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Article Excerpt
[This article creates a narrative of the Opes Prime insolvency from the copious and sometimes confusing commentary available to the public. It explains the background to margin lending practices in Australia, the Opes Prime business model and the immediate reasons behind Opes Prime's collapse into dual external administrations. It clarifies the consequences of placing a company into external administration in the current circumstances and the position of unsecured creditors. It also analyses the position of Opes Prime's major financiers---in particular, Australia and New Zealand Banking Group Ltd--and argues that the latter organisation has acted in the same way that any rational financier in its position would have acted. Moreover, the article analyses the potential for success of some of the proposed litigation. The only real winners may be the lawyers and their backers, the litigation funders. Finally, it argues that although the immediate future of margin lending is uncertain and some of the legal techniques used to make it work from a creditor's perspective may be under fire, margin lending is' not dead It will only take a lift in the sharemarket to whet investors' appetites again.]
CONTENTS I Introduction II Margin Lending A What Is Margin Lending? B Margin Lending in Australia III The Rise and Fall of Opes Prime A Background to the Rise of Opes Prime B Collapse of Opes Prime: Appointment of Dual External Administrators C Why the Directors Appointed Voluntary Administrators when They Probably Knew Receivers Would Be Appointed Anyway D Progress of the Administration and the Role of the Administrators E Second Meetings: What Shall We Do with the Opes Prime Companies? IV Collateral Damage: Unsecured Creditors A Opes Prime's Clients as Unsecured Creditors B The Securities Lending Agreement: What Does It Mean? C Margin Loan Borrowers and Injunction Cases V Secured Creditors, Unfair Preferences and Registering Securities A Does Opes Prime Have Any Secured Creditors? B ANZ's Security as a Preference? C Merrill Lynch's Security as an Invalid Charge VI Further Implications for ANZ? A Financial versus Reputational Damage B Contraventions of the Corporations Act: Failure to Lodge Substantial Shareholder Notices and the 20 Per Cent Threshold Rule VII What Does the Future Hold for Opes Prime, ANZ and Margin Lending? A Further Litigation, Including Class Actions? B Increased Investor Caution? C Read the Fine Print and Understand What You Are Signing VIII Conclusion: Lawyers Are Winners
I INTRODUCTION
At the time of writing, it is a little over two months since the collapse of the Opes Prime Group. During that time, a copious amount of analysis was published in the media about the dealings between Opes Prime, its clients, its financiers, its administrators and its receivers. Similarly to other major corporate collapses such as Ansett, Opes Prime is likely to give rise to its own body of literature,l This article begins to make sense of the information by creating a narrative of the events leading up to, and immediately following, the collapse of the margin lending business. It analyses the position of the major stakeholders, including financiers--particularly the Australia and New Zealand Banking Group Ltd ('ANZ') and Merrill Lynch International Ltd ('Merrill Lynch')--and unsecured creditors. It also considers the role of the administrators and explains the normal course of meetings required for a voluntary administration, creating a setting for a preliminary analysis of some of the technical legal issues raised by the demise of the stockbroker.
To provide a background, this article first explains margin lending practices in Australia, the Opes Prime business model and the immediate reasons behind the company's collapse into dual external administrations. In clarifying the consequences of placing a company into external administrations, this article compares the position of secured and unsecured creditors. Whilst some people have expressed concern at ANZ's actions in relation to Opes Prime, it arguably acted as any rational financier would have acted in the circumstances. It sought to inject additional funds and to formulate a reorganisation plan, and it attempted to improve its position by obtaining security in the process.
This article also analyses the potential for success (whatever that means when most parties are likely to suffer loss) of some of the litigation that has been announced, particularly the voidable transaction claims that may be brought if the administrators are unsuccessful in negotiating a compromise with Opes Prime's financiers. In the short-, medium- and long-term, the only real winners may be the lawyers and their backers, the litigation funders. Finally, this article concludes that, while the immediate future of margin lending is uncertain and some of the legal techniques used to make it work from a creditor's perspective may be under fire, margin lending is not dead.
II MARGIN LENDING
A What Is Margin Lending?
Put simply, margin lending refers to the practice of borrowing money to invest in securities and other investment products. (2) It offers potentially high returns because investors have more money to invest. A person with $1000 to invest, for example, may borrow $9000 and invest $10 000 in total. In this example, any return-on the investment as a result of the greater value of the investment would be increased by 900 per cent. However, margin lending also has the potential to magnify an investor's losses if the value of investments purchased with the loan falls. The loans are usually secured by the underlying investments. (3) For example, in the case of Opes Prime the investments were shares and the shares formed the 'security' for the lending. (4) Investors pay interest on the loan. The Reserve Bank of Australia ('RBA') estimated that the average margin lending rate in Australia as at 6 May 2008 was 10.4 per cent. (5)
Investors may have to meet 'margin calls' if the market value of the underlying investments falls below an agreed level (known as the 'Loan-to-Value Ratio'). The Australian Securities and Investments Commission ('ASIC') suggests that a typical margin loan will have a Loan-to-Value Ratio of 70 per cent. (6) A margin call may occur, for example, after a fall in the value of investments purchased with the loan funds, because the Loan-to-Value-Ratio may rise beyond the agreed level. In the case of shares, this might reflect a decrease in an individual company's share price or a dramatic fall in the overall market. Margin loan documentation usually provides for a tight timeframe for investors to respond to margin calls. The deadline could be less than 24 hours. (7) An investor must either find extra cash to pay the lender, sell part of the underlying investments to obtain cash or provide the lender with additional security. (8) A further risk involved in margin lending is that, if an investor fails to meet a margin call, most margin lending products enable a lender to sell some or all of the investments, even if it means the investor will suffer a loss. (9)
B Margin Lending in Australia
Not all aspects of margin lending are directly regulated in Australia. (10) No regulator, for example, is required to monitor the solvency of brokers such as Opes Prime. Accordingly, even though it would appear that the Australian Securities Exchange ('ASX') and ASIC knew about solvency problems at Opes Prime before it collapsed, they did not take any action because they lacked jurisdiction. (11) In the most important court decision to arise from the Opes Prime collapse to date, Finkelstein J of the Federal Court of Australia noted that other jurisdictions have a 'regulatory and statutory framework' designed to provide 'a measure of protection to investors that is lacking in Australia.' (12) In the United States, for example, the Securities and Exchange Commission regulates the solvency of registered broker-dealers. (13) In the wake of recent stockbroking failures, there have been calls for ASIC to be given regulatory responsibility. (14) Should this occur, one of the areas that ASIC is likely to monitor is solvency. (15)
Even without direct responsibility for margin lending, ASIC appears to have been watching the growth of margin lending in Australia with some concern. It released a warning about the risks involved in margin lending in January 2000. (16) The use of margin lending in Australia has surged over the last decade, reflecting the booming economy and compulsory superannuation. The most reliable statistics are collected by the RBA, which claims that its statistics have at least 95 per cent market coverage. (17) It estimates that there were 202 000 client accounts at the end of the March quarter 2008. (18) There were only 84000 accounts when it started collecting this data in 2000. (19) The total value of margin lending increased from $21 502 million at the end of the March quarter 2006 to $32 630 million at the end of the March quarter 2008, although this is down 14 per cent from $37 767 million at the end of the December quarter 2007. (20) In return for approved loan limits of $32 630 million, clients had posted underlying security valued at $75 541 million at the end of the March quarter 2008. (21) The level of security compared to funds available suggests conservative lending strategies, (22) but the statistics do not reveal the type of assets provided as security. Some assets could be illiquid, small cap securities which, from a credit perspective, are not worth as much to financiers as blue chip securities.
III THE RISE AND FALL OF OPES PRIME
A Background to the Rise of Opes Prime
Small, new stockbrokers such as Opes Prime thrived in a rising market for personal credit with little regulatory input. (23) Opes Prime specialised in securities borrowing and lending. (24) Opes Prime was created in 2003 by Laurie Emini and Julian Smith. Emini and Smith were also responsible for the securities lending model used by Tricom Securities, another stockbroking firm which encountered difficulties in early 2008. (25) Both Emini and Smith served on the board of the industry body, the Australian Securities Lending Association ('ASLA'). (26)
Opes Prime was generally willing to lend against more speculative and illiquid stocks, (27) and at higher Loan-to-Value Ratios than other margin lenders. (28) Margin lenders usually allow a maximum Loan-to-Value Ratio of about 65 per cent for blue chip shares such as BHP Billiton. (29) In some cases, Opes Prime lent against speculative shares but only allowed Loan-to-Value Ratios of 10 per cent on loans. (30) This meant that the size of the loans were considerably smaller than the parcels of shares put up as collateral--for example, a borrower may offer $100 000 worth of speculative or non-investment grade shares to borrow just $10 000. (31) One client used shares worth nearly $500 000 to support a loan of just $35 000 (32) and another client signed over shares worth approximately $7 000 000 for a loan of $1 353 830.02. (33) On the other hand, Opes Prime reportedly provided flexibility to a favoured client, who had a portfolio of blue chip and speculative shares, with a Loan-to-Value Ratio of 95 per cent. (34)
B Collapse of Opes Prime: Appointment of Dual External Administrators
The dramatic increase in margin calls at the end of 2007 and the beginning of 2008 placed Opes Prime's business model in jeopardy. (35) By some time in March 2008, the directors and Opes Prime's bankers were concerned about the solvency of the business. (36) On Thursday 27 March 2008 at 4.25pm, John Lindholm, Peter McCluskey and Adrian Brown of Ferrier Hodgson were appointed voluntary administrators to the Opes Prime Group by a resolution of the Boards of Directors. (37)
Under the Corporations Act 2001 (Cth) ('Corporations Act'), only the directors of a company, a liquidator, a provisional liquidator or a substantial secured creditor may appoint an administrator. (38) In most administrations in Australia, an administrator will be appointed by the directors of the company (39) after discussion with the company's main creditors, particularly its relationship bank or banks. It is fairly rare for an administrator to be appointed by a substantial chargee. Substantial secured creditors would usually rather appoint a receiver under their own security, giving them control over the insolvency.
Although the appointment of receivers and managers followed the appointment of the administrators in the Opes Prime collapse, under the Corporations Act the receivers take precedence over the administrators in relation to charged assets and report to the receivers' appointer, rather than to all creditors. On 27 March 2008 at 5.15pm, ANZ appointed Salvatore Algeri and Chris Campbell of Deloitte as receivers to companies in the Opes Prime Group over which ANZ held fixed and floating charges. (40) Trading operations ceased and 'all client accounts, including client direct trading facilities' were frozen. (41)
C Why the Directors Appointed Voluntary Administrators when They Probably Knew Receivers Would Be Appointed Anyway
The directors of the Opes Prime Group were worried about the state of the business by early March 2008. (42) According to the receivers, the directors appointed the administrators 'when they became aware of a number of cash and stock movement irregularities in relation to a small number of accounts.' (43)
Encouraging directors to file for administration before the financial difficulties of a company become overwhelming was one of the reasons for introducing the voluntary administration procedure in 1992-93. (44) The same policy objective is supported by the directors' duty to ensure that a company does not trade whilst insolvent. (45) According to the administrators, the potential claims against the directors of the Opes Prime Group include insolvent trading. (46) A defence to a claim of insolvent trading will be made out if the director can prove that they 'took all reasonable steps to prevent the company from incurring the debt.' (47) In determining whether such a defence has been proved, the court may have regard to 'any action the [director] took with a view to appointing an administrator of the company', 'when that action was taken' and 'the results of that action.' (48) Accordingly, directors are encouraged to file for voluntary administration.
However, since Australian Securities and Investments Commission v Plymin, (49) the appointment of a voluntary administrator is no longer a panacea for directors. A director may not turn a blind eye to a company's liquidity crisis, and the continuing support of a company's financiers is just one of the issues that a court will take into account when determining whether the director's actions were reasonable. (50) Once they found out that the financiers had withdrawn their support and/or were planning to appoint receivers, the directors of the Opes Prime Group had no choice but to put the company into administration on 27 March 2008. Arguably, however, the directors should have acted earlier on their concerns about the solvency of Opes Prime. According to one report, Opes Prime directors Anthony Blumberg and Julian Smith were aware of 'irregularities' at Opes Prime as early as 9 and 10 March 2008. (51)
D Progress of the Administration and the Role of the Administrators
In accordance with the Corporations Act, the first meeting of creditors was convened by the administrators on 8 April 2008. (52) Administrators must hold a first meeting of creditors within eight business days of being appointed, having given at least five business days' notice of the meeting to as many of the company's creditors as is reasonably practicable. (53) Little usually occurs at a first meeting other than the administrator giving a brief report to creditors and...
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