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. INTRODUCTION Defining the role of trustees in protecting the interests of debenture holders The Bridgecorp case1 concerned an application by the Australian Securities & Investments Commission (ASIC) for orders to be imposed on Bridgecorp Finance Limited (BFL) in respect of debentures that BFL had issued. As the debentures had been offered in such a way as to require a prospectus to be prepared under Chapter 6D of the Corporations Act 2001, a trust deed was entered into. Permanent Nominees (Aust) Limited (Permanent Nominees) was appointed as trustee for the debenture holders under section 283AA. Bridgecorp Holdings Limited (BHL), BFL’s parent company, granted a performance guarantee in favour of Permanent Nominees in relation to the debentures. The prospectuses lodged by BFL for the issue of debentures attracted the attention of ASIC which, on 17 February 2006, issued an interim stop order on BFL’s December 2005 prospectus and February 2006 supplementary prospectus. A final stop order was issued on 3 April 2006. 1. [2006] NSWSC 836. Subsequently, Permanent Nominees retained an accountant to undertake a review of the operations and records of BFL to ensure that BFL was in a position to meet its obligations to debenture holders and, separately, BFL and BHL engaged Deloitte Touche Tohmatsu to undertake an independent solvency review of BFL. Following these investigations, BFL took steps with respect to doubtful debt provisioning, improvement of its capital position (and liquidity and cash flow) and implemented an enhanced regime of reporting to Permanent Nominees as trustee for the debenture holders. ASIC’s application to the court under s283HB(1) of the Corporations Act sought to formalise this enhanced monitoring and reporting regime. BFL consented to ASIC’s application. ASIC contended that the orders should be considered by the court as appropriate ‘to protect the interests of existing or prospective debenture holders’ under s283HB(1)(g). There was no suggestion that BFL was in breach of the trust deed or the Corporations Act. The court made the orders sought by ASIC and consented to by BFL. IMPORTANCE OF THIS CASE In light of comments made by the court in concluding its judgment, the case may be cause for regulated debenture trustees to reconsider their diligence systems, as well as the financial wellbeing of the borrowers whose activities they agree to monitor and whose debentures they agree to enforce on behalf of investors. Indeed, ASIC has stated that many independent trustees are not doing enough to protect the interests of investors and it recently issued a letter to some of Australia’s largest trust companies reminding them of their duties to protect the interests of investors.2 The letter was intended to remind trustees of ‘the powers of the Corporations Act available for use by ASIC or debenture trustees that effectively enable them to take steps to protect investors’, which ASIC said was underlined by the Bridgecorp case.3 (e) BFL notify all debenture holders of the above orders and the outcome of the mortgage loan book review referred to in paragraph (d) above. The reporting requirements under the order were imposed in addition to the standard quarterly reporting obligations of debenture issuers under s283BF of the Corporations Act. In making these orders, the court stated that section 283HB(1)(g) was intended to confer a broad remedial and protective jurisdiction, and that it was open to a court to make any order that appears to be calculated to safeguard the interests of the holders of debentures in receiving the payments due to them under their debentures as and when those payments become due. The court was satisfied that the particular measures directed towards independent review and enhanced reporting in this case would operate to safeguard that interest. The court also stated that, while it was essentially endorsing measures that were already agreed between ASIC and BFL, the making of the orders would nonetheless be appropriate because they would construct a regime of compulsion for BFL with sanctions for noncompliance. ORDERS MADE IN BRIDGECORP The orders made by the court were the following: (a) Unless and until BFL lodges a prospectus or replacement prospectus in accordance with the requirements of Part 6D.2 of the Corporations Act, BFL be restrained from promoting, offering and issuing debentures, from extending the redemption date for all unredeemed debentures and from otherwise rolling over any unredeemed debentures; (b) BFL provide Permanent Nominees each month with a written report addressing certain agreed matters, identifying any material deterioration in BFL’s net profit, cash flow and net asset position, and otherwise opining on BFL’s solvency; (c) BFL provide Permanent Nominees each week with a written report that identifies the balance of cash held by BFL at the end of the previous week and all cash received and payments made by BFL during the previous week; (d) BFL engage independent chartered accountants to review and report on its mortgage loan book with a view to 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. COMMENTS ON THE ROLE OF THE TRUSTEE IN BRIDGECORP In concluding the judgment the court made some interesting comments on the role of the trustee for holders of publicly offered debentures. The court stated that, absent of ASIC interest and involvement, it would be expected that the trustee might bring a matter such as Bridgecorp’s before the court, as ‘the aim of the statutory provisions in this area is to stock the armouries of trustees so that they may be active in the protection of debenture holders’. The message is that the trustee has a right and possibly an obligation to seek orders from the court in circumstances like the Bridgecorp case. Permanent Nominees was not a party to the application and did not wish to place any matter before the court, but the court reasoned that this was not a significant matter because ASIC was making the application and Permanent Nominees had been closely involved in the formulation of the court ordered proposals. OBSERVATIONS While not binding, these comments should operate as a warning to trustees as to what the law may regard as their duties in safeguarding the interests of debenture holders under the Corporations Act. Part 2L.4 of the Corporations Act (in particular, s283DA) requires trustees take the following actions to protect the interests of debenture holders: • exercise reasonable diligence to ascertain whether the property of the borrower and each guarantor will be sufficient to repay the amount deposited or lent; • exercise reasonable diligence to ascertain whether the borrower or any guarantor is in breach of the terms of the debentures, the provisions of the trust deed, or Chapter 2L of the Corporations Act, and to do everything in its power to remedy any breach that materially prejudices the interests of debenture holders; • ensure that the borrower and each guarantor complies with the relevant parts of Part 2K of the Corporations Act (charges); • notify ASIC if the borrower has not informed the trustee about charges or given the trustee and ASIC the required reports in accordance with the Corporations Act, or if a guarantor has not informed the trustee about charges; and • apply to the court for an order under s283HB if the borrower requests it.4 In addition, under the Corporations Act, the trustee may, but does not have an obligation to, call a meeting of debenture holders where the terms of the debentures, provisions of the trust deed or the requirements of the Corporations Act have been breached by the borrower (or a guarantor) and the breach remains unremedied. The trustee may call a meeting to inform debenture holders of the failure to remedy the breach, to submit proposals for the protection of the debenture holders’ interests and to ask for 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. In essence, the court has suggested that trustees have a duty to actively monitor and take steps within their power to improve their understanding and the understanding of debenture holders of the financial health of the borrower by expanding the borrower’s reporting 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 As the court’s comments arose in a case in which there was no breach of the terms of the debentures, the trust deed or Chapter 2L and not at the request of the debenture holders or the borrower, perhaps the steps that trustees should take as described by the court derive from the statutory duty to ‘exercise reasonable diligence to ascertain whether the property of the borrower and each guarantor will be sufficient to repay the amount deposited or lent’ (s283DA(a)), on the basis that it is an ongoing duty. This, in turn, would suggest that the ambit of the duties of trustees to debenture holders is broader than current practice would indicate. Trustees would also be well advised to note that ASIC is now taking a more active approach to regulating the duties of trustees through its expanding Compliance Directorate team (which was set up after the high-profile Westpoint failure) to seek and resolve problems that might lead to companies losing investors’ money. It is in this vein that ASIC issued a letter to various trust companies earlier this month to remind those companies of their duties to debenture holders. ASIC has also warned that trustees who do not properly carry out their duties risk being joined in a court action initiated by ASIC against issuers of publicly offered debentures.6 It would seem that the Bridgecorp case offers a good starting point for understanding what ASIC may see as the proper discharge of trustee duties when concerns over the ability of a borrower to repay debentures arise. 5. Trustees are conferred with a clear right (but not obligation) under s283HB to apply to the court for remedial orders at any time and not just when the trustee believes the borrower or any guarantor will not be able to repay the debentures (see Explanatory Memorandum to the Corporate Law Economic Reform Program Bill 1999 (Cth)). 6. ’ASIC’s strategy to help prevent another Westpoint’, Australian Financial Review, 14 September 2006, p48. GET THE LATEST LEGAL NEWS ONLINE Allens Arthur Robinson’s publications are available online. 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