But I had not until now read the terms of the guarantee deeds under which the Crown agreed to pay depositors. They clarify some matters, while raising new questions.
Copies of the deeds have been helpfully posted on the Red Alert site.
From what I can gather, here’s a timeline for the documentation.
- The initial deed was entered into on 19 November 2008.
- The initial deed included a provision that allowed the Crown to withdraw the guarantee and require a new deed of guarantee to be entered into, if the Crown reasonably believed the business affairs of SCF were being conducted in a manner inconsistent with the intent of the deed.
- Critically, depositors as at the time of the withdrawal of the guarantee would still be covered by the initial guarantee.
- The Crown exercised its rights under the initial deed and a replacement deed was entered into on 11 December 2009. This second deed is more comprehensive and detailed. I’m not sure whether the deed was entered into based on specific concerns about SCF, or whether this was just a “standard” replacement deed the Crown was getting all finance companies to sign.
- On 1 April this year the government extended the guarantee scheme until October 2010 under a third deed. The terms of the deed were largely similar to those of the second one.
- A supplemental deed was executed on 17 June 2010 to clarify the meaning of one provision in the third deed.
As a commercial lawyer I happen to know a bit about contract law and contractual interpretation, although I know less about banking law. While I’ve only had a cursory glance at the documents, some things stand out clearly.
- The Crown unquestionably had a legal obligation to pay out New Zealand depositors. This is unarguable. When SCF went into receivership, Bill English had no choice but to write out a cheque. Had he not done so the Crown would have been sued en masse by investors, and would have lost and been ordered to pay costs. The same business commentators now savaging Bill English for paying out investors would then be calling him a fool.
- Some in the media and blogosphere have suggested the terms of the guarantee deeds may have been breached, and that this meant payment didn't need to be made. Some go on to say that the fact payment was made proves this is just National looking after its mates. Wrong. It’s quite possible that breaches of the deeds occurred and should have been detected, and that the detection of such breaches may have enabled action to be taken to limit the Crown’s liability. But prior breaches do not affect the Crown’s liability to pay.
- There was no obligation to pay overseas investors, as Bill English has himself admitted. He has said paying them out enables the Crown to take control of the receivership. It may seem unfair that some people are getting the benefit of a guarantee not designed for them, but the alternative is to risk getting much less during the receivership. English's position on this matter is at least defensible, and may in fact be financially prudent.
- SCF had a number of obligations under the deeds, including the obligation to conduct its business and operations in a proper, businesslike, efficient and prudent manner, and the obligation not to engage in related-party transactions. Any breach by SCF of those obligations would give the Crown the right to withdraw the guarantee in relation to future deposits only.
- However, had the guarantee been closed down early upon discovery of a breach, the Crown would still have been liable under the guarantee to pay out creditors who had deposited funds prior to the closure of the guarantee.
Here’s what I don’t know.
- When should Treasury have become aware of SCF’s troubles, and what was it doing to monitor the company?
- What are the circumstances behind the replacement deed in December 2009?
- If Treasury was aware of SCF's troubles, did it consider giving notice of breach, and if not why not?
- If Treasury had given notice of breach upon becoming aware of the troubles, how much money would have been saved?
- When was the bulk of investor funds deposited into SCF? This is important to understand because, if it turns out that most of those funds were put into SCF immediately following the November 2008 guarantee, it might indicate that had Treasury acted to stop the guarantee in mid to late 2009, it would have made little difference to the result. Of course, if money poured in regularly during 2009, then the monitoring role of Treasury becomes more critical.
- The deeds give the Crown the right to require directors of SCF to give undertakings to use their best endeavours to ensure SCF complies with its obligations under the guarantee deeds. Were such undertakings asked for? If so, will they now be enforced against the individuals? If not, why not?
- What questions are being asked about Standard and Poor’s, the ratings agency that gave the credit rating enabling SCF to qualify for the guarantee?
I stand by the move to pay New Zealand depositors, because legally any other position would have been utterly indefensible. The decision to pay overseas depositors can at least be debated, though I understand the reasoning behind the move.
But questions remain about the role of Treasury and others in this. Could SCF's troubles have been detected earlier? Could the Government have avoided paying out some of this money?
This needs a public enquiry. A huge amount of money has been paid out, and the decisions of those involved should be scrutinised. If it turns out they have acted entirely properly, then they will have nothing to fear.