Introduction
Reserve Bank of New Zealand
Proposed Changes
Code of Banking Practice
Recent Developments
The official currency of New Zealand is the New Zealand dollar and the dollar floats freely in the market. No exchange controls have operated in New Zealand since March 1985.
The structure of the banking system in New Zealand is largely governed by the Reserve Bank of New Zealand Act 1989. There have been many significant developments in 1999 that relate to specific areas of banking law and practice. These include the Personal Properties Securities Act, recent netting legislation, and the decision of the Court of Appeal in Re Brumark Investments Ltd (in rec) which is awaiting a decision from the Privy Council.
The Reserve Bank of New Zealand, which is constituted by the Reserve Bank of New Zealand Act 1989, is New Zealand's central bank and one of the major components of the New Zealand financial system.
The act provides for the Reserve Bank to register banks and to undertake prudential supervision of registered banks. Unless a person or body is registered under the act, it is prohibited from carrying on business in New Zealand under a name or title that includes the words 'bank', 'banker' or 'banking'.
On receiving an application for registration as a registered bank, the Reserve Bank is required to satisfy itself that the applicant's business will substantially consist of the borrowing and lending of money, and/or the provision of other financial services. The Reserve Bank is required to have regard to a number of factors including the ownership structure of the applicant and the ability of the applicant to carry on its business in a prudent manner. The principles that the Reserve Bank applies when considering applications for registration differ depending on whether the applicant wishes to register as a branch of an overseas-incorporated entity or applies for registration as a locally incorporated entity.
The act establishes a system of supervision which requires banks to disclose (on a quarterly basis) information on financial performance and risk positions, and directors to attest to certain key matters. The aim of these measures is to strengthen market disciplines. These measures are backed up by various powers which the Reserve Bank can use should a bank distress or failure situation threatens.
In September 1999 the Reserve Bank proposed that foreign banks which operate through branches in New Zealand should be required to incorporate those branches as New Zealand subsidiaries if either (i) the branch conducts activities in New Zealand which are sufficiently large that the soundness of the branch is important for the New Zealand financial system as a whole, or (ii) the branch has a significant level of retail deposits in New Zealand, and its offshore parent company is incorporated in a country which either allows banks to operate with low levels of public financial disclosure or gives priority to depositors in that country in the event of a financial crisis.
The intention of these proposed changes is to formalize the assets ownership of the New Zealand branches of offshore banks and protect those assets from potential foreign claims which may currently take priority in insolvency, under the law of the jurisdiction in which the branch is incorporated. If introduced, the rules will assist creditors in determining the jurisdiction in which bank assets are held.
The Reserve Bank is currently undertaking a consultation process with banks and at present there has been no final determination on whether the proposed changes will be made.
The first Code of Banking Practice was published in 1992 by the New Zealand Banker's Association. The current second edition came into effect in November 1996. The Code of Banking Practice sets out the standards of good banking practice that the members of the New Zealand Banker's Association have agreed to observe when dealing with personal customers in New Zealand. In light of this, it is generally only applicable at a retail level.
The code does not apply to all banks and is not legally enforceable unless expressly incorporated into the contract between the bank and the customer. However, the court is likely to treat the code's standards as evidence of acceptable banking practice.
As of June 1 1999, the New Zealand Banker's Association released a statement of principles to small and medium-sized businesses and farming customers. The aim of these principles is to 'make the industry more transparent' and show customers what they can expect from their bank, and in return, what they can do to develop their relationship with their bank.
The Personal Property Securities Act
The Personal Property Securities Act (the PPSA) is likely to come into effect at some stage during 2000 or possibly even in 2001. The PPSA will replace the current law relating to security over personal property in New Zealand.
The rules governing the registration of charges over the assets of companies registered in New Zealand are of particular importance to foreign banks and lending institutions. These rules are found in Part IV of the Companies Act 1955. The PPSA will replace Part IV of the Companies Act. The significant features are as follows:
- There will be uniform priority rules for all types of security interests in property. Generally, the first secured party to register a financing statement relating to a security interest will take priority;
- Special rules of 'super' priority will attach to purchase money security interests; and
- Lenders will have the ability to take a security interest in all of a debtor's present and after-acquired property, including stock in trade and book debts. This rule will essentially abolish the concept of a floating charge.
Other features of the regime include the introduction of new key concepts such as 'perfection', by registration of a financing statement or possession of the collateral, and 'attachment', whereby when the debtor has rights in the collateral, the security interest is given and the creditor gives value.
Netting legislation
New legislation clarifying the enforceability of closeout netting legislation came into force on April 26 1999. The insolvency regimes set out in various acts were amended by the legislation. It amended many acts, including the Companies Act 1993, the Reserve Bank of New Zealand Act 1989, the Corporations (Investigations and Management) Act 1989 and the Insolvency Act 1967.
Notwithstanding certain provisions to the contrary in the Companies Act 1993, the new netting legislation provides that the amount calculated as being due under a 'netting agreement' is the amount that is due to or from the insolvent counterparty. Netting agreements can be either bilateral netting agreements or recognized multilateral agreements.
To qualify for protection, a netting agreement does not need to relate to particular types of transactions or need to be entered into between particular types of counterparty. With regards to liquidation under the Companies Act 1993, the netting legislation provides that the netted balance is the amount that is payable to, or claimable in the liquidation of, the insolvent company.
Book debts
In the Brumark Case, the receivers of Brumark Investments Ltd sought directions from the court as to whether the claim by a bank debentureholder had priority over the claims of preferential creditors of the company in respect of the company's uncollected book debts.
The High Court had determined that the distinction between whether a charge over a book debt was 'fixed' or 'floating' was that, under a fixed charge, the chargor is prohibited from alienating any interest in the charged property to third parties. The nature of the charge (whether fixed or floating) over uncollected book debts was ascertained independently of the existence and nature of any charge over their proceeds. As a result, the fixed charge over uncollected book debts was upheld.
However, the Court of Appeal reversed the decision of the High Court. It held that when determining whether a charge over book debts is fixed or floating, there is no distinction in principle between the disposition of uncollected debts to third parties and the collection of those debts. It was also held that a debenture which purports to restrict the ability of the chargor to dispose of uncollected debts on the chargor's own behalf does not create a fixed charge over the uncollected debts. As a consequence of allowing the chargor to collect in the book debts on its own behalf, the debenture created a floating charge over both the uncollected book debts and the proceeds of the book debts.
In allowing the appeal, the court approved the orthodox categorization of fixed charges over book debts as requiring control by the chargeholder over all dealings with book debts. However, the case is far from resolved as a final judgment is due to be given from the Privy Council in 2000.
The problematic distinction between fixed and floating charges is likely to be obsolete in view of the enactment of the Personal Property Securities Act. The Court of Appeal noted that after this, the distinction may be of 'academic interest only'. The PPSA will allow security interests to attach upon the date that the secured party gives value, and consequently the debtor will obtain rights in the collateral and, if required, the agreement will be enforceable against third parties.
For further information on this topic please contact Dermot Ross or Hayley Mulholland at Buddle Findlay by telephone (+64 9 358 7024) or by fax (+64 9 358 2055) or by e-mail ([email protected] or [email protected]).
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