The Australian Federal Court in Leveraged Equities Limited v Goodridge has reaffirmed accepted practice regarding novations and assignments in the loan syndication and securitisation markets.
This should lay to rest concerns raised in the first instance decision, Goodridge v Macquarie Bank Limited, almost a year ago. But the relief may be temporary as Mr Goodridge has indicated that he will appeal the court’s decision to the Australian High Court.
In brief, the judge held that Leverage Equities, the assignee of a margin loan contract, had not given proper notice to Mr Goodridge when demanding a margin call.
The judge also found that the transfer of the margin loan contract from Macquarie Bank to Leverage Equities was ineffective because Mr Goodridge had not consented to the transfer and the loan was incapable of assignment.
It was this finding that caused most concern as it had potentially significant ramifications for syndicated loan transfers and the assignment of financial assets in securitisations. It is this aspect of the judgment, which the Federal Court in Leveraged Equities Limited v Goodridge  FCAFC 3 has now overturned by allowing the appeal, which is of most interest from a New Zealand perspective.
Consent to transfer
The Federal Court found that Leveraged Equities had validly assumed Macquarie’s obligations under the margin loan contract.
Although the court found that the wording of the contract in relation to this point could have been clearer, it nevertheless held that Mr Goodridge had validly prospectively consented to the novation. It was not a mere agreement to agree in the future to an assignment or novation as was found by the trial judge.
The court decided that, consistent with the position in the United Kingdom and the United States, the trial judge’s proposition that a party cannot consent in advance to a novation was not correct. It confirmed that such a proposition was “wholly uncommercial” and a “purist” point of view contrary to the development of the law of contract.
The court also decided that the inclusion of a trustee limitation of liability provision in the margin loan contract as part of the novation was permissible and did not affect the ability of Macquarie Bank to transfer the contract. The court considered that the clause merely identified the capacity in which the assignee agreed to enter into the novation contract. The court noted that the novation provision specifically provided for novation to a trustee.
Further, the nature of the margin loan contract and the relationship between the margin lender and the borrower did not involve obligations so closely linked to the personal qualities of the lender that the court should imply an intention that the obligations were incapable of assignment. The Federal Court found nothing that pointed to Mr Goodridge having specifically stipulated that the margin loan contract was to be carried out by Macquarie Bank only.
Ability to assign
On the issue of whether there was an effective assignment, the Federal Court held that even if there had been no effective novation of the margin loan contract, it was possible for Macquarie Bank to retain the obligation to make loans under the contract while Leveraged Equities had assigned to it the rights under the contract. It was not necessary that all rights under the contract were assigned to Leveraged Equities, only those that it sought to exercise.
The court considered that there was a clear division between the rights of Leveraged Equities and the continuing obligations of Macquarie Bank. Accordingly, while the arrangements were complex, that did not mean they were “unworkable” as the trial judge had found.
The Federal Court’s decision will be welcomed by financial institutions on both sides of the Tasman as providing a clear reaffirmation of the previously accepted position in relation to consents to transfer and assignments. While it will provide certainty and comfort, there are some ancillary comments in the judgment worth noting and the court’s comments on the attention to detail in drafting transfer provisions should be taken on board for future reference.
Having said this, it is unlikely that the matter will be laid completely to rest just yet. It appears that Mr Goodridge will appeal the decision to the High Court of Australia.