Australia: Claims by Creditors, Property and the GST and the Global Financial Crisis

Bank Notes: Banking & Finance
Last Updated: 3 March 2010
Article by Ian Beattie, Jacquie Browning and Sean Rush

Reinstatement of claims by creditors over shareholders

Maddocks Bank Notes has followed with interest the legal tussle for supremacy of creditors and shareholders when a company becomes insolvent in the case known as the Sons of Gwalia. The High Court of Australia recently overturned the lower court's ruling and held that when an insolvent company goes into external administration, certain compensation claims by shareholders have equal footing with those of unsecured creditors. The ruling has been seen to disadvantage some creditors in favour of shareholders in corporate collapses.

As a result of the High Court ruling, the Federal Government has announced that it will legislate to overturn the ruling to reinstate what Banks and corporate lawyers have said is the rightful supremacy of secured creditors' claims over shareholders. Banks have been concerned that the decision could cause problems for Australian companies to raise debt and would impact on the costs suffered by companies as a result of the practical implications of the decision in terms of insolvency delays and administration.

The future use of a property by a purchaser may impact on the GST liability

A recent test case, reported in the Australian Financial Review, in the Federal Court of NSW has raised issue with the GST treatment for property transactions. The case addressed the issue of whether GST liability was determined by a vendor's use of the property as well as its physical nature or by the purchaser's intended use. Normally GST is not payable on second hand residential property to be used predominantly for residential accommodation. In this instance, as the purchaser developer intended at some time in the future to develop the land for commercial purposes, it claimed that it should be entitled to a GST credit on the purchase price. The Court held that as the purchaser intended to develop it commercially, that this must be considered in determining if GST was payable.

Unless appealed, there is a real uncertainty as to what GST treatment will be applied to property transactions. A vendor may be left in the uncertain position of being unaware of how far in the future it must consider the purchaser's intentions in respect to its use of the property.

Bank Notes will monitor any appeal by the taxpayer to the full Federal Court.

Government Guarantee to Cease

The Federal Government has recently announced that from the end of March it will no longer guarantee deposits of more than $1 million. Bank accounts under $1 million will continued to be underwritten until late 2011. Bank borrowing on global capital markets will also lose the protection of the Government's wholesale guarantee from the end of March 2010.

The Rudd Government has to date facilitated $190 billion in wholesale funding under the guarantee scheme. The response from smaller Banks so far indicates that there is a concern that there will be a need to reduce their housing and business finance. Whether the market response is a rise in interest rates as a consequence of increased cost of capital will need to be seen.

Parallel to this, lobbying is taking place by some of the smaller banks and non bank lenders to convince the Government to introduce legislation that allows the creation of a multi billion dollar bond market which would give such lenders the capacity to accept more capital to onlend. Such smaller lenders have not been able to benefit from the government guarantee as most could not afford to use it as they had to pay a higher fee to the government in compensation for their lower credit rating. Such lenders have also had to rely on deposits as their principal method of fund raising so any move to create a bond market may provide a valuable and viable source of alternative funding.

Is the Global Financial Crisis really over?

As Greece wrestles with a budget deficit of 12.7pc of GDP and credit default swaps on Greek debt surged to a record on February 5, we are reminded that any climb out of the GEC may be slow and unsteady.

As markets endeavour to engender confidence to woo investors back and encourage Banks to lend again, the concern with Greece as well as Spain and P Portugal causes some observers to question how quickly the recession will turn as high sovereign debt levels raise questions as to the ability of such countries to service their debts. The European Commission has recently approved a blueprint by the Greek Government aimed at halting its spiralling debt. Greece has a requirement in April and May to raise funds for close to half its 53 billion Euro funding requirement for the year. With Portugal and Spain also experiencing financial struggles to control their debt, it may be some time before the sustainable good times return and confidence is restored.

Foreign Acquisitions and Takeovers Amendment Bill 2009

The Federal Government has recently introduced a bill to amend the Foreign Acquisitions and Takeovers Act 1975 to improve the notification requirements to the Government by foreign investors. The Act relies on the notion of control to require investors to notify investment proposals to the Government and to trigger the Treasurer's powers to block or place certain conditions upon those proposals which it determines to be contrary to the national interest.

Since the Act was introduced some 35 years ago, financing arrangements have become increasingly complex and innovative and whilst such types of investment arrangements may have a solid commercial basis, they can have the effect of delivering influence or control over Australian companies that were simply not anticipated when the Act was first drafted.

The Bill is said to improve the integrity of Australia's foreign investment screening regime by ensuring that the Government has the capacity to examine all substantial investment proposals that could potentially raise national interest concerns. In particular, a foreign investor will be required to notify the Government where there is a possibility that the type of arrangement being used will deliver influence or control over an Australian company, either currently or at some time in the future. The amendments specifically include transactions, agreements or arrangements that include debt instruments having quasi-equity characteristics.

The Bill now awaits royal assent.

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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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