Michael Jacobs & Michael Chapman | March 2012 | Commercial disputes & insolvency
The recent High Court decision of Equuscorp Pty Ltd v Haxton reinforces the equitable principle that those seeking equity must come with clean hands. The decision questions the ability of financiers of investment loans to recover where the underlying investments are found to have regulatory issues.
Who does this impact? Financiers and assignees of investment loans.
What action should be taken? Do prior due diligence on underlying investment compliance.
TurkAlert
Lenders tarred with promoter’s brush
Background Rural Finance Pty Ltd (“Rural”) provided loans between 1968 and 1989 for non-farmer investors to purchase interests in blueberry investment schemes in northern NSW. Rural was part of the Johnson Group, which included various companies that promoted, financed and managed the schemes. The schemes ostensibly were for investors to share in profits and capital appreciation from production of blueberries. However, a particular benefit was an immediate tax deduction. Rural provided finance to investors. Contrary to section 170(1) of each state’s then Companies Code, no statement, or prospectus, was registered when investors were offered, or invited to purchase, interests in the schemes. The Johnson Group’s blueberry farming enterprise collapsed in 1991 and receivers and managers were appointed to Rural by Equuscorp Pty Ltd (“Equuscorp”), an arms-length lender to the Johnson Group. In 1997 Equuscorp took assignments of the loans provided by Rural to investors in the schemes.
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Lenders tarred with promoter’s brush
Commencement of proceedings Equuscorp issued 550 writs against investors between November 1997 and March 1998. It claimed loss and damage for breach of loan agreements and for unjust enrichment. Eight proceedings were selected for trial. In each of those proceedings, the investors, in response to the loss and damage claim, pleaded inter alia the defence of illegality based on the contravention of 170(1) of the Companies Code. In response to the claim for unjust enrichment, investors denied the allegations and claimed that restitution was not an available remedy. In the alternative, investors alleged that if restitutionary relief was available, the right to claim such relief could not be assigned and, nonetheless, as a matter of construction of the assignment deed between Rural and Equuscorp, the right to claim restitutionary relief had not been assigned. The Court of Appeal agreed.
High Court appeal Equuscorp was granted special leave to appeal. A majority of five to one agreed that the loans were so associated with the illegal schemes that they could not be recovered, either upon a contractual or restitutionary basis. The majority differed in respect of other defences, such as whether the restitutionary claims could be assigned. Heydon J dissented, finding that Rural did have a restitutionary claim notwithstanding the illegal schemes, and which had validly been assigned to Equuscorp.
However, it is to be noted that in this case, the context was “black and white” in that there was an illegal purpose in failing to register the prospectus, which made it easier for the Court to decide the associated loans were tainted and unenforceable. The position may well differ in the event of full compliance with the Corporations Act requirements for MIS investment loans. In addition, assignment deeds should include specific reference to assignment of all possible rights, including equitable choses in action and restitutionary rights.
TurkAlert
Michael Jacobs & Michael Chapman | March 2012
For more information, please contact: Michael Jacobs Special Counsel T: 03 8600 5025 M: 0407 618 851 michael.jacobs@turkslegal.com.au
Michael Chapman Lawyer T: 03 8600 5001 M: 0408 988 283 michael.chapman@turkslegal.com.au
Implications for lenders Lenders need to ensure that associated investments fully comply with all requirements to avoid the potential for non-recovery of loans.
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