A Guide to the Law of Securitisation in Australia - Clayton Utz

More documents

Recommendations

Info

assess precisely the type of material that a court is likely toconsider should be disclosed in a capital markets informationmemorandum.To date there has been no case law directly on this issue.The answer is likely to turn on a court’s assessment of thefunction and role of an information memorandum in theinvestment process. Unfortunately, there appear to be twoopposite views on this.The first is that investors typically do not have access, nor areprivy, to all information relating to the particular capital marketssecurities. An information memorandum, therefore, performs afunction similar to that of a prospectus by providing an intendinginvestor with all material information necessary to make aninvestment decision. Accordingly, the material that an investorwould expect to be disclosed in an information memorandum issimilar to the standard set out in section 710 of the CorporationsAct, ie. all information that investors and their professionaladvisers would reasonably require to make an informedassessment of the issuer and the relevant securities.The contrary view is that those who prepare an informationmemorandum are not investors. They cannot predict all theinformation that would be relevant to an investment decision.While all due care may be taken to prepare an informationmemorandum, there is no guarantee that it contains all relevantinformation. It is the duty of each prospective investor to satisfythemselves on this front. If a prospective investor fails toadequately protect its interests, this should not lead to liabilityfor those who prepare an information memorandum.There is some merit in both views. On one hand, investorsare largely dependent on the disclosures in an informationmemorandum in making their investment decisions. On the otherhand, to require disclosures equivalent to a section 710 standardwould be to equate capital markets investors to members of thepublic; yet the present legislative scheme is founded on theassumption that sophisticated investors do not need theprotection of prospectus legislation.The doubt regarding the appropriate standard of disclosure in aninformation memorandum represents a major deficiency with thepresent situation. It creates a substantial uncertainty for thoseinvolved in the preparation of an information memorandumregarding the disclosures necessary to avoid liability for a breachof sections 1041H and 12DA(1).3.3.4 Inadvertent omissionsAnother area of uncertainty in relation to omissions is whetheran inadvertent (as opposed to a deliberate) failure to disclosematerial in an information memorandum can breach sections1041H and 12DA(1).The expression “engaging in conduct” is defined in section12BA(2) of the ASIC Act as, amongst other things, “doing orrefusing to do any act”. The phrase “refusing to do an act” isdefined to include “restraining (otherwise than inadvertently)from doing that act”. These definitions are identical to those insection 4(2) of the TPA.The expression “engage in conduct” is defined in section 9(1) ofthe Corporations Act as “to do an act or thing or to omit toperform an act or thing” (see also the definition of act in section9(1)). Importantly, unlike the corresponding definitions ofengaging in conduct under the ASIC Act and the TPA, theCorporations Act definition does not specifically excludeinadvertent omissions.The exception in section 12BA(2) of the ASIC Act suggests thatconduct does not include an inadvertent failure to do an act andthat a positive refusal to do an act is required before it can besaid that there has been “conduct”. This line of reasoningsuggests that an innocent omission from an informationmemorandum will not lead to a breach of section 12DA.However, this approach is in tension with the well establishedprinciple that knowledge is not a necessary ingredient for abreach of section 52 (and presumably sections 12DA(1) and1041H). In Parkdale Custom Built Furniture Pty Limited v Puxu Pty.Limited (1982) 149 CLR 191, Chief Justice Gibbs stated:“There is nothing in the section that would confine it to conductwhich was engaged in as a result of a failure to take reasonablecare. A corporation which has acted honestly and reasonably maytherefore nevertheless be rendered liable to be restrained byinjunction and to pay damages if its conduct has in fact misled ordeceived or is likely to mislead or deceive.”This approach was endorsed by the Full Federal Court in Fraser vNRMA Holdings:“... for the purposes of section 52, if by reason of what was saidand what was left unsaid the conduct of the corporation ismisleading or deceptive or likely to mislead or deceive, acontravention would occur even if the corporation through itsdirectors and officers did not have knowledge of the undisclosedfacts which rendered the conduct in breach of section 52.”19
The implication of this approach in relation to a breach of section52, and lack of any specific exemption for inadvertent failuresunder section 1041H, is that if the “reasonable expectation” testcarries with it a standard of disclosure, as seems likely, and anissuer innocently fails to meet that standard, even after say duediligence, then a breach of sections 1041H and 12DA(1) couldoccur. This imposes a very exacting (if not unfair) requirement onissuers and is to be compared to the more favourable treatmentin relation to a misleading or deceptive statement in a disclosuredocument where a liability for a breach of section 728 can bemet by the due diligence defence of section 731.An alternative approach is for the courts to incorporate withinthe “reasonable expectation” test a standard of diligence inrelation to an information memorandum. For example, they mayconsider that capital markets investors would reasonably expectan information memorandum to only state material known to theissuer or that the information memorandum would only be issuedafter due diligence by those responsible for its preparation. Thiswould deal with the problem of the potential liability that anissuer has for omissions not known to it, and would also beconsistent with the likely expectation of capital marketsinvestors. However, until the issue is considered by the courts,those responsible for the preparation of an informationmemorandum face the prospect of potential liability for failing todisclose information which is not known to them.3.3.5 The consequences of a contraventionA breach of sections 1041H and 12DA does not constitute anoffence (sections 1311 of the Corporations Act and 12GB(1) ofthe ASIC Act, respectively). However, a person who suffers lossor damage by conduct in breach of section 1041H or 12DA mayrecover the amount of this under sections 1041I of theCorporations Act and 12GF of the ASIC Act, respectively.3.3.6 Two classes of persons exposed to civil liabilitySections 1041I of the Corporations Act and 12GF of the ASIC Actimpose civil liability on the person who “engaged” in the conductconstituting the contravention and on any other person “involvedin the contravention”.Engaged in a contraventionNormally, an information memorandum identifies the party thattakes responsibility for its contents. It is this person who engagesin the relevant conduct for the purposes of sections 1041H and12DA. Usually, this is the issuer of the relevant securities or themanager or sponsor of the program. Sometimes, where a numberof parties have prepared an information memorandum, they takeresponsibility for their individual portions. A single informationmemorandum in these circumstances can, therefore, comprise aseries of separate instances of conduct by different parties.Section 52 of the Corporations Act provides that a reference todoing an act includes a “reference to causing or authorising theact ... to be done”. Section 52 applies to both section 12GF(section 5(3) of the ASIC Act) and to section 1041I. As a result,the directors who formally authorise the issue of a defectiveinformation memorandum are probably deemed to engage in acontravention of the sections.Involved in a contraventionSection 79 of the Corporations Act defines the phrase “involvedin a contravention” as follows:“A person is involved in a contravention if, and only if, theperson:(a) has aided, abetted, counselled or procured the contravention;(b) has induced, whether by threats or promises or otherwise,the contravention;(c) has been in any way, by act or omission, directly or indirectly,knowingly concerned in, or party to, the contravention; or(d) has conspired with others to effect the contravention.”Section 79 also applies to section 12GF (see section 5(2) of theASIC Act).3.3.7 The position of dealersSecuritised instruments are usually issued through a dealerpanel. The name of each dealer often appears on the front pageand in the body of the information memorandum as performingthis role. The dealers also distribute the informationmemorandum to potential investors, sometimes accompanied bysupplementary materials prepared by them regarding thesecurities on offer.Normally, an information memorandum will include a disclaimerthat the dealers have not prepared, and do not accept liability, forits contents (except, perhaps, in relation to nominated sectionsprepared by a particular dealer).A dealer, though, can be exposed to potential liability on adefective information memorandum in a variety of ways. It will,for example, be liable for those sections in respect of which ithas specifically accepted responsibility. In addition, depending onthe extent to which it has assisted in the preparation of theinformation memorandum, it may be liable on the basis that ithas caused the issue for the purposes of section 52 of the20
Page 6: 12.7.3 Euroentitlements............
Page 9 and 10: 1 General overview of the nature of
Page 12: An interest in a managed investment
Page 15 and 16: 142.3.4 Provision of a financial se
Page 17 and 18: 3 The disclosure and civil liabilit
Page 19: 18The statutory source for this ste
Page 23 and 24: Interestingly, the majority then we
Page 25 and 26: 4 Stamp duty and securitisation244.
Page 27 and 28: 264.8 Relief for mortgage-backed se
Page 29 and 30: 4.10 ConclusionStamp duty is a very
Page 31 and 32: Despite the absence of an express a
Page 33 and 34: 32share of the profits of the compa
Page 35 and 36: (d) before the issue:(i) the compan
Page 37 and 38: 365.4 Debt/equity rulesDivision 974
Page 39 and 40: Entities that make GST-free supplie
Page 41 and 42: • “ enterprise” is defined in
Page 43 and 44: 6 The Consumer Credit Code andsecur
Page 45 and 46: 7 The regulation of the participati
Page 47 and 48: inclusion within the ELE depends on
Page 49 and 50: 8 Set-off and securitisation8.1 Int
Page 51 and 52: 50However, this result and the prin
Page 53 and 54: 9 Insolvency and securitisation529.
Page 55 and 56: 54• if the trustee has not limite
Page 57 and 58: Section 588FG provides a measure of
Page 59 and 60: 10 Issues relating to debt securiti
Page 61 and 62: 60indemnity existed) and had no han
Page 63 and 64: The effect of the decision has been
Page 65 and 66: the ASX has discretion to ask the e
Page 67 and 68: • Public Trustee Members - for pr
Page 69 and 70: When Austraclear receives notificat
Page 71 and 72:
have been completed in relation to
Page 73 and 74:
Some CMBS transactions allow the is
Page 75 and 76:
14.3 GamingIn the past, another con
Page 77 and 78:
16 Clayton UtzOur securitisation te
show all

A Guide to the Law of Securitisation in Australia - Clayton Utz

Create successful ePaper yourself

Delete template?

Save as template?