Even on the TV game show It’s in the Bag, it was never possible to take the money and the bag. ING NZ investors who signed up to full and final cash settlements on their frozen funds earlier this year and now feel their rights to take further action have been unfairly confiscated need to remember that.
They might also look at a recent Federal Court of Australia decision which found that, where there is a benefit to the creditor, there is no confiscation in such schemes of arrangement.
This Brief Counsel considers the Australian case in terms of the perspective it offers on the backlash against the ING NZ settlement deals.
The Australian story - Opes Prime Stockbroking
Opes Prime, a stock broking group of companies which provided institutional and private clients with a range of services, predominately in the form of securities lending and equity financing, collapsed in March 2008. The liquidators, looking to trade out, developed offers of settlement where the group’s assets - plus A$226m from its core financiers, ANZ and Merrill Lynch - would be pooled and distributed to unsecured creditors provided they released their claims against both Opes Prime and its financiers.
The extension of the waiver of claim to a third party (the company’s financiers) was contested in the Federal Court where it turned on the question of whether the scheme was a ‘compromise’ or ‘arrangement’ between a company and its creditors (s 411(1) Corporations Act 2001 (Cth)).
The Court found that a scheme can validly incorporate a release of claim to third parties provided there is a sufficient connection between the release and the relationship between the creditor and the scheme companies. On the facts of the case, the Court found this was so because:
- the creditors’ claims against the Opes companies and their financiers largely, and in many cases completely, overlapped, and
- the schemes were in settlement of interlocking claims.
Accordingly, the Court did not accept that the release amounted to a ‘confiscation’ of property (as argued by counsel for the opposing creditors). The Court also noted that the A$226m put forward by the financers was not insignificant and that what was being proposed was a true compromise of the claims.
The Court found that schemes of arrangement were intended to be flexible instruments to facilitate compromise between insolvent companies and their creditors (as an alternative to liquidation). Now they are used for wider purposes, including allowing businesses to restructure or reorganise their affairs to enable them move forward in better shape.
Allowing the successful reorganisation of a debtor was also part of the policy behind third party releases under Chapter 11 of the United States Bankruptcy Code.
The New Zealand Story: ING NZ and ANZ
Over 13,000 investors had approximately $700 million invested in the ING NZ Diversified Yield Fund (DYF) or Regular Income Fund (RIF) offered by Dutch Bank ING (whose NZ arm is 49% owned by ANZ). The funds were frozen last year after the value of units dropped dramatically in the wake of global economic turmoil.
Earlier this year, ING offered investors two options for return of capital:
- a “cash out” option where investors would get 60c (DYF) and 62c (RIF) per unit (originally bought for $1) with payment by the end of August, or
- take the cash at the same rates offered in the “cash out” option and invest it in a cash account with ANZ offering 8.3% fixed interest for five years.
Both options were conditional upon investors waiving their right to take any further action against ING and ANZ or against financial advisors who were involved in selling the funds. In other words, a full and final settlement of all investor claims.
An exception to this was for investors who were advised by an ANZ Bank Adviser to invest in the funds. Such investors had the option to accept the settlement offer as well as make a complaint to the Banking Ombudsman and might receive a “top up” if their complaint was upheld.
Investors who did not wish to take either settlement option retained their rights to pursue legal action against ING and ANZ. The settlement offer closed on 13 July with around 95% of investors opting to settle.
Possibility of further action?
Under the offer terms, it is acknowledged that the Commerce Commission is investigating a possible breach of the Fair Trading Act 1986 (FTA) and that this may result in further compensation for all investors. The Commission is unlikely to complete its investigations until the end of the year. Should it find in favour of investors, it is not clear whether those who have taken up the settlement offer will be entitled to further compensation given that their losses have been addressed under the settlement. In circumstances like this, where investors were aware of their potential rights (including under the FTA) but agreed to a waiver, full and final settlement should bring finality to all claims to give all parties closure and allow the business a chance to rebuild.
Labour MPs Lianne Dalziel and David Cunliffe and Revenue Minister Peter Dunne are calling for ING to be a “good corporate citizen” and put aside the waiver clause to allow further claims. Dalziel has said she is prepared to go further and put forward a Private Members' Bill to retrospectively override the waiver agreed to by the 95% of investors who elected to settle.
The fate of such a Bill would depend first on being selected in the lottery which decides which Private Member’s Bills go forward and then on getting majority support in the House. If it ever comes to a vote, it will be interesting to see how many of our MPs are prepared to legislate to override a commercial contract freely and knowingly entered into by the contracting parties.