bridgecorp

FOCUS

CAPITAL MARKETS









September 2006









IMPLICATIONS OF ASIC V

BRIDGECORP

In the recent case of ASIC v Bridgecorp Finance Limited, the Supreme Court

of New South Wales helped define the role of trustees for publicly offered

debentures in protecting the interests of the debenture holders. Partner David

Robb and Lawyer Nicole Seeto look at the implications of the Bridgecorp

decision.

Subsequently, Permanent Nominees retained

INTRODUCTION an accountant to undertake a review of the

operations and records of BFL to ensure that

Defining the The Bridgecorp case1 concerned an application

BFL was in a position to meet its obligations

by the Australian Securities & Investments

role of trustees Commission (ASIC) for orders to be imposed on

to debenture holders and, separately, BFL and

BHL engaged Deloitte Touche Tohmatsu to

in protecting Bridgecorp Finance Limited (BFL) in respect

undertake an independent solvency review of

of debentures that BFL had issued. As the

BFL. Following these investigations, BFL took

the interests of debentures had been offered in such a way as

steps with respect to doubtful debt provisioning,

to require a prospectus to be prepared under

debenture holders Chapter 6D of the Corporations Act 2001, a

improvement of its capital position (and liquidity

and cash flow) and implemented an enhanced

trust deed was entered into.

regime of reporting to Permanent Nominees as

Permanent Nominees (Aust) Limited (Permanent trustee for the debenture holders.

Nominees) was appointed as trustee for the

ASIC’s application to the court under

debenture holders under section 283AA.

s283HB(1) of the Corporations Act sought

Bridgecorp Holdings Limited (BHL), BFL’s

to formalise this enhanced monitoring and

parent company, granted a performance

reporting regime. BFL consented to ASIC’s

guarantee in favour of Permanent Nominees in

application. ASIC contended that the

relation to the debentures.

orders should be considered by the court as

The prospectuses lodged by BFL for the issue appropriate ‘to protect the interests of existing

of debentures attracted the attention of ASIC or prospective debenture holders’ under

which, on 17 February 2006, issued an interim s283HB(1)(g). There was no suggestion that

stop order on BFL’s December 2005 prospectus BFL was in breach of the trust deed or the

and February 2006 supplementary prospectus. Corporations Act.

A final stop order was issued on 3 April 2006.

The court made the orders sought by ASIC and

1. [2006] NSWSC 836. consented to by BFL.

IMPORTANCE OF (e) BFL notify all debenture holders of the

above orders and the outcome of the



THIS CASE mortgage loan book review referred to in

paragraph (d) above.



In light of comments made by the court in The reporting requirements under the

concluding its judgment, the case may be cause order were imposed in addition to the standard

for regulated debenture trustees to reconsider quarterly reporting obligations of debenture

their diligence systems, as well as the financial issuers under s283BF of the Corporations Act.

wellbeing of the borrowers whose activities they

agree to monitor and whose debentures they In making these orders, the court stated that

agree to enforce on behalf of investors. section 283HB(1)(g) was intended to confer

a broad remedial and protective jurisdiction,

Indeed, ASIC has stated that many independent and that it was open to a court to make any

trustees are not doing enough to protect the order that appears to be calculated to safeguard

interests of investors and it recently issued the interests of the holders of debentures in

a letter to some of Australia’s largest trust receiving the payments due to them under

companies reminding them of their duties to their debentures as and when those payments

protect the interests of investors.2 The letter was become due.

intended to remind trustees of ‘the powers of

the Corporations Act available for use by ASIC or The court was satisfied that the particular

debenture trustees that effectively enable them measures directed towards independent review

to take steps to protect investors’, which ASIC and enhanced reporting in this case would

said was underlined by the Bridgecorp case.3 operate to safeguard that interest.



The court also stated that, while it was

ORDERS MADE IN essentially endorsing measures that were already

agreed between ASIC and BFL, the making of

BRIDGECORP the orders would nonetheless be appropriate

because they would construct a regime of

The orders made by the court were the following: compulsion for BFL with sanctions for non-

compliance.

(a) Unless and until BFL lodges a prospectus

or replacement prospectus in accordance

with the requirements of Part 6D.2 of the COMMENTS ON

Corporations Act, BFL be restrained from

promoting, offering and issuing debentures, THE ROLE OF

from extending the redemption date for all

unredeemed debentures and from otherwise THE TRUSTEE IN

rolling over any unredeemed debentures;



(b) BFL provide Permanent Nominees each

BRIDGECORP

month with a written report addressing In concluding the judgment the court made

certain agreed matters, identifying any some interesting comments on the role of

material deterioration in BFL’s net profit, the trustee for holders of publicly offered

cash flow and net asset position, and debentures.

otherwise opining on BFL’s solvency;

The court stated that, absent of ASIC interest

(c) BFL provide Permanent Nominees each

and involvement, it would be expected that

week with a written report that identifies the

the trustee might bring a matter such as

balance of cash held by BFL at the end of

Bridgecorp’s before the court, as ‘the aim of

the previous week and all cash received and

the statutory provisions in this area is to stock

payments made by BFL during the previous

the armouries of trustees so that they may be

week;

active in the protection of debenture holders’.

(d) BFL engage independent chartered The message is that the trustee has a right and

accountants to review and report on possibly an obligation to seek orders from the

its mortgage loan book with a view to court in circumstances like the Bridgecorp case.

establishing and verifying the underlying

security value and repayment timing of

specific cashflow important loans; and



2. ’ASIC gets tough on high-risk property schemes’,

Australian Financial Review, 13 September 2006, p1.

3. ’ASIC gets tough on high-risk property schemes’,

Australian Financial Review, 13 September 2006, p1.

Permanent Nominees was not a party to the In essence, the court has suggested that

application and did not wish to place any matter trustees have a duty to actively monitor and

before the court, but the court reasoned that take steps within their power to improve their

this was not a significant matter because ASIC understanding and the understanding of

was making the application and Permanent debenture holders of the financial health of the

Nominees had been closely involved in the borrower by expanding the borrower’s reporting

formulation of the court ordered proposals. obligations, and to apply to the court for orders

on its own initiative (not just if the borrower

requests it or when ASIC takes an interest).5

OBSERVATIONS

As the court’s comments arose in a case in

While not binding, these comments should which there was no breach of the terms of the

operate as a warning to trustees as to what the debentures, the trust deed or Chapter 2L and

law may regard as their duties in safeguarding not at the request of the debenture holders or

the interests of debenture holders under the the borrower, perhaps the steps that trustees

Corporations Act. should take as described by the court derive

from the statutory duty to ‘exercise reasonable

Part 2L.4 of the Corporations Act (in particular,

diligence to ascertain whether the property

s283DA) requires trustees take the following

of the borrower and each guarantor will be

actions to protect the interests of debenture

sufficient to repay the amount deposited or lent’

holders:

(s283DA(a)), on the basis that it is an ongoing

• exercise reasonable diligence to ascertain duty. This, in turn, would suggest that the ambit

whether the property of the borrower and of the duties of trustees to debenture holders is

each guarantor will be sufficient to repay the broader than current practice would indicate.

amount deposited or lent;

Trustees would also be well advised to note that

• exercise reasonable diligence to ascertain

ASIC is now taking a more active approach to

whether the borrower or any guarantor is in

regulating the duties of trustees through its

breach of the terms of the debentures, the

expanding Compliance Directorate team (which

provisions of the trust deed, or Chapter 2L of

was set up after the high-profile Westpoint

the Corporations Act, and to do everything in

failure) to seek and resolve problems that might

its power to remedy any breach that materially

lead to companies losing investors’ money. It is

prejudices the interests of debenture holders;

in this vein that ASIC issued a letter to various

• ensure that the borrower and each guarantor

trust companies earlier this month to remind

complies with the relevant parts of Part 2K of

those companies of their duties to debenture

the Corporations Act (charges);

holders.

• notify ASIC if the borrower has not informed

the trustee about charges or given the trustee ASIC has also warned that trustees who do not

and ASIC the required reports in accordance properly carry out their duties risk being joined

with the Corporations Act, or if a guarantor in a court action initiated by ASIC against

has not informed the trustee about charges; issuers of publicly offered debentures.6

and

• apply to the court for an order under s283HB It would seem that the Bridgecorp case offers

if the borrower requests it.4 a good starting point for understanding what

ASIC may see as the proper discharge of trustee

In addition, under the Corporations Act, the duties when concerns over the ability of a

trustee may, but does not have an obligation to, borrower to repay debentures arise.

call a meeting of debenture holders where the

terms of the debentures, provisions of the trust

5. Trustees are conferred with a clear right (but not

deed or the requirements of the Corporations obligation) under s283HB to apply to the court for

Act have been breached by the borrower (or a remedial orders at any time and not just when the

guarantor) and the breach remains unremedied. trustee believes the borrower or any guarantor will

not be able to repay the debentures (see Explanatory

The trustee may call a meeting to inform Memorandum to the Corporate Law Economic Reform

debenture holders of the failure to remedy the Program Bill 1999 (Cth)).

breach, to submit proposals for the protection of 6. ’ASIC’s strategy to help prevent another Westpoint’,

Australian Financial Review, 14 September 2006,

the debenture holders’ interests and to ask for

p48.

directions from debenture holders in relation to

the matter (see s283EB).



4. Under s283HB, the court may make any order that

the court considers appropriate to protect the interests

of debenture holders.

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David Robb Jon North Craig Henderson

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