Disrupting to Win BLB 31 4-5 (May-June)

Contents

page 78 General Editor’s note

Karen Lee LEGAL KNOW-HOW

page 80 ASK THE EXPERT

Disrupting to win — the business of adding value

through technology

Tania Mushtaq MARQIT

page 84 Financial System Inquiry: Part 2 — A lending

industry perspective on SMSF lending

Leonie Chapman LAWYAL SOLICITORS and Tim

Brown MORTGAGE AND FINANCE ASSOCIATION

OF AUSTRALIA

page 89 “Split executions” and s 127 of the Corporations

Act 2001

Dr Nuncio D’Angelo NORTON ROSE FULBRIGHT

AUSTRALIA

page 93 Lessons from Lavin v Toppi — contribution between

co-sureties

Leigh Schulz and Felicia Duan MINTER ELLISON

page 96 Griffin Energy Group Pty Ltd (Subject to Deed of

Company Arrangement) v ICICI Bank Ltd

Julie Talakovski and Michael Bridge HWL

EBSWORTH LAWYERS

page 98 Extensions and specificity: recent clarification from

the High Court of Australia on s 588FF orders for

voidable transactions

Amanda Carruthers LEWIS HOLDWAY LAWYERS

page 102 Book reviews

Anthony Lo Surdo SC 12 WENTWORTH SELBORNE

CHAMBERS

General EditorKaren Lee

Principal and Consultant, Legal

Know-How

Editorial BoardMark Hilton

Partner, Henry Davis York, Sydney

David Richardson

Partner, HWL Ebsworth Lawyers,

Sydney

Bruce Taylor

Solicitor

David Turner

Barrister, Owen Dixon West

Chambers, Melbourne

Nicholas Mirzai

Barrister, Banco Chambers, Sydney

John Mosley

Partner, Minter Ellison, Sydney

David Carter

Partner, DibbsBarker, Sydney

Samantha Carroll

Special Counsel, Clayton Utz,

Brisbane

John Naughton

Partner, King & Wood Mallesons,

Perth

Leonie Chapman

Principal Lawyer and Director,

LAWYAL Solicitors

2015 . Vol 31 No 4–5

Information contained in this newsletter is current as at May/June 2015

General Editor’s noteKaren Lee LEGAL KNOW-HOW

Our first Ask the Expert piece (in our previous issue)

was very well received. I am very pleased to learn that

many of our readers liked the idea of having such a

column, and enjoyed reading Ruth Neal’s (HWL Ebsworth

Lawyers) commentary on Australian Securities and

Investments Commission (ASIC) v The Cash Store.1

In this double issue, our expert is experienced legal

IT professional, Tania Mushtaq (Marqit). My question to

her relates to “fintech”. Following the recent Financial

Systems Inquiry (FSI), banking and finance lawyers are

hearing a lot about fintech. What exactly is fintech? Why

is it important? What should we know about it? Read our

Ask the Expert column to find out. Tania also shares

with us her pick of three technologies that should not be

underestimated when it comes to delivering measurable

results.

Staying on the subject matter of the FSI, our next

article is the much-anticipated Part 2 of Tim Brown

(Mortgage & Finance Association of Australia) (MFAA)

and Leonie Chapman’s (LAWYAL Solicitors) commen-

tary, this time on the final FSI report’s findings to

prohibit self-managed superannuation fund lending. Read-

ers will gain valuable insight as they learn more about

the lending industry’s response as expressed by MFAA.

What should you do where separate copies of a

document are signed by a company’s officers, purport-

edly under s 127(1) of the Corporations Act?2 There are

a number of views regarding whether such “split execu-

tion” satisfies the requirements of s 127(1) and (3) of the

Corporations Act. I am most delighted to have Dr

Nuncio D’Angelo’s (Norton Rose Fulbright) article to

shed light on split execution. Importantly, he answers the

question of how the conflicting views can and should be

dealt with in practice. Dr D’Angelo authored this article

in consultation with the other members of the Walrus

Committee, which composed of partners and senior

lawyers from the firms Allens, Ashurst, Herbert Smith

Freehills, King & Wood Mallesons and Norton Rose

Fulbright. This is the bulletin’s second article published

with the involvement of the Walrus Committee, and I

hope there will be more to come.

In the next part of our bulletin, we turn our focus to

recent case law. First, we will take a look at the case of

Lavin v Toppi3 regarding contribution between co-sureties.

Leigh Schulz and Felicia Duan (Minter Ellison) examine

this High Court decision and consider some of the

practical implications of the decision for co-sureties and

creditors.

The next case under the spotlight is Griffın Energy

v ICICI Bank.4 The co-authors of this case note are new

contributor, Julie Talakovski, and regular contributor,

Michael Bridge (HWL Ebsworth Lawyers). Find out

how the court’s interpretation and enforcement of the

terms of the contractual documents, in this case, letters

of credit and the sale agreement, resulted in harsh

consequences for the appellant.

Last but not least, Amanda Carruthers (Lewis Holdway

Lawyers) looks at two recent High Court decisions

regarding orders made under s 588FF(3) of the Corpo-

rations Act — Grant Samuel v Fletcher5 and Fortress

Credit v Fletcher.6 Among other things, the author

explains why these decisions on s 588FF orders for

voidable transactions are important from a banking and

finance perspective.

Our bulletin ends with two book reviews by Anthony

Lo Surdo SC. Mr Lo Surdo was on the bulletin’s

editorial board for almost 20 years, and I, as well as the

LexisNexis team, very much welcome his return. Should

you read the latest edition of the Annotated National

Credit Code7 or Ong on Subrogation?8 I would say yes,

and I encourage you to read the book reviews to decide

for yourself.

Happy reading!

Karen Lee

Principal and Consultant

Legal Know-How

[email protected]

About the author

Karen Lee is the General Editor of the Australian

Banking & Finance Law Bulletin. She has also contrib-

uted to LexisNexis’s Australian Corporate Finance Law.

Karen established her legal consulting practice, Legal

Know-How, in 2012. She provides expert advice to firms

and businesses on risk management, legal and business

australian banking and finance May/June 201578

process improvement, legal documentation, regulatorycompliance and knowledge management. Prior to this,Karen worked extensively in-house, including as Headof Legal for a leading Australasian non-bank lender, aswell as in top-tier private practice, including as Counselat Allen & Overy and Clayton Utz.

Footnotes1. Australian Securities and Investments Commission (ASIC)

v The Cash Store Pty Ltd (in liq) [2014] FCA 926.

2. Corporations Act 2001 (Cth)

3. Lavin v Toppi (2015) 316 ALR 366; 89 ALJR 302; [2015] HCA

4; BC201500378.

4. Griffın Energy Group Pty Ltd (Subject to Deed of Company

Arrangement) v ICICI Bank Ltd (2015) 317 ALR 395; [2015]

NSWCA 29; BC201500972.

5. Grant Samuel Corporate Finance Pty Ltd v Fletcher; JP

Morgan Chase Bank, National Association v Fletcher (2015)

317 ALR 301; 89 ALJR 401; [2015] HCA 8; BC201501286.

6. Fortress Credit Corporation (Aust) II Pty Ltd v Fletcher (2015)

317 ALR 421; 89 ALJR 425; [2015] HCA 10; BC201501284.

7. A Beatty and A Smith LNAA: Annotated National Credit Code

(5th edn) LexisNexis, 2014, ISBN 9780 409336160.

8. D SK Ong Ong on Subrogation, The Federation Press, 2014,

ISBN 978 1 86287 979 9.

australian banking and finance May/June 2015 79

ASK THE EXPERT

Disrupting to win — the business of addingvalue through technologyTania Mushtaq MARQIT

Question

Following the recent Financial Systems Inquiry, fintech issomething that banking and finance lawyers are talkingabout. What is fintech, and what should banking and financelawyers know about it?

There is no doubt that we are living in a world where

clients are not only expecting expert legal advice but

also demanding value for money. This drove law firms

to shift to an innovative mindset. The status quo for law

firms of all sizes is no longer a state of rest, but a

momentary state of adjustment to new ways of provid-

ing top legal services. Clients are in control of their own

experiences and organisations — including law firms

and their clients, such as banks — have to deliver

innovative solutions in order to meet the world’s ever-

changing expectations. Since client loyalty is only as

good as a client’s last experience with a firm, and the

banking and finance industry has made it a priority to go

beyond just the product and offer relevant solutions,

banking and finance lawyers who can value added and

deliver desirable experiences are critical for client reten-

tion and acquisition. Given this scenario, banking and

finance lawyers need to disrupt themselves and recognise

that the rapid technological advances can play a big part

in delivering value added services to the constantly

connected omniscient clients, especially where the client

is a major financial institution.

For the banking and finance industry, new develop-

ments and innovations in financial services technology

(fintech) have exploded. Since 2008, there has been a

proliferation of fintech start-ups with their numbers

almost tripling globally in 2014.1 At the same time

global venture capital investment in fintech start-ups has

reached almost US$3 billion.2 These start-ups are focused

on developing innovative technologies for the banking

and finance industry creating an aggressively competi-

tive landscape for the incumbents.

Fintech was in the spotlight following the release of

the final Financial Systems Inquiry (FSI) report. The

report had a focus on innovation in the financial services

industry and it identified technology-related innovation

has the potential to transform the sector as long as policy

and regulatory settings were amended to ensure techno-

logical change was not hindered.3

Disruptive industries such as fintech are supposed to

find quicker, simpler ways of doing things, clearing out

the dead wood in the process. In Australia, banking and

finance industry is not on the back foot but fast becom-

ing a proactive player in development of disruptive

technologies in order to future proof themselves. There

is an increased focus on identifying and addressing

client needs and delivering targeted solutions through

implementation of digital strategies. They are enabling

fintech start-ups in order to gain foresight into innova-

tive technologies that can be snapped up ahead of

competitors to add value to the customers. Banking

lawyers have a significant opportunity here to join such

ventures, take advantage of the clients’ digital interac-

tion and identify and implement relevant technologies

that will help them deliver more for less for an enhanced

customer experience.

As the banks are fast evolving from being immutable

to being agile and progressive, banking lawyers don’t

have much of an option but to evolve with the banks.

The new Stone and Chalk technology hub is evidence of

the financial industry’s commitment to innovation. Offi-

cially opening in May 2015, this hub provides fintech

start-ups subsidised rent and helps them investigate

venture capital opportunities. It is backed by some of

Australia’s largest financial institutions, technology giants,

retailers and also by one law firm, Allens. With over a

100 companies that can be classified as fintech start-ups

just in Sydney alone, this project will make a significant

contribution to the financial industry’s capabilities keep-

ing it in step with the phenomenal rise in the global

fintech investment. Given the very nature of banking

lawyers work that involves piles of documents, endless

searches and information exchange, this opportunity will

help find and fund technologies that may deliver pro-

ductivity gains, improve collaboration and allow diver-

sification of services for a sustained competitive advantage.


So which technologies should banking lawyers explore

and embrace? Technology that can help lawyers stay in

step with the evolving banking and finance industry goes

beyond document management and email. More than

ever before, lawyers need to stay relevant to their clients

to compete with the offerings of emerging non-legal

firms and future proof themselves. In order to do so, they

need to drill down into their clients’ needs in the context

of changing lifestyles, cost of living, increasing globalisa-

tion and mobilisation, technology preferences and their

social media behavior. While innovation in fintech will

continue to deliver technologies that will help financial

services and banking lawyers increase their billable

hours and reduce waste, there are several technologies

available today that can be leveraged to create signifi-

cant competitive advantages. Here is my pick of three

technologies that cannot be underestimated when it

comes to delivering measurable results:

1. Analytics and customer data: There is a vast

range of CRM solutions that can be instrumental

in gathering and analysing client data. Analytics

form the bases of digital initiatives being embraced

and implemented by all major banks in Australia.

Gathering and analysing client data allows law-

yers the capability to easily create and maintain a

clear view of clients right from the first meeting

through matter management and ongoing client

care. Analytics in this day and age are digital gold

because they provide actionable insights and reveal

clients’ behavioural patterns. These patterns are

valuable in development of innovative value added

offerings as well as sharing native content that

resonates with the clients. Understanding clients at

a granular level allows banking lawyers to tailor,

price and deliver their services to meet their

clients’ expectations which in turn results in reten-

tion and also acquisition through word of mouth.

2. Social media: Social media is a powerful tool.

Lawyers who understand and harness the formi-

dable impact of social media are not only able to

reach audiences worldwide in real time, but they

are also able to attract the next generation of

clients. Moreover, when it comes to value for

money, social media is predominantly free. Plat-

forms like Twitter allow lawyers to share valuable

and informative content with their followers with

minimal effort as well as interact with audiences

and gather information about customer sentiment.

The beauty of Twitter is that while links can be

shared in tweets, the message can only be deliv-

ered in 140 characters making it easy to read

especially on mobile devices. Such platforms

allow lawyers to establish themselves as thought

leaders resulting in improved customer perception

of the firm. Social media platforms such as Facebook,

LinkedIn and Twitter, also provide detailed real

time analytics including the most viewed updates

and most active followers in order to recalibrate a

firm’s direction and messaging and identify lucra-

tive opportunities, again with minimal cost.

3. Apps for workflows: Just like the rest of the world,

mobility is a reality for lawyers and it is fast

becoming the only way to get more done in less

time increasing billable time — which is what

every lawyer wants to do. It is important to

explore which apps can deliver the most value

when it comes to seamless flow of information

that is also secure. Apps like Whatsapp allow

secure collaboration because all communication

by default is encrypted, and this app is also

available at no charge. There are several other

apps on the market that may not be free but are

still affordable and available through a monthly or

annual subscription. Paid apps generally have

better functionality, do not contain advertising or

annoying banners popping up as work is being

done while connecting with other apps for seam-

less flow of information. Given that banking

lawyers are consistently reviewing and sharing

documents, apps that allow document annotation,

secure document signatures, sharing for comments

and secure storage in the cloud for access any-

where, anytime and from any device deliver tan-

gible productivity gains all without the need to

print documents.

References:

CustomerEngagementfor legal industry:www.highq.com

KPMG report on Fintech: www.kpmg.com

Innovation in legal industry: www.americanbar.org

Fintech in Australia: www.startupbootcamp.org

Fintech start up scene in Australia — Chalk and

stone: www.smh.com.au

Fintech globally: www.banktech.com

Fintech in UK: www.forbes.com

Allens and involvement in Chalk and Stone:

www.australasianlawyer.com.au


Tania Mushtaq

Principal Consultant

Marqit

Twitter @tanmushi

About the author

Tania Mushtaq is the founder and Principal Consultant

of Marqit, a marketing communications consultancy for

IT industry. Tania has worked and written extensively in

the space of IT with specific focus on cybersecurity,

mobility, cloud, information management and genera-

tional differences. She also ghost writes for senior IT

executives and has worked with clients across Asia

Pacific to develop business positioning and differentia-

tion strategies. Tania holds an MBA from MGSM.

Footnotes1. J Camhi, Report: Global FinTech Investment Will Grow to at

Least $6 Billion by 2018, 2014, www.banktech.com.

2. Above, n 1.

3. A Coyne, Australia’s fintech landscape goes under the micro-

scope, December 2014, www.itnews.com.au.


Financial System Inquiry: Part 2 — A lendingindustry perspective on SMSF lendingLeonie Chapman LAWYAL SOLICITORS and Tim Brown MORTGAGE AND FINANCEASSOCIATION OF AUSTRALIA

BackgroundThis is the second article in our two-part series

covering a lending industry perspective on the Financial

System Inquiry (FSI). In Part 1,1 we explored the

findings by the FSI panel as they apply to the mortgage

broking and lending industry and in particular, heard the

views of Tim Brown, Chairman of the Mortgage and

Finance Association of Australia (MFAA) on the Final

Report’s findings in relation to competition in the

banking sector. In this second article, we explore the

FSI’s recommendations to prohibit self-managed super-

annuation fund (SMSF) lending, and the lending indus-

try’s response2 as expressed by MFAA.

To recap, in late 2013 the Treasurer released draft

terms of reference for the FSI, charged with examining

how the financial system could be positioned to best

meet Australia’s evolving needs and support Australia’s

economic growth. The intension of the FSI is to estab-

lish a direction for the future of Australia’s financial

system. In July 2014 the committee produced its Interim

Report (Interim Report), dealing with issues relevant to

credit advisers such as the substantial regulatory reform

agenda, and relevant to this article, the restoration of a

ban on SMSF lending. In November 2014 the FSI Final

Report3 was published (Final Report) taking into account

industry and expert responses, including from the MFAA.4

In this article we explore the Final Report recommen-

dation for a prohibition on SMSF lending through

Limited Recourse Borrowing Arrangements (LRBAs),

which MFAA and other industry participants challenge

for the reasons outlined below.

Interim Report on SMSF leverage riskThe Interim Report documented findings that the

number of SMSFs has grown rapidly, now making up

the largest segment of the superannuation system in

terms of number of entities and size of funds under

management, which are expected to continue to grow.

The use of leverage in SMSFs to finance asset purchases

is also growing, with the proportion of SMSFs, while

still small, increasing from 1.1 percent in 2008 to 3.7

percent in 2012. The Interim Report observes that,

allowing the use of leverage in SMSFs to finance assets

to grow “may create vulnerabilities for the superannua-

tion and financial systems”, as leverage magnifies risk

“both on the upside and downside.”5 While leverage was

originally prohibited in superannuation in most situa-

tions, in 2007 the Superannuation Industry (Supervision)

1993 (SIS Act) was amended to allow all SMSFs to

borrow.

The key policy option put forward by the FSI’s

Interim Report was to restore the general prohibition on

direct leveraging of superannuation funds on a prospec-

tive basis. It argues the general prohibition was put in

place for sound reasons, including one highlighted

during the Global Financial Crisis (GFC) where it

demonstrated the benefits of Australia’s almost entirely

unleveraged superannuation sector, which the Interim

Report claims resulted in minimal losses in the super-

annuation sector. This had a stabling influence on the

financial system according to the Interim Report,6 one of

the key objectives of the FSI.

MFAA Submission in response to FSI’sInterim Report

While Mr Brown and the MFAA acknowledge the

Interim Report’s comments that borrowing in SMSFs

are often associated with poor advice by credit and

financial advisers and accountants related to establishing

an SMSF as part of a geared investment strategy,7 in its

submissions to the Interim Report MFAA expresses a

view that rather than prohibit direct SMSF leveraging,

training and education of advisers and accountants is a

better alternative, including continuing initiatives such

as the MFAA SMSF Lending Accreditation. This would

help ensure consumers are better protected by qualified

advice from all the professionals in the SMSF process,

including SMSF lending. The introduction of MFAA’s

new SMSF Lending Accreditation program was moti-

vated in 2012 after it recognised the gap in understand-

ing of SMSF lending by quality advisers, and a desire to

ensure they were properly educated in understanding its

risks and pitfalls.8 Mr Brown describes one of the key


outcomes of the program is to develop credit advisors to

be competent in relation to LRBAs, to better be able to

advise on the appropriateness and suitability of this type

of lending from a credit perspective.

Mr Brown describes how at an institutional level,

lenders have also been diligent in creating SMSF lend-

ing products that will protect SMSF trustees and ben-

eficiaries, while at the same time providing the flexibility

to achieve SMSF objectives. For example, most major

lenders require a Financial Advice Certificate by finan-

cial advisers or accountants to certify that the lending is

appropriate for the trustee, and have started to introduce

a minimum fund balance. Lending criteria is also tight-

ening, with lenders mortgage insurers requiring proper-

ties to be funded with LRBA’s to be at least 12 to 18

months old, which reduces the risk of off-the-plan

property sales from property developers and therefore

reduces asset value. All lenders require property valua-

tions and many a maximum loan to value ratio of 80%

for residential property, to help improve the SMSF cash

flows and improve liquidity within the fund. Finally,

responsible lending guidelines are followed by lenders,

when assessing suitability of SMSF lending products.

Final Report recommendations on directborrowing for LRBAs

In the Final Report,9 despite submissions from indus-

try arguing against it, including the above arguments

from MFAA, the FSI recommended the removal of the

exception to the general prohibition in direct borrowing

by SMSF from LRBAs under the SIS Act.10 The section

the FSI seeks to remove, currently allows SMSFs to

borrower to purchase assets directly into the SMSF

using LRBAs. The Final Report lists objectives includ-

ing preventing the “unnecessary build-up of risk in the

superannuation system and financial system more broadly”

and to fulfil the “objective for superannuation to be a

savings vehicle for retirement income, rather than a

broader wealth management vehicle.”11

In essence, the Final Report is concerned that bor-

rowing even with LRBAs will magnify gains and losses

from fluctuations in the price of assets held within

SMSFs, and particularly so soon after the GFC. This

could increase the risk of large losses in funds, where

lenders can charge higher interest rates and require more

personal guarantees from trustees. In this particular

example, with a significant reduction in value of the

asset and personal guarantees, the Final Report describes

a likely outcome that the trustee would sell other assets

in the fund to repay a lender, which could mean

ineffective limiting of losses flowing from one asset to

others, either inside or outside the SMSF.12

In many cases, SMSFs were set up to achieve a

diversity of assets, mostly in the form of shares, money

and real estate.13 As such, the Final Report believes that

selling other assets to pay a loan might concentrate the

asset mix of a small fund, which reduces the benefits of

diversification and increases risk to the SMSF. The

ultimate end result of a failure of superannuation like

this, the Final Report believes, will be a transfer of

downside to taxpayers, through the provision of the Age

Pension. Finally, the FSI is not keen on borrowing by

SMSF where it allows members to circumvent contri-

bution caps and accrue large assets in the superannuation

system in the long run.14

Industries views on banning SMSF lending

Predictably the recommendation to ban SMSF LRBAs

has been attacked from many sectors, with some point-

ing to the current low volumes, and others, like MFAA,

stating that lending standards should be tightened and

advice requirements toughened. Many Accountants and

Financial Advisers join the voice of MFAA in disagree-

ing with the FSI’s recommendation to ban direct bor-

rowing in SMSFs, predicting intense lobbying for and

against LRBAs in 2015 and strong resistance to the

recommended ban.15 In a joint submission to the Final

Report by MFAA, Association of Financial Advisers,

Financial Planning Association of Australia and Com-

mercial Asset Finance Brokers Association of Australia,

MFAA reminds the FSI of the heavy government regu-

lation and self-regulation over the SMSF industry and

outlines that the sector has been assessed favourably by

ASIC and the ATO, with no hint of any systemic risk

having been raised in relation to SMSF lending.16

Regarding personal guarantee risk

Regarding the Final Report’s comments that there is

a frequent use of personal guarantees to protect Lenders

against the possibility of large losses and this could

potentially reduce the effectiveness of the SIS Act17

restrictions, this is unlikely to be the case in many

scenarios involving LRBAs, according to Mr Brown.

The SIS Act18 prohibits any legal right of recourse

against the assets of the fund should the trustees default

on the loan. The rights of the lender against the fund as

a result of default on the borrowing are limited to rights

relating to the acquirable asset.19 Some industry submis-

sions even call for a ban on personal guarantees,

however MFAA’s joint submission highlights that the

removal of personal guarantees will result in Lenders

lowering LVRs for LRBAs, meaning that SMSFs will

need to contribute more of the purchase price for the

property, impacting the ability of SMSF to diversify its

asset mix and restricting the availability and cost of

finance. Given the very low default rate of LRBAs,

MFAA does not believe that the removal of member

personal guarantees is justified.20


Regarding diversification

To the Final Reports comments on diversification,

most in the industry, including Mr Brown and the

MFAA, agree that there are some dangers of SMSF

lending, and in particular if the weighting of property in

SMSFs is too heavy then this could reduce the diversi-

fication benefit of leveraging. An SMSF is essentially

about having liquid assets to fund retirement, and

therefore having assets tied up in property could result in

SMSF portfolios that are predominantly based in real

estate rather than cash or some other form of greater.21

However, MFAA also believes that a restriction in

maximum LVR to 80% will help address the diversifi-

cation risk the FSI has raised. In fact, without gearing, a

lot of SMSFs may be forced to access real estate

exposure through managed funds and their portfolios

could be restricted only to shares and money.22 Some

submissions describe a key differences between “tradi-

tional style” leveraged investments and LRBAs, claim-

ing a lower level of systemic risk posed by direct SMSF

leverage compared with direct leverage outside of super-

annuation.23

Many in the industry, including Mr Brown, believe

that the use of LRBAs is likely to result in higher, and

not lower, levels of asset diversification and lower, and

not higher, levels of investment risk, as they enable

SMSF investors to reduce their exposure to asset classes

which historically SMSFs have held over exposed posi-

tions, such as listed securities and cash.24 For example,

according to MFAA’s joint submission in response to the

Final Report, due to the long term performance and

stability of property, if SMSF borrowing is banned,

SMSFs with moderate balances will still invest in direct

property using cash and such investments will be at the

expense of fund diversification.25

Further, banning LRBAs, according to MFAA’s joint

submission, will simply channel SMSFs into less regu-

lated, riskier structures that also use leverage, such as

unit trusts, warrant products and derivatives. To the

contrarily, LRBAs are within the oversight of the ATO

and must comply with strict rules set out in the SIS Act.

Despite any ban, SMSFs would also still be able to

invest in management investment funds holding direct

property. As superannuation is compulsory in Australia,

individual should have the discretion regarding where

and how to invest those savings and SMSF lending is

essential to consumer choice and competition, to allow

people to build their retirement savings in a manner that

suits their needs and preferences. Finally, banning SMSF

lending could also have a significant impact on small

businesses that use leverage to assist their SMSF to

purchase their business property, which is then leased to

a related trading entity.26

Possible alternative solutions suggested by industry

As demonstrated, Mr Brown believes the impact on

banning SMSF lending will be significantly felt, and he

and the MFAA believes that better education and train-

ing for those involved in the SMSF lending industry,

measures to protect and license LRBA advice, and the

continue restriction of lending parameters for SMSF

lending, are better alternatives to prohibiting SMSF

lending completely. He also believes that in order to give

Australians confidence in superannuation it is important

that regulation in the industry is stable. Many trustees

enter into long-term investments, and making regular

changes to the superannuation laws means that trustees

lack the necessary certainty to make such long term,

stable investments.27 At the very least, Mr Brown

believes, the LRBA provisions should not be repealed

without first implementing proposed regulations and

protection measures, and after some time, assessing their

effectiveness. MFAA also believes banning borrowing

from related parties could assist reduce the risk, and

require borrowing to be from a licenced lender, with

sound credit policies and a requirement for independent

financial and legal advice for the trustee.

Unfortunately for industry, however, there is a risk

that it may face a difficult task lobbying to retain SMSF

lending against the FSI’s recommendations to ban it.

Many submissions put forward by industry wish to

improve the superannuation system and seek to weigh

up the costs versus benefit of SMSF funding, however

according to some, very few have responded directly to

the actual concern of the FSI.28 The terms of reference

of the FSI are to promote a competitive and stable

financial system that contributes to Australia’s produc-

tivity growth, and to consider the threats to stability of

the Australian financial system, including superannua-

tion. The review did not consider the potential benefits

to superannuation leverage or the inappropriateness of

advice. It was set up to ensure the prevention of

unnecessary build-up of risk in the superannuation and

financial system and to fulfil the objective for superan-

nuation to be a savings vehicle for retirement income.29

The Final Report noted some of these alternatives to

address the risk surrounding SMSF borrowing and the

industry goal to provide funds with more flexibility to

pursue alternative investment strategies, however found

that some alternatives would impose additional regula-

tion, complexity and compliance costs on the superan-

nuation system.30

Despite this, according to MFAAs joint submission to

the Final Report, the FSI has not provided any evidence

of risk, damage or loss arising from LRBAs. The

evidence cited in support of the ban is anecdotal at best,

according to Mr Brown. In any case, as mentioned


above the MFAA believes that a ban on SMSF lending

to avoid leveraging will be ineffective because SMSFs

will still be able to invest in derivatives and other traded

products with built in leverage, and if the underlying

company or investment scheme fails, there is no residual

value on the asset. This, however, is not the case with

real property, which is the primary asset acquired

through the use of LRBAs. Even if property values fall,

the asset itself is still a residual value and it is often hard

for yields to be materially adversely affected, even

during the GFC. MFAA’s joint submission explains how

real property has an added benefit of providing capital

growth as well as an income stream during retirement

(for example, rental income on investment properties),

where dividends are not and therefore shareholdings

may need to be sold when the fund moves into pension

mode.31

ConclusionThe government is currently considering the recom-

mendations of the FSI and is accepting consultations,

with plans to respond sometime during 2015.32 In

summary, the FSI panel was mostly concerned that

leverage in the superannuation system, combined with

leverage in the banking sector, will weaken the financial

system and limit the ability to respond to the next GFC.

As leverage cannot be removed from the banking sector,

the only response is to ban it in the superannuation

system.33 In making its recommendation, the FSI believes

that the ability for SMSFs to borrower funds may, over

time, erode the strength of the Australian superannuation

industry, and could contribute to systemic risks to the

financial system if allowed to grow at high rates.34

According to FSI, prohibiting direct borrowing by SMSF

would be consistent with the objectives of superannua-

tion being a savings vehicle for retirement income, and

would in the views of the FSI, preserve the strengths and

benefits of the superannuation system for individuals,

the system and the economy.35 In particular, they expressed

concern that if SMSFs do not meet the retirement

objectives the government hopes for, they will then have

to fall back on the public purse to fund retirement

through taxes.36

So far many of the banking and advisory industries

appears to disagree with the ban and it will be interesting

to see how hard MFAA and other industry bodies will

lobby for LRBAs in 2015. Mr Brown and the MFAA

believe that Credit Advisers and Lenders are acutely

aware of the potential negative implications of LRBAs

and have introduced policies to substantially reduce the

risk presented to clients, and ensure that trustees have

success with SMSF lending. With the work being

undertaken by the MFAA to up skill members on

LRBAs, and the proactive initiatives undertaken by

Lenders to ensure responsible Lending, the restoration

of the general prohibition on direct leverage of superan-

nuation funds in the views of the MFAA, is inappropri-

ate. Given the broad number of stakeholders who would

be impacted by a ban on SMSF lending, the potential

risks to the financial system if it is not banned according

to the Final Report, and the currently very low default

rate of LRBAs according to MFAA, it will be interesting

to see if the government pursues the prohibition, and if

it does, the flow on consequences to the banking,

advisory and superannuation industries.37

Leonie Chapman

Principal Lawyer and Director

LAWYAL Solicitors

[email protected]

www.lawyal.com.au

About the author

Leonie Chapman’s experience extends to banking and

finance, consumer credit and mortgage lending, contract

negotiation, trade practices and fair trading legislation,

intellectual property and trade marks, and corporate

and financial services. After completing her Bachelor of

Laws and Bachelor of Commerce in 2002, Leonie went

on to work both in private practice and as senior

in-house lawyer supporting a specialist lender, and then

for six years with Macquarie Bank Ltd. Having achieved

a Master of Laws in 2009 specialising in banking and

finance law, Leonie’s main focus now as Principal of

LAWYAL Solicitors is on regulation and compliance for

banking and financial institutions.

Tim Brown

President

Mortgage Finance Association of Australia

(MFAA)

[email protected]

About the author

Tim Brown is the Chairman of the Mortgage and

Finance Association of Australia (MFAA). He has worked

in the banking and finance industry for over 30 years

and has held senior management positions in organisa-

tions such as Macquarie Bank, LJ Hooker, Suncorp,

Aussie Home Loans and AVCO Finance (now GE

Capital). Tim’s industry experience has seen him suc-

cessfully establish and own LJ Hooker Home Loans as a

master franchise which was acquired by LJ Hooker in

2003. Tim is currently the CEO of Vow Financial,

Australia’s sixth largest mortgage aggregator. He has an

MBA and also completed a Diploma in Mortgage

Lending and Business Management and a Diploma in

Financial Planning.


Footnotes1. L Chapman and T Brown, Financial System Inquiry: Part 1 —

A lending industry perspective on competition, LexisNexis

Australian Banking & Finance Law Bulletin, (2015) 31(1) BLB

at p 4.

2. Submission by Mortgage Finance Association of Australia in

response to Financial System Inquiry, dated March 2014.

3. Financial System Inquiry, Final Report, Treasury, November

2014.

4. Mortgage Finance Association of Australia, submission in

response to Financial System Inquiry, Interim Report, August

2014.

5. Financial System Inquiry, Interim Report, Treasury, July 2014,

at p 2–116.

6. Above, n 5, at p 2–117.

7. Australian Securities and Investments Commission (ASIC)

2013, SMSFs: Improving the quality of advice given to

investors, Report 337, ASIC, Sydney.

8. Mortgage Finance Association of Australia, submission in

response to Financial System Inquiry, dated August 2014.

9. Above, n 3, at p 86.

10. Superannuation Industry (Supervision) Act 1993 (Cth), s 67A.

11. Above, n 3, at p 86.

12. Above, n 3, at p 86.

13. N Bendel, Finance broking associations at odds over SMSF

borrowing, SMSF Adviser, 8 January 2015.

14. Above, n 3, at p 86.

15. M Masterman, Accountants reject ban on SMSF borrowing:

poll, SMSF Adviser, January 2015.

16. Joint Submission by Mortgage Finance Association of Austra-

lia, Association of Financial Advisers, Financial Planning

Association of Australia and Commercial Asset Finance Broker

Association of Australia in response to Financial System

Inquiry Final Report, dated March 2015.

17. Above, n 10, s 67A.

18. Above, n 10, s 67A.

19. K Taurian, Cavendish disputes FSI stance on borrowing, SMSF

Adviser, 9 April 2015.

20. Above, n 16.

21. Above, n 13.

22. Above, n 13.

23. Above, n 19.

24. Above, n 19.

25. Above, n 16.

26. Above, n 16.

27. Above, n 16.

28. L Smith, Have people got the FSI SMSF LRBA recommenda-

tion wrong? Sole Purpose Test, 2 April 2015.

29. Financial System Inquiry’s terms of reference dated 20 Decem-

ber 2013.

30. Above, n 5, at p 2–116.

31. Above, n 16.

32. Above, n 28.

33. Above, n 29.

34. Above, n 5, at p 2–116.

35. Above, n 3, at p 88.

36. Minter Ellison Lawyers, FSI must focus on SMSF risks, News,

accessed in April 2015.

37. Above, n 16.


“Split executions” and s 127 of theCorporations Act 2001Dr Nuncio D’Angelo NORTON ROSE FULBRIGHT AUSTRALIA

Introduction — the issueThis brief article concerns the execution of a docu-

ment by a company, purportedly under s 127(1) of the

Corporations Act 2001 (Cth) (the Act), where separate

copies of the document are signed by the company’s

officers. This is sometimes described as “split execu-

tion”. There are differing views among lawyers in the

market as to whether split execution satisfies the require-

ments of s 127(1) and (3) of the Act.

Views vary from acceptance that split execution does

satisfy s 127 (the liberal view) to the opposite, ie, that it

does not (the conservative view). Some take the view

that the position is unclear and will qualify their advice

or formal closing opinions accordingly (the cautious

view). Positions differ between law firms and even

within law firms and are often quite strongly held.

It is important to note that in most cases the question

is not whether the document has been duly executed but

whether the statutory assumption as to due execution in

s 129(5) is available.1 This may have an impact on any

“due execution” opinion that is to be given by a law firm

involved in the transaction but, importantly, it can also

affect settlements and financial closings.

This article does not recommend or favour any

particular view over the others. Rather, the purpose is to

highlight the issue to the market. It is important that

lawyers recognise that there is a disparity of views and

that this needs to be factored into settlements and

closings and discussions on closing opinions. The poten-

tial difficulties can be eliminated, or at least managed, if

the issue is exposed early enough in a transaction.

What is “split execution”?Section 127(1) of the Act provides that:

A company may execute a document without using acommon seal if the document is signed by:

(a) two directors of the company; or(b) a director and a company secretary of the company.2

That supports the statutory assumption in s 129(5) of

the Act, which provides (as relevant) that:

A person may assume that a document has been dulyexecuted by the company if the document appears to havebeen signed in accordance with subsection 127(1).

This, in turn, can support the “duly executed” para-

graph in legal opinions (when included).

In some instances, the two officers signing a docu-

ment for a company will sign different copies of the

document, usually because they are physically located in

different places at the time. This results in the signature

of one officer being on one copy of the document and the

signature of the other officer being on a separate copy.

Alternatively, it could result in the original signature of

one officer being on a document that bears a faxed or

PDF scanned signature of the other officer.3

In essence, the issue is whether the references to “the

document” in s 127(1) and to “a document” in s 129(5)

are satisfied where execution is split across two physical

copies of a document. If so, all is well. If not, then the

statutory assumption as to due execution in s 129(5) will

not be available.4

The effect of Re CCI Holdings LtdThere is only one reported decision to date which has

considered a document affected by split execution: Re

CCI Holdings Ltd.5

In that case, CCI Holdings applied to the Federal

Court of Australia for orders approving a scheme of

arrangement under Ch 5 of the Act. One of the scheme

documents was a deed poll which had been signed by

way of split execution by two officers of CCI Holdings.

Emmett J stated in the judgment:6

I expressed some reservation as to whether execution oftwo counterparts of a document satisfies s 127(1) of theAct. That section provides that a company may execute adocument without using a common seal if the document issigned by two directors of the company or a director and acompany secretary of the company. Under s 127(3), acompany may execute a document as a deed if thedocument is expressed to be executed as a deed and isexecuted in accordance with s 127(1).The reservation that I had is that s 127(1) may be construedas requiring a single document to be signed by the twodirectors or the director and secretary. In principle, how-ever, I can see no reason why that should be, so long as thetwo counterparts are treated as a single instrument and thatinstrument is delivered as is contemplated by the Convey-ancing Act 1919 (NSW). In the circumstances I am satisfiedthat the deed poll has been executed on behalf of theofferor.


While some are of the view that this case has settled

the matter, others are not. The specific point regarding

split execution of the deed poll was not dealt with at

length or in detail in the judgment.7

How the conflicting views can affectsettlements and closings

This conflict of views can disrupt a settlement or

closing, for example, where a lawyer who takes the

conservative view refuses to accept a document executed

via split execution, or will only accept it with evidence

of actual authority of the signatories. In the case of a

deed, without the benefit of s 127(3), the lawyer may

demand that the document be re-executed in some other

way to satisfy the general law requirements for deeds.

Even where a lawyer takes the cautious rather than the

conservative view and accepts the document, the addressee

of his or her opinion may not accept the qualification.

Clearly, this can create undue stress at a critical time in

a deal. In extreme cases, it can delay or even derail a

settlement or closing.

How the conflicting views can and shouldbe dealt with in practice

In practice split executions only cause difficulties

where there is a difference of opinion among the lawyers

involved in a transaction. Until the matter is resolved by

the courts or Parliament, lawyers should, as a matter of

professional courtesy, acknowledge and respect the views

of others and, if necessary, explain to clients that some

lawyers may qualify their legal opinions or not accept

split execution at all. There is little to be gained by

lawyers bickering over this issue at the expense of

clients, who may perceive it as a technical legal matter

that the lawyers should simply “sort out”.

If the parties are contemplating execution of any

document under s 127 and there is a chance that split

execution may be necessary, then at the earliest oppor-

tunity the parties should discuss whether that is accept-

able to all concerned. Common sense dictates that the

discussion should be initiated by the lawyer acting for

the party who is to sign under s 127. That discussion

should then lead to agreement as to the way forward and

should also assist in settling the form of the opinion in

relation to due execution.

In any event, the earlier the issue is dealt with, the

better the outcome for all involved.

Dr Nuncio D’Angelo

Partner

Norton Rose Fulbright Australia

[email protected]

www.nortonrosefulbright.com

About the author

Nuncio D’Angelo is Head of Banking and Finance with

global law firm Norton Rose Fulbright in Australia. He

is widely published and has lectured at both the under-

graduate and postgraduate levels at several Australian

universities. Nuncio holds an LLM and PhD in law from

Sydney University.

This article was prepared by the author in consultation

with the other members of the Walrus Committee, which

is composed of partners and senior lawyers from the

firms Allens, Ashurst, Herbert Smith Freehills, King &

Wood Mallesons and Norton Rose Fulbright.That Com-

mittee meets regularly to discuss issues of current

importance in legal practice in the banking & finance

market with the objective of suggesting solutions. Noth-

ing in this article should be taken as legal advice.

Footnotes1. However, if the document is intended to operate as a deed, the

issue of due execution as a deed does arise. Without the

assistance of s 127(3), execution of a deed by a company

without using a common seal is a complex matter.

2. Section 127(3) then provides (as relevant) that “A company

may execute a document as a deed if the document is expressed

to be executed as a deed and is executed in accordance with

subsection (1)”.

3. This occurs when the first officer signs the document, then

emails or faxes the signed document to the second officer, who

signs the emailed or faxed version.

4. And, if the document is to be a deed, the formal requirements

for execution as a deed may not be satisfied. It is worth noting

that, in our view, the usual “Counterparts” clause in the

boilerplate provisions of a document does not fix this problem

— we are here concerned about whether a counterpart to which

that clause can apply has actually been created in the first place

by one of the parties.

5. Re CCI Holdings Ltd [2007] FCA 1283; BC200707556.

6. Above, n 5, at [6]–[7].

7. After noting that “[s]ection 127(1) does not require that the two

parties who sign do so in each other’s presence”, Dr Nicholas

Seddon has recently argued that “they must both sign the same

document because due execution of a document by a company

under this subsection requires two signatures … Where two

signatures are required to complete the execution, it is not


sufficient that they appear on different counterparts or copies of

the document because no one counterpart or copy would be

properly executed by the company under s 127(1)”: N Seddon,

Seddon on Deeds (The Federation Press, 2015) at p 69. He does

not, however, cite Re CCI Holdings Ltd in his discussion.


Lessons from Lavin v Toppi — contributionbetween co-suretiesLeigh Schulz and Felicia Duan MINTER ELLISON

IntroductionCo-sureties should be aware that the extent of their

liability may not necessarily begin and end with the

creditor.

In the recent High Court decision of Lavin v Toppi,1

the court unanimously confirmed that a covenant not to

sue provided by a creditor in favour of one guarantor

does not extinguish the liability that exists between

co-guarantors. If one co-guarantor pays a disproportion-

ate amount of the guaranteed debt, they are entitled

(absent any express agreement in the guarantee or a

settlement agreement to the contrary) to contribution in

equity from any other co-guarantor under the guarantee,

even if that co-guarantor is the recipient of a covenant

not to sue from the creditor.

This article examines the decision of the High Court

in Lavin v Toppi and considers some of the practical

implications of the decision for co-sureties and creditors.

BackgroundMs Lavin and Ms Toppi were the directors of Luxe

Studios Pty Ltd (Luxe). Luxe borrowed the sum of

$7,768,000 from National Australia Bank Ltd (NAB) for

the purposes of running a photographic studio business.

Lavin and Toppi in their personal capacities (among

other associated entities) provided a joint and several

guarantee of the loan in favour of NAB.

Luxe went into receivership and NAB enforced its

security over property owned by Luxe. The proceeds of

that enforcement, however, were insufficient to dis-

charge the loan and so NAB claimed against each of

Lavin and Toppi in their personal capacities under the

guarantee.

Lavin cross-claimed against NAB on the basis that

the guarantee was procured in unconscionable or unjust

circumstances. A deed of release and settlement was

entered into by both parties, with Lavin agreeing to pay

to NAB a sum of approximately $1.73 million. Under

that deed, Lavin agreed not to pursue the cross-claim

and NAB covenanted not to sue Lavin in respect of the

guarantee.

Toppi later sold her home and used some of the

proceeds (approximately $2.9 million) to discharge her

obligations under the guarantee. Toppi commenced pro-

ceedings against Lavin for contribution in the amount of

$773,661.04, representing half of the difference between

their respective payments to NAB. In response, Lavin

argued that she and Toppi did not have “coordinate

liabilities” (that is, liabilities of the same nature and to

the same extent) as a result of NAB’s covenant not to

sue; in short, Lavin claimed that Toppi’s liability in

respect of the guarantee was enforceable, but Lavin’s

was not.

Relying on the decision of the New South Wales

Court in Carr v Thomas,2 the primary judge held that

NAB’s covenant not to sue had no bearing on the

equitable right of contribution that existed between

Lavin and Toppi.3 This line of reasoning was upheld by

both the Court of Appeal4 and the High Court.

Coordinate liabilitiesA “coordinate liability” arises when two or more

obligors share a legal obligation to a third party. The

liability must be “of the same nature and to the same

extent”.5 Where coordinate liabilities exist, one obligor

can seek contribution from the other obligor(s) in order

to reduce or offset their liability where it is dispropor-

tionate.

Lavin claimed that her liability under the guarantee

was not coordinate with Toppi’s liability by reason of

NAB’s covenant not to sue. The High Court, however,

affirmed the Court of Appeal’s finding that a creditor’s

covenant not to sue does not extinguish an existing

coordinate liability.

The equitable doctrine of contributionThe equitable doctrine of contribution aims to pre-

vent the unjust enrichment of one co-surety at another

co-surety’s expense. The burden of suretyship should be

placed equally on co-sureties so that if the creditor

exercises its right under a guarantee, one co-surety is not

left to bear a disproportionate amount of the suretyship.

In the case at hand, Lavin claimed that she gained no

real benefit from Toppi’s discharge of the loan; by that

time, she had already obtained a creditor’s covenant not


to sue. However, it was held by the High Court that the

timing of Toppi’s payment would only be relevant under

common law. Equity, on the other hand, takes a more

flexible view. In McLean v Discount and Finance Ltd6 it

was said that in equity, the right to contribution can arise

even before any payment has been made or loss incurred,

so long as the payment or loss is imminent. As such,

Toppi’s right to contribution in equity arose as soon as

NAB made a claim under the guarantee.

Under cl 8(c) of the deed of release and settlement,

NAB retained its rights against the remaining guarantors

without exception. The court considered that NAB’s

willingness to issue a covenant not to sue was influenced

by the fact that it could still recover the full payment

from the remaining guarantor which was, in and of

itself, a benefit to Lavin.

The court commented that Lavin’s argument was

essentially predicated on the creditor having the ability

to select a victim of its own volition. This was said to be

the kind of treatment that equity sought to preclude.7 In

Mahoney v McManus, contribution was referred to by

Chief Justice Gibbs as a “principle of natural justice”

that “should not be defeated by too technical an approach”.8

Lavin’s argument was considered by the High Court to

be both novel and unduly technical.

While it may seem reasonable to assume that a

co-surety cannot have their rights under contribution

excluded unless through express agreement, the courts

have found that a co-surety’s equitable right to contri-

bution can be impliedly excluded. In Pacanowski v Wygoda,9

for example, Pacanowski and Wygoda entered into a

business venture with Pacanowski acting as the financier

and Wygoda providing building and construction exper-

tise. When the venture failed and Pacanowski made a

claim against Wygoda, Wygoda argued that he was not

liable for contribution; by providing the security, Pacanowski

had undertaken to bear the risk of any financial loss. The

court accepted this argument. It was deemed equitable as

although Pacanowski bore the financial loss, Wygoda

also “lost the value of his time and work”.10

The approach towards contribution in theUnited Kingdom

In the United Kingdom, it appears that the equitable

right of contribution can be excluded or modified, both

expressly and impliedly, subject to concepts of fairness

and justice. A co-surety cannot, for instance, exclude

another co-surety’s right to contribution through agree-

ment with the creditor.

By way of example, in Steel v Dixon11 two of four

co-sureties entered into an agreement with the creditor

whereby they took priority in the distribution of the

benefits of a bill of sale in satisfying their liability under

the guarantee, with any residual amounts being paid to

the other co-sureties. It was held that the proceeds from

the bill of sale should be distributed equally. Similarly in

Lavin v Toppi, the High Court looked unfavourably upon

allowing the creditor to favour one co-surety over

another.

Practical tips for creditorsFrom the creditor’s perspective, the decision in Lavin

v Toppi makes it clear that a covenant not to sue granted

in favour of one guarantor will not of itself release the

other co-guarantors’ liability to the creditor. Such cov-

enants merely prevent the creditor from enforcing the

liability against the guarantor with whom it has entered

into settlement.

It remains to be seen, however, whether co-sureties

will react to the decision by exercising greater caution

when entering into settlement agreements with creditors.

A creditor’s covenant not to sue may no longer be

enough incentive to induce a co-surety to enter into

settlement with the creditor, as the co-surety will clearly

still be liable under the equitable doctrine of contribu-

tion. The co-surety may only be willing to settle with a

creditor when each other co-surety comes to the table to

agree on contribution matters. Creditors may therefore

find it increasingly difficult to reach settlement with

individual co-sureties.

What does a co-surety need to think about?It is essential for co-sureties to exercise great care

when reviewing the wording of a settlement agreement

with a creditor. In particular, a release granted by the

creditor — even if it is expressed to be a “full and final

release” — will not result in a release from obligations

owed to a co-guarantor.

To avoid the result in Lavin v Toppi, a released

co-surety will need to ensure that the other co-sureties

enter into an agreement to regulate each co-surety’s

respective rights and obligations. Without such an agree-

ment, the doctrine of equitable contribution, coupled

with the factual matrix of the case, will be the determi-

native factor in deciding the obligations of two or more

co-sureties to each other.

Leigh Schulz

Senior Associate — Finance

[email protected]

www.minterellison.com

About the author

Leigh Schulz in a specialist in corporate finance,

leveraged finance and debt restructuring. Acting for

both Australian and international financiers and bor-

rowers, Leigh has a strong track record in complex


financing transactions in sectors such as aged care,property, retail and financial services.

Felicia Duan

Graduate — Finance

[email protected]

www.minterellison.com

About the author

Felicia Duan is a recent graduate of the University ofAdelaide. She joined Minter Ellison in February 2015and is currently completing a rotation in the Financedivision.

Footnotes1. Lavin v Toppi (2015) 316 ALR 366; 89 ALJR 302; [2015] HCA

4; BC201500378.

2. Carr v Thomas [2009] NSWCA 208; BC200906346.

3. Toppi v Lavin [2013] NSWSC 1361; BC201312931 at [18].

4. Lavin v Toppi (2014) 87 NSWLR 159; 308 ALR 598; [2014]

NSWCA 160; BC201404412 at [12].

5. Burke v LFOT Pty Ltd (2002) 209 CLR 282 at 293; 187 ALR

612; 76 ALJR 749; BC200201732.

6. McLean v Discount and Finance Ltd (1939) 64 CLR 312 at

341; [1940] ALR 35; (1939) 13 ALJR 428; ; BC4000005.

7. Above, n 1, at [46].

8. Mahoney v McManus (1981) 180 CLR 370 at 378; 36 ALR

545; 55 ALJR 673; BC8100107.

9. Unreported, Full Federal Court of Australia, Neaves, Wilcox

and Spender JJ, 18 December 1992.

10. Above, n 10, at [28].

11. Steel v Dixon (1881) 17 Ch D 825 (Steel).


Griffin Energy Group Pty Ltd (Subject to Deedof Company Arrangement) v ICICI Bank LtdJulie Talakovski and Michael Bridge HWL EBSWORTH LAWYERS

In this case1 in a judgment delivered on 27 February

2015, the Court of Appeal dismissed with costs an

appeal concerning the appropriate construction of a sale

agreement for the sale of shares in a coal mine in

Western Australia and three standby letters of credit

issued by ICICI Bank Ltd (ICICI Bank) located in

Singapore in which the appellant (Griffin) was named as

the beneficiary.

The court found that on a proper reading of the

documents the sum of $150 million did not fall “due and

payable” under the sale agreement until 3 March 2015,

meaning demand by Griffin on ICICI Bank in respect of

the letters of credit could not be made until that date.

Pursuant to the definition of “Business Day” under the

letters of credit however, the letters of credit were

deemed to expire on 2 March 2015.

The consequence of this ruling was that ICICI Bank

had no obligation to pay to Griffin $150 million under

the letters of credit. The result was disastrous for Griffin.

The harsh consequences of this decision for Griffin serve

as a timely reminder that the court will give strict effect

to the terms of letters of credit and that a beneficiary of

a letter of credit needs to take great care when drawing

down on one.

FactsGriffin entered into a sale agreement providing for

payment in instalments, with the final payment falling

due to Griffin being $150 million. In support to the sale

agreement, three standby letters of credit were issued by

ICICI Bank identifying Griffin as the beneficiary under

each of the letters.

The dispute between the parties then arose in the

context of the circumstances set out below:

1. The date on which the final instalment of $150

million fell due and payable pursuant to the terms

of the sale agreement was either Saturday, 28

February 2015 or Sunday, 1 March 2015, neither

of which was a business day.

2. A standard provision was included in the sale

agreement at cl 1.2(g), which provided that:

… if the date on or by which any act must be doneunder this document is not a Business Day, the actmust be done on or by the next Business Day.

3. Monday, 2 March 2015 was a public holiday in

Western Australia, meaning that the next business

day in Western Australia as recognised by the sale

agreement was Tuesday, 3 March 2015.

4. Presentation of the letters of credit was required to

be made at the Bank’s Singapore offices on or

before 1.30 pm on the expiry of the date of the

letters of credit. It was also to be accompanied by

a declaration stating that the amount sought was

“due and payable”.

5. Each of the letters of credit was expressed to

expire on Sunday, 1 March 2015, also a non-

business day.

6. A business day was defined in each letter of credit

as “any day (other than a Saturday or a Sunday) on

which banks are open for general business in

Australia”.

7. While Monday, 2 March 2015 was a public

holiday in Western Australia and banks in that

state would not be open for business, banks

elsewhere in Australia and in Singapore operated

as usual.

First instanceGriffin, concerned about the interplay of the terms

and conditions of the sale agreement and the letters of

credit, brought proceedings seeking declaratory relief to

the effect that:

1. presentation of the letters of credit would be

considered timely presentation if made on or

before 1:30pm Singapore time on 3 March 2015;

and

2. ICICI Bank would be required to make payment

under the letters of credit on their presentation. His

Honour Justice Hammerschlag determined that

ICICI Bank could not be required to make pay-

ments pursuant to the letters of credit as the letters

would expire before the final payment to Griffin

fell due and payable under the sale agreement. In

support of this ruling his Honour set out:

…that all types of letters of credit require thebeneficiary to comply strictly with the terms in order


to invoke the issuing bank’s commitment. Accord-ingly, the Beneficiary in this case (Griffin) is obligedto comply strictly with the requirements for the draftset out in cl 2 of each of the Letters of Credit.2

Court of Appeal DecisionThe primary judge’s view that letters of credit were

stand-alone instruments was not disputed. The parties

agreed that regard could not be had to any provision of

the sale agreement in determining the rights of Griffin to

call on the letters of credit or the obligations of ICICI

Bank to pay under them.

Consideration was also given by the court to the

precise wording of the definition of “Business Day”

contained in the letters of credit, commenting that the

definition did not require every bank in Australia to be

open for general business but rather that despite it being

a public holiday in Western Australia, “in general” on

that day across Australia banks could be deemed to be

open for business.

Ultimately, the Court of Appeal confirmed the pri-

mary judge’s finding. It found that on the proper

construction of the definition of “Business Day” and the

expression “due and payable” under the sale agreement

the final instalment of $150 million fell due and payable

on 3 March 2015 (being the next business day in

Western Australia). As such, Griffin had no legal right to

compel ICICI Bank to pay the final amount due under

the sale agreement before the expiry of the letters of

credit on 2 March 2015 (being the next business day

under those letters). The appeal was dismissed on this

basis.

In this case the court’s narrow reading of the terms of

the letters of credit and the sale agreement resulted in

harsh consequences for the appellant, reaffirming how

contractual documents will be interpreted and enforcedby the courts irrespective of unforeseen commercialramifications for the parties involved.

Julie Talakovski

Partner

HWL Ebsworth

[email protected]

www.hwlebsworth.com.au

About the author

Julie Talakovski is a Partner in the HWL Ebsworth

Commercial Litigation and Dispute Resolution Group.

Her background is in banking, insolvency and general

commercial litigation. She acts for Australia’s largest

banks, financial institutions and insolvency practitio-

ners.

Michael Bridge

Solicitor

HWL Ebsworth

[email protected]

www.hwlebsworth.com.au

About the author

Michael Bridge is a solicitor in HWL Ebsworth Com-

mercial Litigation and Dispute Resolution Group. He

routinely acts for banking and finance institutions in

relation to securities enforcement, loan recoveries and

fraudulent transactions.

Footnotes1. Griffın Energy Group Pty Ltd (Subject to Deed of Company

Arrangement) v ICICI Bank Ltd (2015) 317 ALR 395; [2015]

NSWCA 29; BC201500972.

2. Above, n 1, at 31.


Extensions and specificity: recent clarificationfrom the High Court of Australia on s 588FForders for voidable transactionsAmanda Carruthers LEWIS HOLDWAY LAWYERS

Two High Court decisions have recently been handed

down, looking at key specific questions about orders

made under s 588FF(3) of the Corporations Act 2001

(Cth) (the Act): Grant Samuel Corporate Finance Pty

Ltd v Fletcher; JP Morgan Chase Bank, National

Association v Fletcher1 (Grant Samuel) and Fortress

Credit Corporation (Aust) II Pty Ltd v Fletcher2 (For-

tress Credit). These decisions are important from a

banking and finance perspective, as the ability of a

liquidator to apply for transactions to be rendered void

may significantly impact the prospects and quantum of

recovery available to creditors in a liquidation scenario.

In Grant Samuel the High Court closely considered

whether a court may extend the period ordered under

s 588FF(3)(a) of the Act. The issue was whether the

s 588FF(3)(a) period (the par (a) period) could be further

extended (such as by using powers to vary orders under

r 36.16 of the Uniform Civil Procedure Rules 2005

(NSW) (UCPR)) when that application was made out-

side of the time specified in s 588FF(3)(a), but within a

period already extended under s 588FF(3)(b).

In Fortress Credit, the High Court considered whether

a court may extend the para (a) period in circumstances

where the liquidators are not in a position to specify the

transaction(s) which they wish to render void (ie, shelf

orders).

Section 588FFSection 588FF follows on from ss 588FA–FE, and

grants the court3 power to make a variety of orders

regarding voidable transactions.

For a liquidator to seek orders under s 588FF(1), they

must have made the application to the court during the

period beginning on the relation-back day and ending

three years after that day, or 12 months after the first

appointment of a liquidator in relation to the winding up

(whichever is the later)4 unless the liquidator has obtained

orders for an extension within that specified period.5

At times, the liquidator cannot or does not know

precisely what transactions are to be challenged in the

anticipated proceedings at the time they wish to seek an

extension of time. Orders of this nature are commonly

called blanket orders, or shelf orders (shelf orders) and

are obtained under s 588FF(3)(b).6

Grant Samuel

Prior to these proceedings, the liquidators of Octaviar

Ltd (receivers and managers appointed) (in liquidation)

(hereafter Octaviar) and Octaviar Administration Pty

Ltd (in liquidation) (hereafter Octaviar Administration)

had successfully obtained two sets of ex parte orders

from the Supreme Court of New South Wales, seeking to

extend the time within which they may issue proceed-

ings seeking orders under s 588FF(1).

The relation-back day for Octaviar Ltd was 4 June

2008, accordingly the timeframe set out under the par (a)

period would elapse on 4 June 2011.7 The first set of

orders seeking to extend time were applied for on 10

May 2011 and obtained on 30 May 2011, within in the

par (a) period. The orders obtained (the extension

orders) extended the period to 3 October 2011 (the

extension period).8

During the extension period, but after the expiry of

the par (a) period, the liquidators applied for and

obtained the second set of ex parte orders, in which they

applied to vary to extension orders under r 36.16(2)(b)

of the Uniform Civil Procedure Rules 2005 (NSW)

(UCPR). Those orders were granted on 19 September

2011, and the extension orders were varied to allow the

liquidators to issue proceedings seeking orders under

s 588FF up until 3 April 2012 (the variation orders).9

The appellants each made application to the Supreme

Court to set aside the variation orders. The applications

were dismissed at first instance10 and again on appeal to

the Court of Appeal11 (2:1).12

A key question raised in the appellants’ applications

was whether it is open to a court to grant an extension of

time outside of the par (a) period, but within an extended

period of time which is still on foot. Here, as the

variation orders were sought pursuant to general proce-

dural rules available under the UCPR, the relationship

between the Act and the UCPR were examined, includ-

ing in the context of the Judiciary Act 1903 (Cth).


The Judiciary Act provides in s 79(1) that the laws(including procedural laws) of each state or territoryshall, “except as otherwise provided by the Constitutionor the laws of the Commonwealth” be binding on allcourts exercising federal jurisdiction in that state orterritory. The question which the High Court thereforehad to examine was whether s 588FF(3) “otherwiseprovides”, or whether it was available to the court toutilise the UCPR to further extend that period. Ifs 588FF(3) is sufficiently inconsistent, meaning that itleaves no room for the UCPR to operate, that wouldsuggest that s 588FF(3) does “otherwise provide” and“is clearly intended to be the exclusive source of powerto extend time for the purposes of s 588FF(1)”.13

In the Court of Appeal decision, it was held by themajority that the only restriction on the court’s ability toprovide the extension sought was that the applicationmust be made by the liquidator during the par (a) period.It was considered that while the application for theextension needed to be made within that period, theorder itself did not necessarily need to be made withinthat time. Accordingly, it was found that it was accept-able for an order to be made under the UCPR making thevariation order, when that variation occurred within theextension period.14

The High Court noted the dissenting portion ofPresident Beazley’s judgment, in which Her Honour “tothe extent that it permits a new or further application tobe made for an extension of time, r 36.16(2)(b) isinconsistent with s 588FF(3)(b) and could not thereforebe picked up by s 79 of the Judiciary Act”.15

While the majority judgment in the Court of Appealfound the proceeding to be analogous with Gordonv Tolcher16 the High Court unanimously distinguishedthe facts of those proceedings.17 It was not contestedthat Gordon v Tolcher is regarded as good law for“establishing that, once an application for extension oftime is made in conformity with s 588FF(3)(b), theconduct of the litigation is left for the operation of theprocedures of the court in which the application ismade”18 it was noted that the application in that case hadalready been filed and so use of procedural rules toextend time for filing under s 588FF was not raised.

A principal point of distinction is that in Gordonv Tolcher orders had been sought not to extend time forissuing after the period had lapsed, but rather “toovercome the effect of their automatic operation on theproceedings which had been instituted” so as to avoidthe proceedings from being deemed to be dismissedautomatically.19

The High Court discussed the background and pro-gression of legislative reform surrounding s 588FF(3)including from the Harmer Report and previous caselaw, and noted that an important legislative aim has beento afford certainty.20 Ultimately, the High Court unani-mously found that:

… [t]he only power given to a court to vary the par (a)period is that given by s 588FF(3)(b). That power may notbe supplemented, nor varied, by rules of procedure of thecourt to which an application for extension of time is made.The rules of courts of the States and Territories cannotapply so as to vary the time dictated by s 588FF(3) for thebringing of a proceeding under s 588FF(1), because s 588FF(3)otherwise provides. It provides otherwise in the sense thatit is inconsistent with so much of those rules as wouldpermit variation of the time fixed by the extension order.21

Accordingly, it was held that while the extension

order was valid (and the liquidators could therefore

bring applications up to and including 3 October 2011)

the variation order was not valid, as it was made outside

of the par (a) period. Once that period had expired, no

further extension could be granted, by use of the UCPR

or otherwise.22

The High Court therefore allowed the appeal, with

costs, and directed that the Court of Appeal and Trial

orders be set aside and replaced by orders in favour of

the appellants, with costs paid by the liquidators.

The liquidators are therefore now precluded from

issuing proceedings against the appellants in relation to

claims under s 588FE of the Act.

Fortress CreditThe liquidators of Octaviar Administration and Octaviar

had obtained orders prior to the end of the par (a) period

for Octaviar Administration extending time for that

entity to file application(s) in relation to voidable trans-

actions.23

The relation-back date for Octaviar Administration

was 3 October 2008, and the par (a) period therefore

elapsed on 3 October 2011. The liquidators obtained the

orders for extension of time on 19 September 2011,

which granted time for issuing until 3 April 2012. The

liquidators issued proceedings against the appellants on

3 April 2012.24

The appellants sought orders in the Supreme Court of

New South Wales setting aside the orders granting the

extension of time. That application was dismissed25 as

was the appellants’ appeal to the Court of Appeal (5:0).26

The judgments at both trial and appeal followed BP

Australia Ltd v Brown27 (Brown) which held that s 588FF(3)(b)

granted a court the power to make orders for an

extension of time even if the relevant transaction(s) were

not specified. While it was acknowledged by Bathurst

CJ that the appellants’ arguments had some strength, His

Honour found that Brown was not “plainly wrong” nor

were there compelling grounds to overrule the precedent

which had been applied and relied upon for over a

decade most likely including by liquidators and their

advisors.28

The appellants then appealed to the High Court of

Australia, arguing that in order for the liquidators to


have obtained orders for the extension of time, they were

required to have specified what parties and transactions

the orders related to.

The High Court confirmed that the findings in Brown

were sound, and to be applied here. The High Court

unanimously dismissed the appeal with costs, holding

that a court was not required to identify what transac-

tion(s) were to be challenged prior to granting the orders

for extension of time. It was held that this construction

was valid under the wording of the Act and was

consistent with the intention of s 588FF(b), which is to

allow the court to mitigate the strict timelines afforded

by s 588FF(3)(a) where appropriate.29

It was held unanimously that “no independent basis

for the assertion that any extension of time which does

not identify a particular transaction or transactions must

be an unreasonable prolongation of uncertainty militat-

ing against a construction which would allow such an

order to be made”.30 Rather, s 588FF allows the court to

use their discretion, and “[q]uestions of what is a

reasonable or an unreasonable prolongation of uncer-

tainty and the scope of such uncertainty are more

appropriately considered case-by-case in the exercise of

judicial discretion than globally in judicial interpretation

of the provision”.31

This supports the pre-existing understanding that

there may be times when notwithstanding a liquidator’s

best endeavours, the liquidator may not be able to

identify all relevant transactions in time to identify them

prior to the elapsing of the par (a) period, and so a shelf

order may be appropriate.

ConclusionThese judgments provide helpful confirmation of the

High Court’s position in relation to further extensions of

time, and shelf orders, which is particularly enlightening

regarding the latter, which has not always been dealt

with consistently across the states.

Liquidators are provided with a firm and resounding

answer in the negative as to whether state or territory

based procedural law may be utilised to further extend

time for issuing proceedings outside of the par (a)

period, but the ability of liquidators to seek shelf orders

is confirmed.

The judgment in Fortress Credit however should not

be interpreted as a carte blanche for seeking shelf orders

without regard to the competing interest of potential

defendants to such claims, and their need for certainty.

Liquidators may need compelling evidence to satisfy the

court that discretion should be applied to grant shelf

orders, as it can be anticipated that the court will

continue to deal with such applications on a case by case

basis.

Amanda Carruthers

Senior Associate and Head of Insolvency

Lewis Holdway Lawyers

[email protected]

www.lewisholdway.com.au

About the author

Amanda Carruthers is head of insolvency at Lewis

Holdway Lawyers. She is an experienced and skilled

litigator and technical adviser, practising in corporate

and personal insolvency law and complex commercial

litigation. Amanda holds a BA/LLB from the University

of Melbourne, and won the prestigious David Fogarty

award as the top Vic/Tas student completing the ARITA

insolvency education program in 2009.

Footnotes1. Grant Samuel Corporate Finance Pty Ltd v Fletcher; JP

Morgan Chase Bank, National Association v Fletcher (2015)

317 ALR 301; 89 ALJR 401; [2015] HCA 8; BC201501286.

2. Fortress Credit Corporation (Aust) II Pty Ltd v Fletcher (2015)

317 ALR 421; 89 ALJR 425; [2015] HCA 10; BC201501284.

3. Defined by s 58AA of the Act.

4. Corporations Act 2001 (Cth) s 588FF(3)(a)(i)–(ii).

5. Corporations Act 2001 (Cth) s 588FF(3)(b).

6. Brown v DML Resources Pty Ltd (in liq) [No 5] (2001) 166

FLR 1; 20 ACLC 529; [2001] NSWSC 973; BC200107064 at

[31].

7. Above, n 1, at [2].

8. Above, n 1, at [3].

9. Above, n 1, at [4].

10. In the matter of Octaviar Ltd (receivers and managers appointed)

(in liq) and Octaviar Administration Pty Ltd (in liq) (2013) 272

FLR 398; 93 ACSR 316; [2013] NSWSC 62; BC201300865.

11. JPMorgan Chase Bank, National Association v Fletcher;

Grant Samuel Corporate Finance Pty Ltd v Fletcher (2014) 85

NSWLR 644; 306 ALR 224; [2014] NSWCA 31; BC201401011.

12. Above, n 1, at [5].

13. Above, n 1, at [8].

14. Above, n 1, at [9], see further above, n 11, at [152]–[166].

15. Above, n 11, at [89].

16. Gordon v Tolcher in his capacity as liquidator of Senafield Pty

Ltd (in liq) (2006) 231 CLR 334; 231 ALR 582; [2006] HCA

62; BC200610441.

17. Above, n 1, at [12]–[17].

18. Above, n 1, at [12].

19. Above, n 1, at [14].

20. Above, n 1, at [17]–[21].

21. Above, n 1, at [23].

22. Above, n 1, at [24].

23. Above, n 2, at [4].

24. Above, n 2, at [4].


25. In the matter of Octaviar Ltd (receivers and managers appointed)

(in liquidation) and In the matter of Octaviar Administration

Pty Ltd (in liquidation) (2012) 271 FLR 413; [2012] NSWSC

1460; BC201209466.

26. Fortress Credit Corporation (Aust) II Pty Ltd (ACN 114 624

958) v Fletcher (2014) 308 ALR 166; 285 FLR 287; [2014]

NSWCA 148; BC201403512.

27. BP Australia Ltd v Brown (2003) 58 NSWLR 322; 176 FLR

301; [2003] NSWCA 216; BC200304438.

28. Above, n 2, at [9].

29. Above, n 2, at [27]–[28].

30. Above, n 2, at [24].

31. Above, n 2, at [24].


Book reviews

Anthony Lo Surdo SC 12 WENTWORTH SELBORNE CHAMBERS

Annotated National Credit Code,5th edition, Beatty, A and Smith A,LexisNexis, 2014, ISBN 9780 409336160

This popular practical work, now in its fifth edition is

the natural first port of call for any issue involving the

National Credit Code (Code) and its predecessor the

Uniform Consumer Credit Code. It provides commen-

tary on, and precedent related to, the provision of credit

to consumers or strata corporations for personal, domes-

tic or household purposes, or for purchasing, refinanc-

ing, renovating or improving residential investment

property.

It considers transactions regulated by the Code,

statements of account, payouts and surrender of goods,

formal requirements for documents and other notices,

disclosure obligations, compliance and enforcement,

penalties and an overview of privacy reforms enacted on

12 March 2014.

The reason for the book’s popularity becomes evident

from the moment a credit related issue arises. It provides

the busy practitioner with a readily accessible and

readily digestible guide to the relevant statutory provi-

sions. It does so by reproducing the legislation in its

totality and by providing useful references to cases

which have considered and applied those provisions.

Where appropriate, commentary appears at the end of

the section. That commentary provides an overview of

the section and links the topic in issue to related areas.

Ong on Subrogation, Denis SK Ong,2014, The Federation Press,2014 ISBN 978 1 86287 979 9

This slim volume provides an outline study of the

doctrine of subrogation.

It commences with an examination of the doctrine of

the equitable principles governing the doctrine of subroga-

tion and distinguishes it from the assignment of a chose

in action. It then explores the circumstances in which

subrogation may operate: the right of subrogation to the

trustee’s right of indemnity; an insurer’s right of subroga-

tion; where the right of subrogation vests in a party

(other than a surety) who discharges a third party’s debt

to a secured creditor; a surety who discharges the

principal debtor’s debt to a secured creditor; and the

rights to subrogation of a putative lender who purports

to lend money to an ultra vires borrower who then uses

the proceeds of the putative loan to discharge its ultra

vires debts. It concludes with a consideration of those

situations where a third party payer does not have any

right to be subrogated to the right of the payee against a

debtor.

The work contains a useful summary of the essential

legal principles by reference to the primary source

material and, in doing so, provides a springboard for

further detailed research if required.

Anthony Lo Surdo SC

12 Wentworth Selborne Chambers

[email protected]

www.12thfloor.com.au

About the author

Anthony Lo Surdo specialises in commercial, equity,

corporations, insurance, professional indemnity, prop-

erty and sports law. He has a particular interest in

banking and insolvency in respect of which he has

written extensively. He has been described by “Doyle’s

Guide to the Australian Legal Profession — 2011” as a

“Leading” counsel at the Insolvency Bar. Anthony is

accredited as an advanced mediator, arbitrator and

expert determiner.


COMMISSIONING EDITOR: Virginia Ginnane MANAGING EDITOR: Joanne Beckett SUBSCRIPTIONS:

include 10 issues plus binder SYDNEY OFFICE: Locked Bag 2222, Chatswood Delivery Centre NSW 2067

Australia For further information on this product, or other LexisNexis products, PHONE: Customer Relations:

1800 772 772 Monday to Friday 8.00am–6.00pm EST; EMAIL: [email protected]; or VISIT

www.lexisnexis.com.au for information on our product catalogue. Editorial queries: Virginia Ginnane,

[email protected]

ISSN 1035-2155 Print Post Approved PP 255003/00764 Cite as (2015) 31(4–5) BLB

This newsletter is intended to keep readers abreast of current developments in the field of banking, finance and credit

law. It is not, however, to be used or relied upon as a substitute for professional advice. Before acting on any matter in

the area, readers should discuss matters with their own professional advisers. This publication is copyright. Except as

permitted under the Copyright Act 1968 (Cth), no part of this publication may be reproduced by any process, electronic

or otherwise, without the specific written permission of the copyright owner. Neither may information be stored

electronically in any form whatsoever without such permission.

Inquiries should be addressed to the publishers. Printed in Australia © 2015 Reed International Books Australia Pty

Limited trading as LexisNexis ABN: 70 001 002 357.


Disrupting to Win BLB 31 4-5 (May-June)

Documents

Transcript of Disrupting to Win BLB 31 4-5 (May-June)