Lawyers to the finance industry
banknotes
Winter 2003
contents
N3 - Countdown to regulation 1
Stamp duty land tax
2
Land Registration
Act 2002
6
Enterprise Act 2002
3
Financial Assistance
4
Corporate Governance
update
6
Reducing the risk of
money laundering
7
Welcome to the
Winter edition...
The last three months have seen
changes in the law which will affect
secured lenders. This edition
reviews those key changes which
have just taken place and those
which will be happening in the near
future. Our headline article looks
at the final rules for the regulation
of mortgage sales published last
month. Other articles include
information on the new Stamp Duty
Land Tax, the recently published
'Combined Code of Principles of
Good Governance and Best
Practice', financial assistance and
money laundering requirements.
www.ngj.co.uk
N3 - Countdown to regulation
Regulation of providers of first
residential mortgages will be
transferred from the Consumer Credit
Act regime to regulation by the
Financial Services Authority (the "FSA")
with effect from 31 October 2004.
The FSA have now published final rules
for the regulation of mortgage sales.
Firms now have a year in which to
prepare for the start of regulation.
Which mortgages are
going to be regulated?
The following circumstances must exist
at the time of execution for the
mortgage agreement in question to be
a 'regulated mortgage contract':
J
The borrower must be an individual
or trustee;
J
The lender must take a first legal
charge over land in the UK; and
J
At least 40% of that land must be
used, or intended to be used, by
the borrower or a member of his
immediate family in connection
with a dwelling.
The mortgage contract must meet
these conditions at the time it is
entered into. Contracts that do not
start out as regulated mortgage
contracts cannot subsequently become
so even if they later meet all of the
above conditions.
banknotes
It is clear from the definition that
mortgages taken over company
property will not be covered by the
regulatory regime. Neither will second
charge loans, 'home reversion
schemes' and 'buy to let' mortgages.
However, where a guarantor secures
obligations under a guarantee by a
mortgage over his residence, the
contract will be a regulated mortgage
contract. Lending to sole traders or
partnerships for businesses purposes
where the loan is secured on the
borrower's house or houses will also be
caught by the definition. According to
the FSA, lenders have suggested that
the new regime will capture around
1% of their business lending.
In addition, other loans secured on
land, may be regulated mortgage
contracts. such as loans to consolidate
debts or to enable the borrower to
purchase goods and services and other
types of secured lending such as a
secured overdraft facility, a secured
bridging loan, a secured credit card
facility and 'equity release loans'.
Which activities are to
be regulated?
There are six regulated mortgage
activities requiring authorisation or
exemption if carried on in the UK on
after the 31 October 2004:
J Arranging regulated mortgage
contracts;
J
Making arrangements with a view
to regulated mortgage contracts;
J
Advising on regulated mortgage
contracts;
J
Entering into a regulated mortgage
contract as lender;
2
J
Administering a regulated
mortgage contract.
J
Agreeing to carry on any of the
above.
Each of the types of activity are likely
to be given a wide interpretation by
the FSA.
What does this mean
for mortgage business?
Any firm wishing to carry on any of
the new regulated activities will need
to be authorised by the FSA to do so
by 31 October 2004, or otherwise will
need to be contracted to carry on
those activities as an "appointed
representative". If the body/person is
already authorised, an application
must be made to the FSA for a
variation in its/their permissions.
In addition, employees who carry out
any of the regulated activities above,
may depending on the scope of their
role, need to become "approved
persons" under the regime in Chapter
12 of the Supervision Manual. They
may be required to take exams if they
will be involved in advised sales of
regulated mortgage contracts and
non-advised sales of lifetime
mortgages, although the FSA are
intending to "grandfather" some
existing advisers e.g. those who meet
the Mortgage Code Compliance
Board's Fitness and Competence
requirements.
To ensure compliance with FSA
Handbook rules, firms engaged in
regulated mortgage business which
are becoming authorised for the first
time will have to implement various
changes in their working practices.
The rules currently include
requirements to have certain
management systems in place and to
meet minimum financial resources
tests. A firm must meet and maintain
these requirements in order to
become, and remain, authorised.
In addition, there will be rules that
relate specifically to the mortgage
related regulated activities listed
above. For example, early in the
application process for a regulated
mortgage contract, the consumer
should receive personalised
information in the form of a preapplication illustration, to be called a
"Key Facts Illustration". This
document will follow a standardised
format and include information on the
services to be provided by the firm,
fees (including any commission
received) and the firm's complaints
procedure.
The rules will vary in their application
depending upon the degree of risk
deemed by the FSA to be involved in
any particular type of mortgage.
Conclusion
Any firm wishing to carry on any of
the activities referred to above in the
UK will, unless an exclusion or
exemption applies, have to become
authorised in relation to that
particular regulated activity. Firms that
envisage engaging in activities caught
by the regulatory regime after 31
October 2004 should start preparing
now. Information on the steps
required to become authorised, or to
vary existing permissions is available
on the FSA website at
http://www.fsa.gov.uk/mort_gen_ins/.
Winter 2003
Stamp duty land tax
From 1 December 2003 stamp duty
has been abolished for all land
transactions and is to be replaced by
stamp duty land tax (SDLT), subject to
limited transitional relief for contracts
entered into before 1 December.
SDLT applies to all UK land
transactions regardless of whether:
J
There is any document effecting
the transaction;
J
The parties are resident in the UK;
J
The document is executed in the
UK.
The new regime has put an end to
certain popular methods of stamp
duty planning on land transactions
such as schemes whereby the bulk of
the purchase price is attributed to
consideration for a non-stampable
event (such as payment for an option
or a deed of variation). SDLT does not
however apply to the purchase of
interests in property holding vehicles
such as limited partnerships (to which
SDLT is expected to apply from
Finance Act 2004) and companies (the
purchase of shares continues to
attract duty at 0.5%). Owning
properties through special purpose
vehicles is therefore likely to become
more popular. Stamp duty has been
abolished on purchases of debts and
receivables, and there is therefore no
longer a need to employ stamp duty
planning on factoring transactions.
SDLT is not a "voluntary" tax in the
same way as stamp duty, and it must
be self-assessed by the completion of
a detailed land transaction return and
paid by the purchaser (or tenant on
the grant of a lease), within thirty
days after completion or (if earlier)
"substantial performance" of the
contract. Substantial performance is
when the purchaser takes possession
of or is entitled to take possession of
the whole or a substantial part of the
property, or when generally 90% or
more of the consideration has been
paid. There are stringent penalties for
failing to pay the correct amount of
SDLT or failing to keep records.
will cover a wider range of
transactions, e.g. variations of leases.
However, the purchase security
interests such as mortgages are not
caught by SDLT.
The SDLT rates for acquisitions of
freehold property remain unchanged
but the regime for leases is radically
different, the SDLT expected to be
being calculated at 1% of the
aggregate net present value of the
rents payable over the term to the
extent that the net present value
exceeds the relevant threshold
(£150,000 for commercial premises
and £60,000 for residential) and
subject to a discount of 3,5% VAT is
added to the value of the rents only if
the landlord has operated to tax at
the effective date.
If you have any questions regarding
SDLT or stamp duty please contact:
Richard Woolich or Alison Dillon on
020 7648 9000 or
richard.woolich@ngj.co.uk
alison.dillon@ngj.co.uk
The definition of land transaction is
also wider than under stamp duty and
Land Registration Act 2002
The Land Registration Act 2002 came
into force on 13th October 2003 and
brings about the biggest single
change to property law in England
and Wales since 1925.
inspections. Other consequences of
the Act include the abolition of Land
and Charge Certificates and the
introduction of a suggested standard
form of charge.
The principal aim of the Act is to
move nearer to the situation where all
land has a complete and accurate
register of title (which may be
accessed online) and to minimise the
need for additional enquiries and
Nicholson Graham & Jones has
produced a flyer setting out the key
points for lenders of the Act. For a
copy contact Natalie Jones on 020
7360 8308.
3
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Enterprise Act
2002
The Enterprise Act 2002 came into
force on 15 September 2003. The Act
covers consumer affairs, fair trading
and competition but it is the
amendments to the existing corporate
insolvency regime which are of
particular significance to lenders. Of
these amendments, those of particular
interest to lenders are the abolition of
administrative receiverships and the
creation of a "fund-pool" for the
benefit of unsecured creditors.
Nicholson Graham & Jones has
produced a flyer setting out the
implications of the Act for lenders. If
you do not already have a copy but
would like one please contact Natalie
Jones on 020 7360 8308.
Financial assistance
The provisions of the Companies Act
1985 (the "Act") dealing with financial
assistance are some of the most
difficult in the Act to interpret. The
prohibition against financial assistance
has formed part of our law since 1929
and was initially enacted to curtail the
activities of asset strippers after the
First World War. Its objective is to
prevent companies using or putting at
risk their assets to assist a purchaser of
their shares. However, section 155(1)
allows a private company to provide
financial assistance if the provisions of
sections 155 to 158 of the Act have
been followed (these sections set out
the whitewash procedure).
share acquisition or refinancing sums
originally advanced to fund a share
acquisition. In such cases, if the lender
lends monies secured by the target,
amongst other things, the provision of
security or payment of fees by the
target will amount to financial
assistance needing to be whitewashed.
proposed that the current restrictions
on companies providing financial
assistance be revised and, in the case
of private companies, abolished
completely. Whilst this would
significantly reduce administrative
burdens and costs, the change remains
a long way off.
A failure by the lender to ensure that
the security is correctly whitewashed
may result in the lender holding such
security or fees as constructive trustee
for the shareholders or unsecured
creditors of the target. In addition,
the directors of the target could face
civil and criminal penalties.
Financial assistance is of particular
relevance to lenders when financing a
In its recent white paper "Modernising
Company Law", the Government
In the last few months there have
been three cases where the courts
have had to consider the question of
what amounts to financial assistance.
The cases show the importance of
correctly following the whitewash
procedure and provide a timely
reminder to be aware of financial
assistance whenever involved with
transactions involving share
acquisitions.
4
Winter 2003
Robert Chaston v SWP Group Ltd ([2003] BCC 140) Re In a Flap Envelope
Company Ltd
A purchaser acquiring shares in a
the fees not been so substantial
([2003] BCC 487)
target company instructed auditors to
relative to the company's assets there
prepare a report on the target
company and its subsidiaries. The
auditors' fees (of approximately
£20,000) were paid by a subsidiary of
the target. The subsidiary, at this time,
had net assets of approximately
£100,000.
The payment of the auditors' fees by
the subsidiary was held to be a
material reduction in the subsidiary's
assets and therefore constituted
financial assistance in accordance with
section 152(1)(a)(iv) of the Act. Had
would have been no unlawful
financial assistance.
The payment of the auditors' fees by
the subsidiary had facilitated the
progress of the negotiations and had
helped the purchaser to decide
whether or not to purchase the
target. The fact that the "assistance"
was received by the auditors as
opposed to the purchaser or vendor
and the fact that the payment had
been made before the share sale had
been documented was irrelevant.
MT Realisations Limited (in liquidation) v Digital
Equipment Co. Limited ([2003] BCC 415)
In this case the target company owed
its parent £8m. The shares in the
target were purchased for £1 and the
secured debt owed by the target to its
parent was assigned to the purchaser
at a discount for £6.5m. A
subsequent agreement provided that
the sums owed by other members of
the parent's group to the target
would be set off against the
outstanding portion of the £6.5m
price owed by the buyer to the parent
in consideration of the assignment of
the debt. The target company then
went into liquidation.
In the Court of Appeal the liquidator
claimed that the setting off of the
various debts was either void or
unenforceable on the ground that it
amounted to unlawful financial
assistance given by the target in
connection with the purchase of its
shares.
The Court of Appeal held that there
had been no unlawful financial
assistance. For there to be financial
assistance "something had to be
given to someone". In this case the
purchaser was already a secured
creditor of the target (by virtue of
having taken an assignment of the
secured loan); by enforcing its rights
against the target it would recover its
legal entitlement and not be the
recipient of financial assistance. The
rescheduling agreement merely
simplified the process by setting
amounts owed by the parent's group
to the target against sums due from
the purchaser to the parent (vendor).
The claimants were the liquidators of
the purchaser and the defendant was
the director of the target. The
defendant and his former co-director
sold their shares in the target to the
purchaser. The shares were
transferred but none of the
instalments under the share sale
agreement were paid. The target
agreed to lend the purchaser money
to discharge its liabilities under the
share sale agreement. As the
transaction involved financial
assistance the target would need to
go through the whitewash. On the
date on which the statutory
declaration was to be made the
defendant appointed a shareholder
and director of the purchaser as a
director of the target and resigned.
The new director signed the statutory
declaration, reappointed the
defendant as director and resigned
himself. Payments were made by the
purchaser to the shareholders. The
Company went into insolvent
liquidation.
Inter alia the Court held that the
whitewash had not been properly
gone through. The statutory
declaration was not properly made
because, notwithstanding his
purported resignation, the defendant
did not cease to be a director de facto
and neither director had properly
informed themselves of the target's
state of affairs. The payment made to
the selling shareholders was
accordingly recoverable by the
liquidators and the defendant was
found to be in breach of his fiduciary
duties to the target.
5
banknotes
Corporate Governance Update
Further to the Higgs Report released
earlier this year (on the role and
effectiveness of non-executive
directors in UK listed companies) the
definitive revised Combined Code of
Principles of Good Governance and
Best Practice has now been published.
The new Combined Code will come
into effect for reporting years
beginning on or after 1 November
2003. The principal differences from
the current Combined Code are:
Board balance
J At least half the members of the
board should be independent nonexecutive directors. There is an
exception for smaller listed
companies (i.e. those outside the
FTSE 350) who need only include 2
such independent non-executive
directors.
Chairman and the chief executive
J The same individual should not act
as both chairman and chief
executive.
J
The chief executive should not
become chairman of the same
company.
The role of the non executive
director and the independent
director
J The chairman should hold regular
meetings with the non-executive
directors without the executives
present.
J
6
A senior independent director
should be available to receive
shareholders' concerns which
cannot be resolved through the
new directors receive a full, formal
and tailored induction on joining
the board.
normal channels of contact with
the chairman, chief executive or
finance director.
Appointment and tenure
J The nomination committee should
consist of a majority of nonexecutive directors.
J
Any term beyond 6 years for a
non-executive director should be
subject to rigorous review.
J
Executive directors should not take
on more than 1 non-executive
directorship in a FTSE 100
company, nor become chairman of
such a company.
J
No individual should be appointed
to a second chairmanship of a
FTSE 100 company.
Training and performance
evaluation
J The chairman should ensure that
J
The board should undertake a
formal and rigorous annual
evaluation of its own performance
and that of its committees and
individual directors.
Although the Combined Code strictly
applies only to companies on the
Official List, it is anticipated that AIM
companies will continue to follow it as
a matter of best practice. Compliance
is often seen as necessary to meet the
high standards of corporate
governance required to attract and
retain institutional investors.
For advice on corporate governance
issues please contact:
Kevin McGuinness or Elizabeth
Dillabough on 020 7648 9000 or
kevin.mcguinness@ngj.co.uk
elizabeth.dillabough@ngj.co.uk
Winter 2003
Reducing the risk of money laundering
The Financial Services Authority (FSA)
published in August 2003 a
Discussion Paper on its money
laundering regime aimed at
stimulating debate on two important
anti-money laundering controls:
J
J
J
J
J
J
J
'Know Your Customer' (KYC)
which relates to obtaining and
using information about a
customer for anti-money
laundering purposes; and
Anti-money laundering
monitoring, which looks at how a
customer is using a firm's products
and services and how this may
point to possible money
laundering.
The FSA hopes that the debate will
help decide whether to make any
changes to the FSA Handbook and
also help the industry make wellinformed decisions about risk
management practices.
On both topics, current practice
varies, partly because of differences in
risk profile, but also through
differences in the professionalism of
risk management techniques.
On KYC the Discussion Paper refers
to existing good practice standards
concerning the scope of KYC
information that firms might obtain.
It also highlights the importance of
firms using information about their
customers that they have obtained
for other regulatory, or for their own
business purposes. And the
Discussion Paper touches on some
practical issues, such as:
The difficulty of keeping
information up to date;
The problem of verification;
Cost;
The need to maintain data
protection standards; and
The need to retain consumer
confidence.
In its discussion of monitoring the
Discussion Paper refers to the varied
industry practice and suggests a
model for a firm's approach to
monitoring. It also discusses practical
issues, including cost and customer
privacy. It recognises that what
monitoring involves in practice will
vary according to the kind of business
a firm does - for example, whether
the business is retail or non-retail and
the kind of service provided.
The Discussion Paper is about both
automated and non-automated
approaches to monitoring, but the
FSA specifically discusses the former
in view of the significant
development and increased use of
automated systems.
The Discussion Paper sets out four
possible options. These are:
J
To make new specific rules and/or
guidance on KYC and/or
monitoring (which could include a
direct link to the Joint Money
Laundering Steering Group
(JMLSG) Guidance Notes);
J
To make no new rules or
guidance; and to rely on the
JMLSG Guidance Notes to
promote adequate standards in
regulated firms; or
J
To make no decision now and
review the position again in, say,
two years time.
The consultation period ends on 30
January 2004.
highlights the importance of
firms using information about
their customers that they have
obtained for other regulatory
J
To make new high-level rules
and/or guidance, to promote
better money laundering risk
management by firms;
reasons, or for their own
business purposes.
7
banknotes
Recent deals
Eurodis Electron
£17.8 million placing and open offer
and associated €47 million financing in
the UK, the Netherlands, Belgium and
Germany.
September 2003
HSBC Bank Plc
Increased loan facilities of £225
million to Edwardian International
Hotels
September 2003
Oversea-Chinese Banking
Corporation Limited
€135 million term and multicurrency
syndicated revolving credit facilities to
Orient-Express Hotels Ltd secured on
three world class hotels in Italy.
August 2003
The Opportunity Fund
Acting for The Opportunity Fund II
Limited Partnership in connection with
a loan facility of more than £60 million
from Nationwide Building Society.
September 2003
Who to contact
For further information contact
Richard Hardwick.
richard.hardwick@ngj.co.uk
tel: 020 7360 8125
© Nicholson Graham & Jones 2003
8
Legal 500
September saw the publication of the
Legal 500 independent survey of
solicitors and barristers for 2003.
Legal 500 concluded that "Nicholson
Graham & Jones is a firm with an
outstanding reputation. The firm's
comprehensive understanding of the
business sectors in which it operates,
combined with the personal service it
provides to its clients ensures that
Nicholson Graham & Jones delivers
consistent, cost-effective and
commercial legal advice. Innovative
thinking has always been a core
strength at Nicholson Graham &
Jones."
Legal 500 remarked that "Nicholson
Graham & Jones advises a wide range
New addition
We are pleased to announce that
Joanna Kaye joined the commercial
banking group on her qualification in
September. Her training included ten
months in our banking group.
Joanna also gained experience of
working for banks during her training
with our litigation, property and
corporate departments.
Nicholson Graham & Jones
110 Cannon Street, London EC4N 6AR
tel: 020 7648 9000
Internationally a member of GlobaLex
The contents of these notes have been
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should take advice before acting on any
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of sponsors, banks, financial
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providers on many types of
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international and has particular
expertise in acquisition funding for
companies and businesses, project
and asset finance, PFI and property
finance where the group's specialists
are highly rated."
The firm was again ranked among the
top practices for property finance,
ahead of many City firms of greater
size. The firm was also listed for the
first time for its expertise in
investment banking litigation in
addition to its highly rated retail
banking litigation work.