COMMENTARY. This commentary sets out the details of our consideration of the bill and the major issues we addressed.

Transcription

1 BANKING AND INSOLVENCY (NETTING AND PAYMENTS FINALITY) BILL AS REPORTED FROM THE COMMERCE COMMITTEE COMMENTARY Recommendation The Commerce Committee has examined the Banking and Insolvency (Netting and Payments Finality) Bill and recommends by rnajority that it be passed with the amendments shown in the bill. Conduct of the examination The Banking and Insolvency (Netting and Payments Finality) Bill was referred to the Commerce Committee on 30June 998. The closing date for submissions was Friday, 3 July 998. We received and considered eight submissions from interested groups and individuals. We heard four submissions orally. Hearing of evidence took two hours and consideration took five hours and twenty-three minutes. We received advice from the Reserve Bank and the Ministry of Commerce. This commentary sets out the details of our consideration of the bill and the major issues we addressed. Background The bill aims to improve efficiency and reduce risk in the financial system. It does this by reformin insolvency law for payments fmality and netting arrangements. The payments nnality provisions are to ensure that payments that have been completed on the same day, but prior to the time at which a liquidation, bankruptcy, or statutory management commences, do not have to be unwound. The netting provisions are intended to provide certainty that netting agreements are enforceable in the event that one of the parties to the agreement is put into liquidation, adjudicated bankrupt, or is subject to statutory manaement. Under current law there is uncertainty as to whether the court will uphold the operation of netting agreements, particularly multilateral netting agreements. The bill aims to reduce systemic risk by enabling banks to reduce their exposures to each other. The payments fmality provisions make it possible for banks to P'rice Code: K No. 62-2

2 reduce their intra-day exposures while the netting provisions will make it possible for them to reduce both intra-day and longer term exposures. The provisions will make the banking system more resilient in the event of a financial crisis and will improve financial system efficiency. The bill aims to bring New Zealand le»lation into line with that in other major jurisdictions so that New Zealand nnancial institutions can compete on an equal footing. Most otherjurisdictions have passed similar legislation or are about to do so. Netting policy Netting is a contract whereby each party agrees to set off amounts it owes against amounts owed to it. We note that the policy intention is to make netting areements enforceable in an insolvency, subject to safeguards to prevent abuse. The underlying transactions subject to a netting agreement are not protected. There are three types of netting. Close-out netting involves the termination of obligations between parties to a netting agreement upon the occurrence of an event specified in that agreement, the calculation of the sums due between the parties, and finally set-off to produce a single amount payable between the parties. Netting b/ novation involves keeping under a master agreement, a running account oi what is due between the parties. Payment netting involves an agreement that the separate contracts under which the parties have a number of payment obligations to each other continue until settlement date when the net amount of those payment obligations is paid by the party with the greater gross liability. Bilateral netting Bilateral netting involves an agreement between two parties. A $00 B $50 Without netting A pays B $00 and B pays A $50. With netting A pays B $50. B pays nothing. Multilateral netting Multilateral netting involves a central clearing house which provides netting arrangements for a group of people.

3 $20 A $00 34 B UP- C $20 Without netting With netting A owes $00 A owes $80 B owes $ 20 B owes nothing C owes $50 C owes $30 Total owed $70 Total owed $0 Therefore, the total exposure is reduced. Submissions and recommended changes One submission argued that bilateral netting should not be included in the bill until the general review of insolvency law has been completed. We do not agree. By including bilateral netting there will be a reduction in systemic risk. The same submission also argued that the provisions in the bill should be part of a wider review of insolvency law. We support a general review of insolvency law. However, we consider that the matters dealt with in this bill are too important to wait until a review can take place. Commencement of liquidation to be recorded Clause 5 amends section 24 of the Companies Act 993 so that both the date and the time of liquidation must be recorded. There is a presumption that events occurred after liquidation if the time is not certain. The submissions argued that the bill should not create a presumption other than on the date of liquidation. They also argued that the time of liquidation should be recorded in rninutes and/or seconds. We do not think that there should be any change in respect of units of time. We consider that clause 5 in the bill as introduced creates a presumption which was unintended. We have recommended an amendment to make it clear that the presumption regarding time applies only to the date of liquidation. Power to disclaim onerous property clause 8 The purpose of this clause is to amend section 269 of the Companies Act 993 to clarify that netting agreements and transactions under a netting agreement cannot be disclaimed by a liquidator as onerous property. Onerous property is defined in the bill as an unprofitable contract or property of the company that is unsaleable or may give rise to a liability. One submission wanted to ensure that liabilities arising from a netting agreement could not be disclaimed as onerous property and considered that the wording in the bill, which referred to property" was not wide enough to include liabilities. Another submission wanted to clarify that security or credit support arrangements could be disclaimed as onerous property.

4 V We have recommended amendments to make it clear that liabilities relating to transactions under a netting agreement cannot be disclaimed as onerous property; that security or credit support arrangements are not excluded from the definition of onerous property unless they form part of the agreement itself. Definitions of "bilateral netting agreement", "multilateral netting agreement" and "recognised multilateral netting agreement" Clause 6 inserts new sections 3OA to 3OL in the Companies Act 993 which relate to the enforceability, in a liquidation, of a netting agreement under which the financial obligations of the parties to the agreement are netted or set-off so that the gross amounts of the parties' financial obligations are reduced to smaller net amounts. Submissions suggested that the bill should clarify that there cannot be more than two parties to a bilateral agreement and it should also clarify that a party to an agreement may be more than one person. Submissions argued that the bill should use the term 'debit' consistently and ensure bilateral agreements with unrecognised clearing houses are covered. We have recommended amending the definitions to make it clear that there cannot be more than two parties to bilateral agreement. We consider that the expression "person" includes groups of persons such as partnerships. Therefore, we do not agree that it is necessary to specifically allow for partnerships. We agree that the term "debit" should be used consistently in the bill. It is not intended that bilateral netting agreements with unrecognised clearing houses come within the definition of bilateral netting so we do not recommend that the definition be amended to cover them. Definition of"clearing house" One submission suggested that the bill needs to clarify that clearing houses providing services outside the nancial sector are included. We consider that the definition makes it clear that only financial type clearing houses can be recognised. The issue of whether other clearing houses, which operate outside the financial sector, are recognised is an issue which can be considered in the general review of insolvency law. Section 308-Application of set-off under netting agreement The purpose of this clause is to make it clear that netting agreements have effect in a liquidation despite the pan passu rule of section 33 of the Companies Act 993. The pan pagu rule is that all creditors have an equal claim in a liquidation. The provisions in the bill do overide this principle enshrined in insolvency legislation. There are many other instances where this happens already. For example, creditors already get priority through rights of set-off and giving of securities. The submissions suggested some drafting changes and requested that provisions to deal with multi-branch netting be introduced and that section 56 should continue to apply to payments subject to a netting agreement. We have dealt with this later in section 3 OE. We agree with some of the drafting suggestions. However, we do not agree that there should be any change to deal with multi-branch netting. If the branch is in New Zealand then the Companies Act 993 will apply to it. We cannot regulate for other jurisdictions.

5 V Section 30c-Calculation of netted balance Submissions argued that stating that the netted balance is to be calculated in accordance with the nettin5 agreement is not necessary. However, we consider that it is necessary as it clarines what is to occur on liquidation. Submissions noted that with close-out netting it is possible that not all transactions will be closed-out. We agree and have recommended amendments to make it clear that not all transactions will necessarily be closed out. However, we have not areed to the suggestion that the words "all or any" be included in section 30c (b) as it may allow a liquidator to select transactions that are favourable to the position of the company and disregard those that are not. Section 300-Mutuality New section 3 OD clarifies the relationship between the calculation of the netted balance and the existing set-off provisions in section 30. Transactions do not need to be mutual in order to net. Mutual transactions occur when claims are owed between the same persons in the same right. Submissions argued that the principal, not the agent, is party to the agreement, therefore, references to agents in this clause should be deleted. The majority of submissions maintained that the requirement for mutuality in bilateral netting agreements is preferred. We have recommended that mutuality be required for bilateral netting and that consent from the principal is required where trustees enter into multilateral netting agreements. We have recommended that similar amendments be made to the Insolvency Act 967. Section 30E-Transactions under a netting agreement This clause provides that the new netting provisions do not prevent the operation of section 292 of the Companies Act 993 which relates to transactions having preferential effect being voidable on the application of the liquidator and section 297 which relates to recovery by a liquidator in respect of transactions at undervalue. Transactions under a netting agreement will still be caught but the netting agreement itself will only be caught by those sections if the effect of the netting agreement reduces any amount owed by, or to, the company in liquidation at the time the company entered into the agreement. Netting agreements are voidable only if they relate to pre-existing transactions. Submissions argued that the whole netting agreement should not be able to be overturned when there are both pre-existing and subsequent transactions. Some subrnissions argued that there is no need to make netting agreements relating to pre-existing transactions voidable. One submission argued that other sections relating to voidable transactions, for example 294 and 298 of the Companies Act 993, should be covered. It also arsued that there is confusion between subclauses () and (3). One submission argued that only the underlying transactions not the netting agreement should be subject to sections 292 and 297 of the Companies Act 993. We have recommended amendments to provide that rather than setting aside the netting agreement, the agreement can only be set aside to the extent that it reduces money owing by, or to, the company at the time the agreement was entered into. We have redrafted the clause to remove any confusion between subclauses () and (3) and to refer specifically to section 298. We do not consider it necessary to refer to section 294 of the Companies Act 993 as it is a procedural section that applies to sections 292 and 293. As section 292 is to apply, it follows that section 294 will apply if resort is made to section 292.

6 V One submission questioned whether section 308 (2) (a) should also include a reference to section 56 of the Companies Act 993 which deals with the recovery of a distribution to a shareholder at a time when the company did not, immediately after the distribution, satisfy the insolvency test. We consider that section 56 should continue to apply in the case of netting, and have recommended an amendment in new section 3 OE. Section 3OH-Court may set aside netting agreement The purpose of this clause is to provide that a court may set aside bilateral related party netting where it considers this just and equitable. Submissions argued that the test should be that used for set-off in section 30 (3), not that for charges and securities. The bill is creating two separate regimes for related party set-off. One submission argued that multilateral netting with related parties should be able to be set aside in the same way as bilateral netting. We recommend amendments to this clause to adopt the test contained in section 30 (3) of the Companies Act 993. The two year period which applies in section 30 (7) should also apply here. The persons to whom the clause applies will be as set out in the bill and not to the more restricted definition of "related person" in section 30 (5). We do not recommend amending the clause to apply to multilateral netting agreements with related parties. Section 3OJ-Recognition of clearing houses The bill provides for controls on multilateral netting agreements. They must be operated by clearing houses recognised by the Reserve Bank of New Zealand (the bank). When deciding whether a clearing house should be recognised, the bank must have regard to the extent to which the application of the netting provisions to any multilateral netting agreement, that is subject to the rules of that clearing house, would assist in promoting the soundness or efficiency of the imancial system. One submission argued that the bill should only be able to recognise clearing houses where failure to protect netting agreements would present significant systemic risk and clearing houses which are not connected with the financial system should be able to be recognised. Other submissions argued that the use of the term financial system requires further defnition. Some submissions argued that the application of multilateral netting should not be limited to the financial markets. We have not recommended any changes as we consider it is clear that the financial system is the New Zealand financial system. The objective is to reduce risk in the financial system, therefore, clearing houses not operating in the financial system are not covered. Section 30L-Notification to recognised clearing houses New section 3OL requires the bank to notify the relevant reconised clearing house about the bank's intention to revoke or vary a declaration which declares a person to be a clearing house. Submissions argued that seven days notice of revocation or variation is insufficient and there should be an obligation to consult. Subrnissions also argued that the existing netting arrangements should remain in effect when clearing house recognition is revoked. We agree that the bill should provide that netting agreements entered into before the revocation or variation should remain effective. Proposed new section 3OM provides for this.

7 Vll There is a need for the bank to be able to act quickly when there is a problem. This has to be balanced with the requirement for fairness to allow parties adequate time to respond to a notice that a recognised clearing house is going to be varied or revoked. No change is recommended to the notice period and consultation requirements as we consider that the seven day notice period strikes the appropriate balance. Clause 23-Moratorium Submissions argued that security should be made enforceable for bilateral netting arrangements. It needs to be made clear that security and credit support arrangements are not enforceable in statutory management. All rights reasonably connected with a netting arrangement should be enforceable. We consider that rnaking security enforceable for bilateral netting would allow scope for abuse. We have recommended amending the wording to make it clear that only the application of the netting agreement is exempt from the moratorium. Other rihts should be treated in the same way as for other transactions. We are also recommending a similar amendment to the Reserve Bank Act 989. Clause 24-Statutory manager may suspend payment of money A submission argued that a statutory manager should not be able to suspend payment or delivery obligations under individual transactions, thereby negating the protection given to netting agreements. We have redrafted this to make it clear that transactions under a netting agreement cannot be suspended but that the netted balance may be suspended. We are also recommending a similar amendment to the Reserve Bank Act 989. Clause 26-Application of certain provisions of the Companies Act 993 A submission argued that a provision is needed similar to that in sections 3 OE and 306 of the Companies Act 993 to restrict application of voidable transaction provisions. We agree and have recommended accordingly. Clause 3-New sections inserted We have recommended amending section 93) (2) in line with amendments to new 30) of the Companies Act 993 and section 93E (2) in line with amendments to new 30E (3) of the Companies Act 998. Minority View Labour members of the committee raised concerns about the effect that multilateral netting agreements, made through a recognised clearing house, rnay have on the priority creditor ranking of employees in a liquidation. Officials advised that they considered it extremely unlikely that priority claims of employees would be adversely affected by a multilateral netting agreement made through a recognised clearing house. Officials considered that it would not be possible to include a clause insertin a guarantee to ensure that employees were not adversely affected without fundamentally undermining the aims of the bill.

8 Vlii KEY TO SYMBOLS USED IN REPRINTED BILL As REPORTED FROM A SELECT COMMITTEE Struck Out (Unanimous) Subject to this Act, Text struck out unanimously Subject to this Act, Text inserted unanimously (Subject to this Act,) Subject to this Act, Words struck out unanimously Words inserted unanimously

9 Rt Hon W F Birch BANKING AND INSOLVENCY (NETTING AND PAYMENTS FINALITY) ANALYSIS Title. Short Title PART COMPANIES ACT Part to be part of Companies Act Liability of shareholders 4. Commencement of liquidation 5. Commencement of liquidation to be recorded 6. Interim liquidator 7. Other duties of liquidator 8. Power to disclaim onerous property 9. Transactions having preferential effect 0. Voidable charges. Transactions at undervalue 2. Transactions for inadequate or excessive consideration with directors and certain other persons 3. Ascertainment of amount of claim 4. Claims relating to debts payable after commencement of liquidation 5. Mutual credit and set-off 6. New sections inserted 3 OA. Definitions relating to set-off under netting agreement 308. Application of set-off under netting agreement 30c. Calculation of netted balance 80 Mutuality is required for transactions under bilateral netting agreements 3ODA. When mutuality is required for transactions under recognised multilateral netting agreernents 30DB. Application of set-off under section 30 to transactions that are subject to netting agreernents 30E. Transactions under netting agreement and their effect on certain sections 30F. Rights under netting agreement not affected by commencement of liquidation 30c. Set-off under netting agreement not affected by notice under section OH. Court may set aside bilateral netting agreement between company and related person 30I. Certain persons rnay be declared to be recognised clearing houses 30. Matters that Bank must or rnay have regard to when making, varying, or revoking declaration under section 30I 80K. Bank may impose conditions in declaration under section 80I 30L. Bank to notify recognised clearing house about Bank's intention to revoke or vary declaration under section 30I 7. Interest on claims 30M. Transactions under recognised multilateral netting agreernent not affected by variation or revocation of declaration under section 3OI 8. Seventh Schedule amended 9. Volunteers Employment Protection Act 973 amended 20. Customs and Excise Act 996 amended PART 2 CORPORATIONS (INVESTIGATION AND MANAGEMENT) ACT Part to be part of Corporations (Investigation and Management) Act Statutory management of corporations and associated persons 23. Moratorium 24. Statutory manager may suspend payment of money owing No. 62-2

10 2 Banking and Insoluency (Netting and Payments Finality) 25. Management of corporation to vest in statutory manager 26. Application of certain provisions of Companies Act Termination of statutory management PART 3 INSOLVENCY AcT Part to be part of Insolvency Act New sections substituted 28. Date of adjudication 28A. Date of adjudication to be recorded 30. Assignee to advertise adjudication 3. New sections inserted 93A. Definitions relating to set-off under netting agreement 938. Application of set-off under netting agreement 98c. Calculation of netted balance 93[). Mutuality is required for transactions under bilateral netting agreements 93DA. When mutuality is required for transactions under recognised multilateral netting agreements 93DB. Application of set-off under section 93 to transactions that are subject to netting agreements 93E. Transactions under netting agreement and voidable preferences 93y. Set-off under netting agreement not affected by notice under section Disclaimer of onerous property and termination of netting agreement not permitted PART 4 RESERVE BANK OF NEW ZEALAND Acr Part to be part of Reserve Bank of New Zealand Act Statutory management of registered banks and associated persons 34. Moratorium 35. Statutory manager may suspend payment of money owing 36. Management of registered bank to vest in statutory manager 37. Application of certain provisions o f Companies Act Terrnination of statutory management A BILL INTITULED An Act to reform the law relating to payments finality and netting arrangements, and for those purposes to- (a) Amend the Companies Act 993; and (b) Amend the Corporations (Investigation and 5 Management) Act 989; and (c) Amend the Insolvency Act 967; and (d) Amend the Reserve Bank of New Zealand Act 989 BE IT ENACTED by the Parliament of New Zealand as follows:. Short Title-This Act may be cited as the Banking and 0 Insolvency (Netting and Payments Finality) Act 998. PART COMPANIES ACT Part to be part of Companies Act 993-This Part is part of the Companies Act 993" (in this Part referred to as the 5 principal Act). *993, No. 05 Amendments: 994, Nos. 6, 82; 996, No. 5; 997, No. 27; 998, No. 3

11 Banking and Insolvency Wetting and Payments Finality) 3 3. Liability of shareholders-() Section 98 (6) of the principal Act is amended by repealing paragraph (a), and substituting the following paragraph: "(a) A period of year before the date of commencement of 5 the liquidation of the company together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". (2) Section 98 (6) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the 0 expression ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the time". 4. Commencement of liquidation-section 24 of the 5 principal Act is amended by repealing subsection (5), and substituting the following subsection: "(5) The liquidation of a company commences on the date on which, and at the time at which, the liquidator is appointed." Commencement of liquidation to be recorded-the principal Act is amended by, inserting after section 24, the following section: "24A. () If- "(a) A liquidator is appointed under section 24 (2) (a), the 25 shareholders must record in the special resolution appointing the liquidator the date on which, and the time at which, the special resolution was passed; or "(b) A liquidator is appointed under section 24 (2) (b), the board of the company must record in the 30 instrument appointing the liquidator the date on which, and the time at which, the liquidator was appointed; or "(c) A liquidator is appointed under section 24 (2) (c), the Court must record in the order appointing the 35 liquidator the date on which, and the time at which, the order was made. Struck Out (Unanimous) "(2) If any question arises as to whether an act was done or a transaction was entered into or effected before or after the

12 4 Banking and Insolvency (Netting and Paymen8 Finality) Struck Out (Unanimous) time at which a liquidator was appointed, that act or transaction is, in the absence of proof to the contrary, deemed to have been done or entered into or effected, as the case may be, after that time." 5 "(2) If any question arises as to whether on the date on which a liquidator was appointed an act was done or a transaction was entered into or effected before or after the time at which the liquidator was appointed, that act or transaction is, in the 0 absence of proof to the contrary, deemed to have been done or entered into or effected, as the case may be, after that time." 6. Interim liquidator-section 246 of the principal Act is amended by adding the following subsections: "(4) The appointment of an interim liquidator takes effect on 5 the date on which, and at the time at which, the order appointing that interim liquidator is made. "(5) The Court must record in the order appointing the interim liquidator the date on which, and the time at which, the order was made. 20 Struck Out (Unanimous) "(6) If any question arises as to whether an act was done or a transaction was entered into or effected before or after the time at which an interim liquidator was appointed, that act or transaction is, in the absence of proof to the contrary, deemed 25 to have been done or entered into or effected, as the case may be, after that time." "(6) If any question arises as to whether on the date on which an interim liquidator was appointed an act was done or a 30 transaction was entered into or effected before or after the

13 Banking and Insoluency (Netting and 5 Paymen8 Finality) time at which the interim liquidator was appointed, that act or transaction is, in the absence of proof to the contrary, deemed to have been done or entered into or effected, as the case may 5 be, after that time." 7. Other duties of liquidator-section 255 (2) of the principal Act is amended- (a) By inserting in paragraph (a) (ii), after the word "date", the words ' and time": 0 (b) By inserting in paragraph (d), before the word "commencement", the words "date of". 8. Power to disclaim onerous property-section 269 of the principal Act is amended by repealing subsection (2), and substituting the following subsection: 5 "(2) For the purposes of this section, 'onerous property'- "(a) Means- "(i) An unprofitable contract; or "(ii) Property of the company that is unsaleable, or not readily saleable, or which may give rise to a 20 liability to pay money or perform an onerous act; but "(b) Does not includeli) A netting agreement to which sections 3OA to 30L apply; or 25 Struck Out (Unanimous) "(ii) Any property of the company that relates to a transaction under a netting agreement. "(ii) Any contract of the company that constitutes 30 a transaction under a netting agreement. 9. Transactions havin preferential effect-() Section 292 (5) of the principal Act ls amended by repealing paragraph (a), and substituting the following paragraph:

14 6 Banking and Insolvency OVetting and Payments Finality) "(a) The period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". (2) Section 292 (5) of the principal Act is amended- 5 (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the time". 0 (3) Section 292 (6) of the principal Act is amended by repealing paragraph (a), and substituting the following paragraph: "(a) The period of 6 months before the date of commencement of the liquidation together with the 5 period commencing on that date and ending at the time at which the liquidator is appointed; and". (4) Section 292 (6) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": 20 (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the time". 0. Voidable charges-() Section 293 (6) of the principal Act is amended by repealing paragraph (a), and substituting the 25 following paragraph: "(a) The period of a year before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". 30 (2) Section 293 (6) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the 35 time". (3) Section 293 (7) of the principal Act is amended by repealing paragraph (a), and substituting the following paragraph: "(a) The period of 6 months before the date of 40 commencement of the liquidation tosether with the period commencing on that date an( ending at the time at which the liquidator is appointed; and".

15 Banking and Insolvency (Netting and Payments Finality) (4) Section 293 (7) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the 5 second place where it appears, the words "and at the time".. Transactions at undervalue-() Section 297 (3) (b) of the principal Act is amended by repealing subparagraph (i), and substituting the following subparagraph: 0 li) The period of a year before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". (2) Section 297 (3) (b) of the principal Act is amended- 5 (a) By inserting in subparagraph (ii), after the word "which", the words ", and at the time at which,": (b) By inserting in subparagraph (iii), after the word "date" in the second place where it appears, the words "and at the time" Transactions for inadequate or excessive consideration with directors and certain other persons- () Section 298 (4) of the principal Act is amended by repealing paragraph (a), and substituting the following paragraph: "(a) The period of 3 years before the date of commencement 25 of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". (2) Section 298 (4) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the 30 words ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the time". 3. Ascertainment of amount of claim-section 306 () 35 of the principal Act is amended by inserting, after the word "date", the words "and time". 4. Claims relating to debts payable after commencement of liquidation-section 309 () of the principal Act is amended by inserting, before the word 40 "commencement", the words "date of'.

16 8 Banking and Insoluency (Netting and Payments Finality) 5. Mutual credit and set-off-() Section 30 (6) of the principal Act is amended by repealing paragraph (a), and substituting the following paragraph: "(a) The period of 6 months before the date of commencement of the liquidation to5ether with the 5 period commencing on that date anci ending at the time at which the liquidator is appointed; and". (2) Section 30 (6) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": 0 (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the time". (3) Section 30 (7) of the principal Act is amended by repealing paragraph (a), and substituting the following 5 paragraph: "(a) The period of 2 years before the date of commencement of the liquidation together with the period commencing on that date and ending at the time at which the liquidator is appointed; and". 20 (4) Section 30 (7) of the principal Act is amended- (a) By inserting in paragraph (b), after the word "which", the words ", and at the time at which,": (b) By inserting in paragraph (c), after the word "date" in the second place where it appears, the words "and at the 25 time". 6. New sections inserted-the principal Act is amended by inserting, after section 30, the following sections: "30A. Definitions relating to set-off under netting agreement-in this Act, unless the context otherwise 30 requires,- " 'Bank' means the Reserve Bank of New Zealand: Bilateral netting agreement' means an agreement that provides, in respect of transactions between 2 persons to which the agreement applies,- 35 "' la) That on the occurrence of an event specified in the agreement, all or any of those transactions must (or may, at the option of a party) be terminated and- "(i) An account taken of all money due between 40 the parties in respect of the terminated transactions; and

17 Banking and Insolvency (Netting and Paymen8 Finality) 9 "(ii) All obligations in respect of that money satisfied by payment of the net amount due from or on behalf of the party having a net (debt) debit to or on behalf of the 5 party having a net credit; or "(b) That each transaction is to be debited or credited to an account with the effect that the rights and obligations of each party that existed in respect of the relevant account prior to the transaction are 0 extinguished and replaced by rights and obligations in respect of the net (debt) debit due on the relevant account after taking into account that transaction; or lc) That amounts payable by each party to the other party are to be paid or satisfied by payment of 5 the net amount Of those obligations by the party having a net (debt) debit to the party havmg a net credit;- but does not include any bilateral netting agreement lbetween a party and a clearing house in respect Of 20 transactions that are subject to a multilateral netting agreement:) that is part of a multilateral netting agreennent: Clearing house' means a person that provides clearing or settlement services in respect of financial 25 transactions between parties to a multilateral netting agreernent: Struck Out (Unanimous) Multilateral netting agreement' means an agreement that is contained in, or is subject to, the rules of a 30 clearing house and that provides, in respect of transactions to which it relates, that all debits and credits arising between the parties are to be brought into account through, or in accordance with the rules of, the clearing house so that all amounts payable by 35 or to each party are satisfied by- "(a) Payment by or on behalf of each party having a net debit to or on behalf of the clearing house (whether as agent or as principal) or a party having a net credit; and 40 "(b) Receipt by or on behalf of each party having a net credit from or on behalf of the clearing house

18 0 Banking and Insolvency (Netting and Paymen8 Finality) Struck Out (Unanimous) (whether as agent or as principal) or a party having a net debit: Multilateral netting agreement' means an agreement 5 that provides for the settlement, between more than 2 persons, of payment obligations arising under transactions that are subject to the agreement, and that provides, in respect of transactions to which it relates, that debits and credits arising between the 0 parties are to be brought into account so that amounts payable by or to each party are satisfied byr la) Payment by or on behalf of each party having a net debit to or on behalf of a clearing house 5 (whether as agent or as principal) or a party having a net credit; and "(b) Receipt by or on behalf of each party having a net credit from or on behalf of a clearing house (whether as agent or as principal) or a party having a 20 net debit: Netted balance' means any amount calculated under a netting agreement as the net (debt) debit payable by or on behalf of a party to the agreement to or on behalf of another party to the agreement in respect 25 of all or any transactions to which the netting agreement applies: Netting agreement' means a bilateral netting agreement or a recognised multilateral netting agreement: Recognised clearing house' means a clearing house 30 declared under section 30 to be a recognised clearing house:

19 Banking and Insolvency (Netting and Payments Finality) Struck Out (Unanimous) Recognised multilateral netting agreement' means a multilateral netting agreement in respect of which the clearing house is a recognised clearing house. 5 Recognised multilateral netting agreement' means a multilateral netting agreement that is contained in, or is subject to, the rules of a recognised clearing house. "308. Application of set-off under netting 0 agreement-() Despite anything in section 33, sections 3OA to (30L) 3OM apply- "(a) To a netting agreement- "(i) Made ja or evidenced by writing; and lii) In which the application of sections 3OA to (30 ) 5 3OM has not been expressly excluded; and "(iii) Whether made before or after the commencement of this section; and "(b) To all obligations under a nettin agreement (whether those obligations are payable in New Zealand 20 currency or in some other currency). "( A) Sections 3OA to 3OM apply despite- "(a) Any disposal of rights under a transaction that is subject to a netting agreement in contravention of a 25 prohibition in the netting agreement; or "(b) The creation of a charge or other interest in respect of the rights referred to in paragraph (a) in contravention of a prohibition in the netting agreement. "(2) Nothing in sections 3OA to (30 ) 3OM applies to an amount 30 paid or payable by a shareholder- "(a) As the consideration, or part of the consideration, for the issue of a share; or "(b) In satisfaction of a call in respect of an outstanding liability of the shareholder made by the board of 35 directors or by the liquidator.

20 2 Banking and Insoluency OVetting and Paymen8 Finality) "30c. Calculation of netted balance-if a company that is a party to a netting agreement is in liquidation,- "(a) Any netted balance payable by or to the company must be calculated in accordance with the netting agreement; and 5 Struck Out (Unanimous) "(b) That netted balance constitutes the amount that may be claimed in the liquidation or is payable to the company, as the case may be, in respect of all transactions that are subject to the netting 0 agreement. "(b) That netted balance constitutes the amount that may be claimed in the liquidation or is payable to the company, as the case may be, in respect of the 5 transactions that are included in the calculation. Struck Out (Unanimous) "30D. Set-off under netting agreement and set-off under section 30-() Section 30c applies whether or not any transactions under a netting agreement constitute mutual 20 credits, mutual debts, or other mutual dealings to which section 30 applies. "(2) Section 30c does not apply to a transaction under a bilateral netting agreement if- "(a) A party to the bilateral netting agreement is acting as 25 agent or trustee for another person in respect Of that transaction; and "(b) That other person has not authorised the party to enter into the transaction as that person's agent or trustee. 30 "(3) Any netted balance calculated under a netting agreement in accordance with section 30C is to be treated as an amount to which section 30 () applies if the company that is in liquidation and the other party to the netting agreement also

21 Banking and Insolvency (Netting and 3 Payments Finality) Struck Out (Unanimous) have mutual credits, mutual debts, or other mutual dealings between them that are not subject to the netting agreement. 5 "30D. Mutunlity is required for transactions under bilateral netting agreements-sections 3OA to 3OM apply to transactions that are subject to a bilateral netting agreement only if those transactions constitute mutual credits, mutual debts, or other mutual dealings. 0 "30DA. When muvis:lity is required for transactions under recognised multilateral netting agreements- ( ) Sections 3OA to 3OM apply to transactions that are subject to a recognised multilateral netting agreement, whether or not those transactions constitute mutual credits, mutual debts, or 5 other mutual dealings. "(2) Despite subsection (), sections 3OA to 3OM do not apply to transactions that are subject to a recognised multilateral netting agreennent if- "(a) Those transactions do not constitute mutual credits, 20 mutual debts, or other mutual dealings; and "(b) A party to any of those transactions is acting as a trustee for another person; and "(c) The party acting as trustee is not authorised by the terms of the trust of which the party is a trustee to 25 enter into the transaction. "30DB. Application of set-off under section 30 to transactions that are subject to netting agreements- ( ) Section 80 does not apply to transactions that are subject to a netting agreement to which sections 3OA to 3OM apply. 30 "(2) However, a netted balance is to be treated as an amount to which section 30 () applies if the company that is in liquidation and the other party to the netting agreement also have mutual credits, mutual debts, or other mutual dealings between them that are not subject to the netting agreement.

22 4 Banking and Insolvency (Netting and Paymen8 Finality) Struck Out (Unanimous) "3 OE. Transactions under netting agreement and transactions having preferential effect, etc-() Nothing in sections 3OA to 3OL prevents the operation of section 292 or section 297 in relation to any transaction to which a netting 5 agreement applies. "(2) For the purposes of sections 292 and 297, the term 'transaction', in relation to a company, does not include a netting agreement entered into by the company, unless the effect of entering into the netting agreement is to reduce any 0 amount that was owing by or to the company at the time the company entered into the agreement. "(3) Nothing in section 292 (3) applies to a transaction that is subject to a netting agreement. 5 "30E. Transactions under netting agreement and their effect on certain sections-() Nothing in sections 3OA to 3OM prevents the operation of section 56 or section 292 or section 297 or section 298 in respect of a transaction that is subject to a netting agreement. 20 "(2) However, nothing in section 292 (3) applies to a transaction that is subject to a netting agreement. "(3) For the purposes of sections 292 and 297, the term 'transaction', in relation to a company, does not include a netting agreement entered into by the company, except to the 25 extent that the effect of entering into the netting agreement is to reduce any amount that was owing by or to the company at the time the company entered into the agreement. "30F. Rights under netting agreement not affected by commencement of liquidation-nothing in section 248 () 80 affects, in respect of a company in liquidation, the exercise of any of the following rights under a netting agreement: "(a) The termination, in accordance with the netting agreement, of all or any transactions that are subject to the netting agreement by reason of the 35 occurrence of an event specified in the netting agreement, being an event (including the

23 Banking and Insoluency (Netting and 5 Payments Finality) appointment of a liquidator) occurring not later than the commencement of the liquidation; or "(b) The taking of an account, in accordance with the netting agreement, of all money due between the parties to 5 the netting agreement in respect of transactions affected by the termination. "30G. Set-off under netting agreement not affected by notice under section 294-The filing of a notice under section 294 in respect of any transaction (under) that is subject 0 to a netting agreement does not affect the operation of section 30c in respect of the transaction, and that section continues to apply to the transaction until the transaction is set aside under subsection (3) or subsection (4) of section 294. Struck Out (Unanimous) 5 "30H. Court may set aside bilateral netting agreement-() The Court may order, on the application of a liquidator, that a bilateral netting agreement entered into by a company be set aside as against the liquidator of the company if- 25 company; or 20 "(a) The agreement is between the company andli) A person who was, at the time the netting agreement was entered into, a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the "(ii) A person, or a relative of a person, who, at that time, had control of the company; or "(iii) Another company that was, at that time, controlled by a director of the company, or a 30 nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or "(iv) Another company that was, at that time, a related company; and "(b) The company is unable to meet all its debts; and 35 "(c) The Court considers that, having regard to the circumstances in which the netting agreement was entered into, the conduct of the person, relative, company, or related company, as the case may be, in relation to the affairs of the company, and any

24 6 Banking and Insoluency OVetting and Paymen8 Finality) Struck Out (Unanimous) other relevant circumstances, it is just and equitable to make the order. "(2) The Court may make any other orders it thinks proper for the purpose of giving effect to an order under subsection (). 5 "3 OH. Court may set aside bilateral netting agreement between company and related person-() The Court may order, on the application of a liquidator, that a bilateral netting agreement entered into by a company be set aside as against 0 the liquidator of the company if- "(a) The netting agreement is between the company and a person who was a related person at the time that the netting agreement was entered into; and "(b) The netting agreement was entered into within the 5 restricted period; and "(c) The related person does not prove that, at the time the netting agreement was entered into, the related person did not have reason to suspect that the company was unable to pay its debts as they 20 became due. "(2) The Court may make any other orders it thinks proper for the purpose of giving effect to an order under subsection (). "(3) In this section, unless the context otherwise requires,- " 'Related person', in relation to the company in 25 liquidation, means- "(a) A director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or "(b) A person, or a relative of a person, who has 30 control oi the company; or "(c) Another company that is controlled by a director of the company, or a nominee or relative of or a trustee for, or a trustee for a relative of, a director of the company; or 35 "(d) A related company. Restricted period' has the same meaning as in section 30 (7).

25 Banking and Insoluency (Netting and Paymen8 Finality) "30I. Certain persons may be declared to be recognised clearing houses-() The Bank may, by notice in the Gazette, declare any person that provides or proposes to provide clearing or settlement services to be a recognised 5 clearing house toi' the purposes of sections 3OA to (30 ) 3OM. "(2) The Bank may, by notice in the Gazette, vary or revoke any declaration made under subsection (). "30. Matters that Bank must or may have regard to when making, varying, or revoking declaration under 0 section 30I-() In determining whether a declaration should be made, varied, or revoked under section 30, the Bank must have regard to the extent to which the application of sections 3OA (300 3OM to any multilateral netting aseement that is subject to the rules of that clearing house would assist m promoting the 5 soundness or efficiency ot the financial system. "(2) In determining whether a declaration should be made, varied, or revoked under section 30, the Bank may have regard to any of the following matters: "(a) The type of transactions that may be effected through 20 the clearing house; and "(b) Any laws or relatory requirements relating to the operation ot that clearing house and compliance with those laws or regulatory requirements; and "(c) Any other matters that the Bank may, in any particular 25 case, consider appropriate. "30K. Bank may impose conditions in declaration under section 30I-() The Bank may, in any declaration made or varied under section 30, impose conditions relating to any of the matters referred to in section 30J. 30 "(2) If a recognised clearing house fails to comply with any conditions referred to in subsection (), the Bank may revoke the declaration made under section 30 that relates to the clearing house. "30L. Bank to notify recognised clearing house about 35 Bank's intention to revoke or vary declaration under section 30I-The Bank must not revoke or vary a declaration made under section 30 unless- "(a) The recognised clearing house to which the notice applies has been given not less than 7 days' notice in 40 writing of the Bank's intention to do so; and "(b) The clearing house has a reasonable opportunity to make submissions to the Bank; and "(c) The Bank considers those submissions.

26 8 Banking and Insolvency (Netting and Paymen8 Finality) "30M. Transactions under recognised multilateral netting agreement not affected by variation or revocation of declaration under section 30I-The variation or revocation of a declaration under section 30 does 5 not affect the application of sections 3OA to 3OM to any transaction- "(a) That is or was subject to a recognised multilateral netting agreement; and "(b) That was entered into before the variation or revocation 0 of the declaration." 7. Interest on claims-section 3 of the principal Act is amended by inserting in subsections () and (3), before the word "commencement" in each place where it appears, the words "date of" Seventh Schedule amended-clause 2 (i) of the Seventh Schedule of the principal Act is amended by inserting, after the word "date", the words "and time". 9. Volunteers Employment Protection Act 973 amended-section 5 ( ) (b) of the Volunteers Employment 20 Protection Act 973 is amended by inserting, after the word "date", the words "and time". 20. Customs and Excise Act 996 amended-section 99 (2) (b) of the Customs and Excise Act 996 is amended by omitting the words "the date of" in the second place where 25 they appear. PART 2 CORPORATIONS (INVESTIGATION AND MANAGEMENT) ACT Part to be part of Corporations (Investigation and Management) Act 989-This Part is part of the Corporations 30 (Investiation and Management) Act 989* (in this Part referred to as the principal Act). *989, No. Amendments: 993, No. 3; 994, No. 26

27 Banking and Insoluency (Netting and 9 Payments Finality) 22. Statutory management of corporations and associated persons-section 38 of the principal Act is amended by adding the following subsections: 73) Every Order in Council made under subsection () must 5 specify the date on which, and the time at which, the Order in Council comes into force. "(4) The date and time as specified must not be earlier than the date on which, and the time at which, the Order in Council is made." Moratorium-() Section 42 of the principal Act is amended by inserting in subsections (5) and (6), after the word "which" in each place where it appears, the expression ", and the time at which,". (2) Section 42 of the principal Act is amended by adding the 5 following subsection: Struck Out (Unanimous) "(7) Nothing in subsection () limits or prevents the operation of a netting agreement to which sections 3OA to 30L of the Companies Act 993 or sections 93A to 936 of the Insolvency Act apply. In particular,- "(7) In the case of a netting agreement to which sections 3OA to 3OM of the Companies Act 993 or sections 93A to 93G of the Insolvency Act 967 apply,- 25 "(a) Nothing in subsection () (h) appfies to any right of set-off provided for in (a) the nettlng agreement; and "(b) Nothing in subsection () limits or prevents the exercise of any of the following rights under (a) the netting agreennent: 30 li) The termination, in accordance with the nettin agreement, of all or any transactions that are sut)ect to the netting agreement by reason of the occurrence of an event specified in the netting agreement, being an event (including the 35 appointment of a statutory manager) occurring not later than the commencement of statutory management; or

28 20 Banking and Insolvency OVetting and Paymen8 Finality) "(ii) The taking of an account, in accordance with the netting agreement, of all money due between the parties to the netting agreement in respect of transactions affected by the termination; and "(c) Nothing in subsection () limits or prevents the exercise 5 by a recognised clearing house (within the meaning of section 3OA of the Companies Act 993), of any r*ht referred to in subsection () (d) to (f) in respect oi any property of that corporation if the right that is exercised has been granted to secure, or to assist 0 in securing, the due performance, by that corporation, of obligations entered into by that corporation under a recognised multilateral netting agreement (within the meaning of that section)." 24. Statutory manager may suspend payment of money 5 owing-() Section 44 (3) of the principal Act is amended by inserting, after the word "which", the expression ", and the time at which,". (2) Section 44 of the principal Act is amended by adding the 20 following subsection: "(4) Nothing in subsection () authorises the suspension by the statutory manager of the payment of any amount that would be included in the calculation of a netted balance in accordance with section 30c of the Companies Act 993 or 25 section 93c of the Insolvency Act 967, as the case may be. However, subsection () applies to the payment of the netted balance." 25. Management of corporation to vest in statutory manager-section 45 () of the principal Act is amended by 30 inserting, after the word "date", the expression ", and at and from the time,". 26. Application of certain provisions of Companies Act 993-() Section 55 () of the principal Act is amended by inserting, after the expression "30", the expression ", 3OE, ,".