expected to receive approximately 22.5 cents in the dollar.
 
It was intended that the proposal would be considered by all creditors prior to the hearing of the applications (9 and 10 September). However, after the original hearing dates were filed, the PTQ, concerned with the dissipation of assets of allegedly $2-3 million a month, sought to have them brought forward. Chesterman J agreed to make them 24 and 25 July.
 
On 24 July, the Group and creditors sought to adjourn the hearing to the original hearing dates in order to properly consider the proposal.  Between 24 July and 8 September, the noteholders and the PTQ adjourned a number of meetings scheduled to consider the proposal.  On 8 September, the majority noteholder again sought an adjournment. The meeting was adjourned to 30 September.
 
Despite this, minutes before the commencement of the hearing on 9 September, the respondent Group were served by solicitors of the PTQ with an affidavit stating that the noteholders had rejected the proposal and believed it was in the best interest of all creditors that the companies be wound up without delay.
 
(i) Administration or winding-up?
 
The issue became whether the companies should be allowed to appoint administrators with an adjournment of the applications for winding up or whether winding up should be ordered.  The companies argued that it was in the best interests of creditors that some alternative arrangement be considered under the regime of an administration.
 
Counsel for the PTQ applied for (and was granted) an interim injunction to restrain the appointment of administrators. The PTQ argued that it had a prima facie entitlement to orders for winding up and that there was a significant risk from the appointment of administrators now, in advance of orders for winding up, because of the impact upon the operation of the voidable transaction provisions and in particular upon what would constitute the "relation-back day".
 
Section 9 of the Corporations Act 2001 (Cth) (the Act) defines relation-back day as:

• if, because of Division 1A of Part 5.6, the winding up is taken to have begun on the day when an order that the company or body be wound up was made - the day on which the application for the order was filed; or
• otherwise - the day on which the winding up is taken because of Division 1A of Part 5.6 to have begun.

The application of Division 1A of Part 5.6 in the present context is as follows. If the Group was ordered to be wound up before the appointment of administrators, then the case would fall within s. 513A(e) of the Act and thus within paragraph (a) of the definition of relation-back day. The result would be that the relation-back day would be the day of the filing of the winding up application, in each case being 4 June 2008.
 
However, if administrators were appointed before the companies were ordered to be wound up, and the companies were under administration "immediately before" the orders for their winding up, they would be within s. 513A(b) and consequently s. 513C would apply. The result would be that the winding up would have been taken to begin on the day on which the administration began and the case would be within paragraph (b) of the definition of relation-back day. The consequence would be that the relation-back date would be no earlier than 9 September.
 
The PTQ argued that there was a "more than theoretical risk" that this difference of three months could be critical.  McMurdo J agreed that if the relation-back day was not 4 June, there could be a loss of the order of $12.8 million while there was also the prospect that transactions totalling $90 million could be affected.
 
The Group argued that there was no significant risk for the operation of the voidable transaction provisions in an administration preceding a winding-up. First, they argued that there was no demonstrated risk that the three month difference would matter. Secondly, they argued that it was possible for orders to be made fixing the relation-back day to be 4 June regardless of whether administration preceded liquidation.
 
The Group argued that this "theoretical risk" from the difference in the relation-back day could be avoided by granting orders under s. 447A that, should the companies be placed into administration, s. 439C of the Act would operate as if it did not include paragraph (c). The companies offered undertakings to appoint an administrator pursuant to s. 436A forthwith and in the event that the administration ends otherwise than upon a deed of company agreement, not to seek any further adjournment of the winding up application and to consent to an order for the winding up of the company.
 
The result would be that the administration would lead to a deed of company agreement or would fall under s. 439C(b), in which case the application could be re-listed and after some interval, the winding up order made. This would ensure that the company was not under administration "immediately before" the order for its winding up and the issues in relation to the relation-back day would be resolved.
 
McMurdo J concluded that this suggestion would provide an effective and proper means of avoiding the problems of the relation-back day and prevent a serious risk to creditors by an administration preceding liquidation.
 
(ii) Should the application for winding-up be adjourned to permit the administrations to go forward?
 
Section 440A(2) provides that a court may adjourn a hearing of an application for an order to wind up a company if the company is under administration and the court is satisfied that it is in the best interests of the company's creditors for the company to continue under administration rather than be wound up.
 
The PTQ had argued against an adjournment saying that the court could not be satisfied that the interests of creditors favour an administration.  The PTQ relied on the statement of McPherson JA in Creevey v Deputy Commissioner of Taxation (1996) 18 ACSR 456 where his Honour said, "in order to satisfy the court of the matter referred to in section 440A(2). one would expect that there would have to be some persuasive evidence to enable it to be seen that there were assets which, if realised under one form of administration rather than the other, would produce a larger dividend, or at least an accelerated dividend for creditors".
 
McMurdo J noted that in that case there was "practically no evidence that the company (had) any assets whatsoever", so that there was no basis for an evidentiary finding on that question.  McMurdo J noted the comments of McDougall J in SGB Raffia v Gammacon (No 2) [2007] NSWSC 1510, where he stated that McPherson JA in Creevey "was not purporting to reframe the statutory test, rather, to state its application firstly in the case before the court and secondly by reference to more general considerations".
 
In Deputy Commissioner of Taxation v Bradley Keeling Management Pty Ltd (2003) 44 ACSR 377 at 380, Campbell J stated that "ultimately what the court needs to do is to be persuaded.  The amount of proof which can result in persuasion, differs with the circumstances in which litigation comes before the court".
 
Campbell J noted that in certain situations, where very little is known about the affairs of the company, comparatively very little material might be needed to justify a short adjournment.
 
While acknowledging the arguments of both sides, McMurdo J stated that he could not be satisfied, at least in the short term, that the interests of creditors were not best served by the companies being given the opportunity of a regime of administration.
 
McMurdo J noted that most of the value of the unsecured creditors favoured the appointment of administrators, while there was substantial evidence that a liquidation would involve the sale of assets at a considerable undervalue.  McMurdo J concluded that he was satisfied that in the short term (six weeks), the interests of creditors favoured the appointment of administrators and an adjournment of the winding up application.
 
(c) Decision
 
Upon the Group providing an undertaking (1) to appoint an administrator pursuant to section 463A of the Act and (2) in the event that such administration ends otherwise than upon a deed of company arrangement being executed by both the company and the deed's administrator, agreeing not to seek any further adjournment of the present application for winding up by the PTQ and to consent to an order for the winding-up of the company upon that application, McMurdo J stated that he intended to order pursuant to section 447A that until further order, section 439C will operate as if it did not include paragraph (c). 
 
McMurdo J further intended to adjourn the application for winding up, filed on 4 June 2008 until 24 October 2008.  When McMurdo J indicated that these would be his orders, he was persuaded by the PTQ to stand the matter down for several days so that the PTQ could consult at least some noteholders.

5.11 Corporate criminal liability

(By Shipra Chordia, Freehills)
 
Presidential Security Services of Australia Pty Ltd v Clinton Joseph Brilley [2008] NSWCA 204, New South Wales Court of Appeal; Allsop P, Beazley JA and IPP JA, 9 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/nsw/2008/august/2008nswca204.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
Mr Bingle, who was sole employee and managing director of the defendant, shot and injured the plaintiff, an intruder to the premises at which Mr Bingle was acting as a security guard during the course of his employment with the defendant. The trial judge held the defendant liable for the offence of battery and assault and awarded the plaintiff damages. The defendant appealed the judgment on a number of grounds, including that the trial judge had made incorrect factual findings and failed to adequately engage with the defence. An important question during the appeal was whether the defendant company could be held criminally liable for the offence.
 
The court held that there are only rare circumstances where a company could not be held criminally liable for an offence. To determine whether the offence is capable of being attributed to a body corporate, recourse must be had to the words of the statute and the nature of the offence. Once it is established that the offence can be so attributed, there are two means of attribution: vicarious liability or that the natural person who carried out the act and held the requisite intention was the directing mind and embodiment of the company.
 
The court held that the trial judge had erred in her factual findings and had failed to adequately engage with the defence. The court did not come to a conclusion as to whether the acts and intention of Mr Bingle could be attributed to the defendant, but held that the issue should be explored in retrial.
 
(b) Facts
 
David Arthur Bingle was a security guard at Earlwood Bardwell Park Sports Club. He was managing director and sole employee of the appellant (hereafter referred to as the defendant) and was guarding the premises in the course of his employment with the defendant. The respondent (hereafter referred to as the plaintiff) broke into the premises at 4am on 23 June 2003. Mr Bingle fired a revolver at the plaintiff and wounded him.
 
The plaintiff claimed damages for personal injuries from the defendant, relying on assault and battery 'on the part of the defendant through its servants, agents and/or subcontractors'. The trial judge upheld the plaintiff's cause of action based on assault and battery.
 
The defendant appealed against the decision, challenging certain factual findings of the trial judge and arguing that the trial judge had failed to properly consider and apply the provisions of the Civil Liability Act 2002, failed to properly engage with the defence and failed to give adequate reasons.
 
(c) Decision
 
The court considered the trial judge's factual findings and reasoning to assess whether the trial judge had adequately engaged with arguments presented by the defence, including self-defence and s. 54 of the Civil Liability Act 2002. The court also considered whether the conduct of Mr Bingle could correctly be attributed to the defendant company, making the defendant criminally liable. This aspect of the judgment is discussed in detail below.
 
(i) Can a company be criminally liable for an offence?
 
The court first addressed the question whether a company can be criminally liable for an offence. Allsop P noted that the proposition that a corporation cannot be criminally liable because criminal acts necessarily go outside the (lawful) objects of a corporation had been rejected in Australian law: Linehan v The Australian Public Service Association (1983) 67 FLR 412 at 435-36. The proposition was based on the fallacy that civil and criminal responsibility are governed by the same considerations, and this was difficult to sustain in light of sections 124 and 125 of the Corporations Act 2001 (Cth).
 
Ipp JA, with whom Beazley JA agreed, was of the view that there are only two classes of criminal offence that a company cannot commit. The first, including suicide or bigamy, arises by virtue of the company's status as an unnatural or artificial person. The second encompasses offences that are only punishable by imprisonment. This second class has all but been eliminated by the introduction of section 16 of the Crimes (Sentencing Procedure) Act 1999 (NSW) which converts punishment by imprisonment into a pecuniary penalty.
 
Allsop P agreed, holding that more recent cases and changes to legislation had narrowed the category of offences that might be considered, by their very nature, incapable of being committed by a company. Bigamy could be considered an exception, because it is not possible for such an act to be committed in the capacity of a company and therefore be attributed to it. However, other crimes, such as perjury and sexual offences, could in some instances be attributed to a company.
 
Allsop P held that the liability of the company for a particular breach of criminal law would depend, in significant part, upon the nature, elements and terms of the offence. The process of 'attribution' of criminal responsibility will be at least partly based on statutory interpretation of the provision creating the offence: Meridian Global Funds Management Asia Ltd v Securities Commission [1995] 2 AC 500. The words of the statute will determine questions in relation to the need for a 'guilty mind' or mens rea, the nature of that mental state and the person, agent or organ of the company who must have that state.
 
Referring to section 16 of the Crimes (Sentencing Procedure) Act 1999 (NSW), and to section 10(1) of the Criminal Procedure Act 1986 (NSW) which states that '[u]nless a contrary intention appears, a provision of an Act relating to an offence applies to bodies corporate as well as individuals', Allsop P concluded that, in the absence of contrary intention, the offences of which Mr Bingle was accused (i.e. sections 61, 33A, 93G and 93GA(1) of the Crimes Act 1900 (NSW)) were capable of being attributed to a body corporate.
 
(ii) Vicarious liability
 
Ipp JA, with whom Beazley JA concurred, held that once it is established that a company is capable of committing a particular offence, there are two bases on which a company can be found guilty of that offence. The first is vicarious liability and the second is that the person who committed the actus reus and had the requisite mens rea was the directing mind and embodiment of the company: Tesco Supermarkets Ltd v Nattress [1972] AC 153.
 
Generally, a company would not be found guilty, on the basis of vicarious liability, for offences having a mens rea element. This is because 'in general, criminal liability only results from personal fault': Tesco Supermarkets Ltd v Nattress at 179 per Lord Morris. However where mens rea is not an element of the offence, the company may be held vicariously liable as the duty is absolute: Mousell Brothers Ltd v London and North-Western Railway Co (1917) 2 KB 836 at 845. On the basis that assault is not an offence of strict or absolute liability, Ipp JA concluded that the defendant could not be held criminally vicariously liable for the acts of Mr Bingle.
 
Allsop P did not consider the issue of vicarious liability relevant. However, in considering a separate point, Allsop P did come to the view that there is sufficient authority supporting the proposition that a company could be convicted of a crime requiring specific or malicious intent: DPP and Kent & Sussex Contractors Ltd [1944] KB 146; R v Haulage Ltd [1944] KB 551; Moore v Bresler Ltd [1944] 2 All ER 515. These cases did not rest on principles of vicarious responsibility.
 
(iii) Directing mind and embodiment of the company
 
Ipp JA held that, although the defendant could not be held vicariously liable for the assault occasioned by Mr Bingle, it could be held liable on the grounds that Mr Bingle was its directing mind and physical embodiment. Ipp JA held that since Mr Bingle was the managing director and sole employee of the defendant and referred to the defendant as 'my company', the recognised tests had been satisfied. Ipp JA also considered that, inherent in the defendant's admission in pleadings that it was vicariously liable for the acts of Mr Bingle, was the further admission that Mr Bingle was the directing mind and embodiment of the defendant.
 
Allsop JA was of the view that, for a company to be attributed with the intentions of a person for the purposes of criminal responsibility, the person must be acting in furtherance of the company's interests (or at least not against them): Director of Public Prosecutions v Gomez [1993] AC at 464-5, 491-2 and 496-97; Attorney-General's Reference (No 2 of 1982) [1984] 1 QB 624; R v Philippou (1989) 89 Cr App R 290.
 
Allsop P concluded that if Mr Bingle was not seeking to perform or execute the defendant's responsibilities to the Club, but had engaged in a violent attack on the plaintiff for reasons other than self-defence, it may be that, although Mr Bingle was managing director and sole employee of the company, he was no longer acting for the company. This question would need to be addressed at any new trial.
 
Beazley JA concurred with Ipp JA's statement of principle, but agreed with Allsop P in that the court should not reach a conclusion as to whether Mr Bing was in fact the directing mind and will of the defendant as this issue had not yet been explored at trial.
 
The court concluded that there were serious problems with the trial judge's factual findings, and that the trial judge did not adequately engage with arguments presented by the defence, including self-defence and section 54 of the Civil Liability Act 2002. The court held that there had been a miscarriage of justice in the trial and that the matter should be remitted to the District Court for rehearing. 

5.12 Return of proxies: a conservative and practical approach sprinkled with a good deal of common sense

(By Kristian Imbesi, Mallesons Stephen Jaques)
 
Portman Iron Ore Ltd (ACN 007 871 892); re Golden West Resources Ltd (ACN 102 622 051) [2008] FCA 1362, Federal Court of Australia, McKerracher J, 5 September 2008
 
The full text of this judgment is available at:

http://cclsr.law.unimelb.edu.au/judgments/states/federal/2008/september/2008fca1362.htm

or

http://cclsr.law.unimelb.edu.au/judgments/search/advcorp.asp
 
(a) Summary
 
This decision concluded that, even though s. 250B the Corporations Act does not explicitly require voting proxies to be returned directly to the company, practical considerations and judicial authority point to that implicit requirement as being the preferable view, and one that contains a good deal of common sense.
 
In deciding whether to grant declaratory relief in response to a provisional decision about the validity of votes made by the chairman of a meeting, Justice McKerracher declined relief  on the basis that the relief would not achieve anything in terms of reversing or validating the resolutions, nor would it resolve any outstanding matter between the parties. This was true because the validity of the proxy votes in question had no ultimate effect on the outcome of the vote.
 
In summarising his response to judicial authority on the appropriateness of granting declaratory relief, his Honour stated that:

".declaratory relief is a discretionary equitable remedy. The power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements ought not to be issued unless there are circumstances calling for their making".
 
(b) Facts
 
Portman Iron Ore Ltd (Portman) owns a 19.2% of the voting shares in the listed, public company, Golden West Resources Ltd (Golden West). Portman served a notice on Golden West pursuant to section 249D of the Corporations Act 2001 (Cth) ("Act") requesting Golden West call and hold a general meeting of its shareholders. Portman was seeking to propose motions to remove two current Golden West directors and replace them with two directors nominated by Portman.
 
The notice of meeting form that Golden West sent out to shareholders contained a proxy form for voting. Portman, however, also wrote to Golden West shareholders, setting out Portman's recommended vote and reasons for voting on all of the motions proposed by the notice of meeting. The Portman letter included a pre-completed proxy form which advised shareholders about how to complete and lodge the pre-completed proxy form ("Portman proxy"). Portman asked shareholders to return the completed Portman proxies to Portman's office by a certain date, so that Portman could subsequently deliver them to Golden West before the extraordinary general meeting in compliance with section 250B of the Act.
 
Portman received approximately 181 completed and returned Portman proxies, which represented about 12% of the total voting shares of Golden West. Portman then delivered these forms to Golden West's office before the meeting, just prior to the deadline for lodgement. Mr Martin Bennett, who was to chair the meeting, called Portman on the afternoon before the meeting to say that he had formed the provisional view that the completed Portman proxies were invalid, and that they would be thus disallowed.
 
Portman filed proceedings with the Federal Court an hour before the meeting was due to be held seeking declaratory relief and/or alternative orders under section 23 or 21 of the Federal Court of Australia Act 1976 (Cth) or, in the alternative, pursuant to section 1324 of the Corporations Act. Specifically, Portman sought orders that Golden West not act on any resolution to be put at the meeting or, alternatively, that Golden West be restrained from holding the meeting.
 
(c) Decision 
 
(i) Appropriateness of granting declaratory relief
 
Justice McKerracher considered the threshold issue of the matter to be whether declaratory relief was appropriate in the circumstances. At the time of judgment, Portman had accepted that even if the Portman proxies were held to be valid, their inclusion in the vote would not change the outcome (i.e. the significant majority of votes cast were contrary to Portman's wishes). As the requested declaratory relief could therefore make no difference to the outcome of the vote, his Honour was left to consider whether such relief was appropriate at all.
 
Portman submitted that they sought declaratory relief so that they could know, for future purposes, whether collecting completed proxies before forwarding them onwards was a valid practice in compliance with section 250B of the Act. Portman also sought a declaration, it submitted, to show shareholders that the vote was closer than they might have thought, and that this would be of practical use to Portman in any future hypothetical meetings.
 
Justice McKerracher began his reasoning on the matter with reference to Industrial Equity Ltd v New Redhead Estate & Coal Co Ltd [1969] 1 NSWLR 565, in which it was held that declaratory relief was inappropriate where the results of a shareholder vote would not be altered by the declaration.
 
His Honour then considered the reasoning of the Full Federal Court in Aussie Airlines Pty Ltd v Australian Airlines Ltd (1996) 68 FCR 406, in which the various tests for when a party has standing to seek and obtain declaratory relief were summarised. In that decision it was held that, for standing to exist, there needed to be a 'real' and 'not abstract or hypothetical' question that involved 'the determination of legal controversies'.
 
Lastly, Justice McKerracher referred to a conservative principle for when to apply declaratory relief observed by Le Miere J in MTQ Holdings v RCR Tomlinson Ltd [2006] WASC 96, and stated that:
 
".declaratory relief is a discretionary equitable remedy. The power to grant a declaration should be exercised with a proper sense of responsibility and a full realisation that judicial pronouncements ought not to be issued unless there are circumstances calling for their making".
 
With this restricted setting for the exercise of the discretionary remedy of declaratory relief in mind, his Honour declined to grant such relief, stating that the relief would not achieve anything in terms of reversing or validating the resolutions, nor would it resolve any outstanding matter between the parties. In his view then, the reasons submitted by Portman for justifying the grant of declaratory relief were below the threshold of significance required for the relief to be warranted.
 
(ii) Existence of a 'justiciable controversy'
 
Given his decision not to grant declaratory relief, his Honour also raised briefly with counsel whether a justiciable matter between the parties existed at all. Defining a matter as 'the justiciable controversy or dispute or the subject matter for determination in a legal proceeding', Justice McKerracher considered that, as Golden West did not challenge the existence of a matter between the parties, it was unnecessary to comment on or decide the issue. His Honour did, however, state that the fact that there could not be any real consequence flowing from the declaratory relief itself at least raised a question as to whether a justiciable controversy could be properly considered to be in existence between the parties.
 
(iii) Had section 250B been breached by the delivery of proxies to Portman?
 
The parties were in agreement that the only issue about the validity of the proxies was whether section 250B of the Act had been breached by the intermediate forwarding of the Portman proxies to Portman. In the course of dispute on this issue, both parties referred to the case of Bisan Ltd v Cellante [2002] VSC 430 ("Bisan"). There, it was considered that the forwarding of proxies to the company via a third party was improper, and as Justice McKerracher noted, it was probably accepted in Bisan that this was because such an action was contrary to the requirements of section 250B.
 
Justice McKerracher noted, however (in accordance with a submission by the counsel for Portman), that neither s. 250B or the related explanatory memorandum make explicit a requirement that proxy forms be returned directly to the company rather than a third party. As opposed to statutory compulsion, Justice McKerracher held that proxies should be returned directly to a company for more practical reasons - i.e. because the risk of allegations or disputes relating to tampering with proxies by third parties is removed. Indeed, such practical concerns were an issue in the present case, as Golden West faced a particular practical difficulty upon receipt of the Portman proxies in having to analyse, for each Portman proxy submitted, whether that shareholder had already signed and submitted Golden West proxy forms (to avoid double voting).
 
His Honour drew further support for this practical view from the recent Australian Takeovers Panel case of Lion Selection Ltd 02 [2008] ATP 16, in which requiring the direct return of proxies was seen as beneficial as it overcame potential issues relating to possible filtering, inappropriate handling, or other issues of procedural integrity in the voting process.
 
Justice McKerracher therefore concluded that, even though the Act does not explicitly require voting proxies to be returned directly to the company, practical considerations and judicial authority point to that implicit requirement as being the preferable view, and one that contains 'a good deal of common sense'.
 
(iv) Other issues
 
Golden West submitted that, as the chairman of the meeting had not yet made a final declaration about the validity of the Portman proxies, there was no breach and thus no cause of action. Justice McKerracher was not persuaded by this argument, stating that a declaration could be made in relation to a future event, adding the rider that this possibility is open 'only when it is quite clear that the conduct will occur'.
 
Golden West also submitted that Portman should not be entitled to a right of review by reason that Portman representatives made no objections to the chairman's provisional ruling in regards to the invalidity of the Portman proxies. His Honour rejected this submission, citing 'numerous occasions' in which this issue has been decided against the submissions of Golden West.
 
(d) Conclusion
 
Portman's application for declaratory relief was dismissed, with costs. Further, the court declared that Golden West was at liberty to proceed with the extraordinary general meeting, with the declaration of the result of the vote and was free to act upon the resulting motions.