Moneylending deals

Press, 5 October 1977, Page 4

Moneylending deals

' In considering whether ■ the financing of developers by Merbank when joint venture agreements were made should be considered money-lending, his Honour said he took into account as well as the agreement, the acceptance credit facility letter which formed pan of the contract with the joint venturers and which they had in common with other persons financed by Mer- | bank. He was driven to the conclusion that the joint I venture agreements were I moneylending transactions. In regard to those clients who did not ertter into a joint venture agreement with Merbank, he said he could not hold that the lack of such an agreement meant that their dealings with Merbank were not moneylending transactions.

The profit sharing and the agreement “to arrange’’ money in the agreement were not enough to convert a nonmoneyiending transaction into a moneyiending one. He concluded that the client bills were not accommodation bills and that, to render the drawers liable on them, the holders should have given notice of dishonour within the stringent time limits laid down in the Bills of Exchange Act, 1908. He said the drawers reamined liable to Merbank under the promissory notes which were regarded by Mr Russell as the obligation by the client to pay to Merbank, on the same date as the bills matured, an amount equivalent to the total face value of the bills maturing, so that when Merbank met its acceptance liability

under the bills it would be reimbursed. The client’s liability to Merbank was secured under the securities, including the promissory notes. Consequently, although Merbank as acceptor was not technically an “accommodation party,” the clierrt developers remained liable under their promissory notes by virtue of the arrangements between Merbank and themselves. His Honour ruled that the liquidator was entitled to require payment on promissory notes. He must then account to the holder for the proceeds so as to relieve the drawer of liability to the holder. One of the major problems facing the Court concerned the deed of sale between Commercial Bills and Merbank. His Honour said the

real problem arose not so much from the interpretation of the deed but from the fact that the parties clearly did not put the deed into operation according to its terms. In theory. Safe Custody Nominees, Ltd, as trustee, could have ascertained the amount of investor bills outstanding and could have appropriated for Merbank a sufficient number of client bills to cover these. These would have become Merbank’s property. , The balance would have been held for Commercial Bills.

There was nothing, he said, to stop two separate portfolios being created and the deed could have been operated according to its terms.

In practice the three parties to the deed did not operate it in such a way, except for the purposes of regulating the inter-com-pany cash flow and regulating balance-sheets by eliminating assets and liabilities from Commercial Bills. The deed was put into effect in an accounting sense with the inter-com-pany cash flows shown by the book-balancing process of aggregate amounts, but not on the basis of dealing with individual bills. In the books of account, the net result was in accordance with the deed, but because the companies did not deal separately with actual bills, it was impossible to say now, or at any time from the. inception' of the second deed, which bill belonged to which company. The Court, he said, had no way of giving effect to the deed by drawing such an arbitrary line which Mr Russell sought to draw in his exercise apportioning the bills between the two companies at the date of the collapse. Whether the deed secured an obligation on the part of Commercial Bills to place Merbank iff funds to meet its acceptance liability depended on the decision as to whether the bills were accommodation bills. His Honour said he had held that they were not and therefore, unless an obligation on the part of Commercial Bills could be implied into the deed, nothing was secured iff any way.

Tie had, he said, considered whether client bill holders were entitled to the benefit of the securities held by Merbank against its acceptance obligations. In many situations the securities given to Merbank by the drawer were to secure other advances as well as the bills. It was also clear that the proceeds of securities would frequently not equal the face value of the bills and in many cases were quite inadequate to cover the amount of the bills drawn. It could not be said that in many cases the securities deposited related to specific bills only. They covered all liabilities and indebtedness and were more comparable to securities supporting a banker’s general lien.

His Honour said he agreed with the submission that the client bill holders must share pari passu with Merbank with all other indebtedness secured under the mortgages and debentures.