REGULATORY SYSTEMS (COMMERCIAL MATTERS) AMENDMENT BILL

Transcription

1 REGULATORY SYSTEMS (COMMERCIAL MATTERS) AMENDMENT BILL Departmental Report to Commerce Committee 14 December 2016

2 The Chair Commerce Committee 1. This is the Departmental report on the Regulatory Systems (Commercial Matters) Amendment Bill. It is in three parts: Part A discusses the main issue comprising: o retention money in construction contracts proposed amendment to enable the use of financial instruments Part B is a clause-by-clause analysis of submissions and changes recommended by officials in response Part C responds to information requests from the Committee. 2. The Bill was introduced to the House on 12 October 2016 and referred to the Commerce Select Committee after its first reading on 18 October On 3 November 2016, the Commerce Committee received a letter from the Regulations Review Committee recommending that the Commerce Committee: seek information from officials as to why it is considered necessary to extend the exemption power in section 556 of the Financial Markets Conduct Act 2013 in the manner proposed by clause 88 of the bill; and if it was not satisfied the extension of the power was necessary, delete this clause. 4. On 6 December 2016, officials provided a response to the Commerce Committee for consideration (Annex 1). Officials recommended that the extension of the exemption power was necessary and it was an appropriate amendment for the regulatory systems bill. Purpose of the Bill 5. The Bill s purpose is to maintain the effectiveness and efficiency of the regulatory systems established by the Acts amended by this omnibus bill and so reduces the chance of regulatory failure and unintended consequences that harm the wellbeing of New Zealanders. 6. The amendments were identified as part of the Ministry of Business, Innovation and Employment s (MBIE) regulatory systems work programme which arises from the chief executive s responsibility to relevant Ministers, under section 32 of the State Sector Act 1988, for the stewardship of the legislation administered by MBIE. 7. The amendments in the Bill will maintain the effectiveness and efficiency of the regulatory systems by: keeping the regulatory system up to date and relevant for example, in the Friendly Societies and Credit Unions Act 1983 the amendments allow friendly societies and credit union to take advantage of modern electronic means of communication; addressing inconsistencies within and between different pieces of legislation, for example in the Fair Trading Act 1986, the purpose of the amendments is to ensure consistency between regimes and provide clarity in the split of responsibilities between the Commerce Commission and the Financial Markets Authority; creating efficiencies, for example, in the Financial Advisers Act 2008, the purpose of the amendments is to improve the operation of the Act by providing the Financial Markets Authority with an effective means of collecting fines; 1

3 providing clarity in relation to whom the law applies to, what rights are being referred and by whom. For example in the Insolvency Act 2006, the amendments relate to ensuring the requirements of the Act can be achieved with minimum compliance costs in relation to the functions of the Official Assignee. Overview of submissions 8. The Committee received 13 written submissions. The submissions support the Bill with particular interests in amendments under the Companies Act, Financial Markets Conduct Act 2013, and the Construction Contracts Act All of the 13 submissions were made by organisations that represent various business sector interests. Recommendations Part A recommendations 9. The Ministry of Business, Innovation and Employment recommends that the Commerce Committee: Part 4 Building and Housing 9.1 agree to add a new amendment to the Construction Contract Amendment Act 2015; 9.2 agree that the Construction Contracts Amendment Act 2015 should be amended to clarify that financial instruments such as retention bonds, guarantees and insurance products can be used to comply with the retention trust obligation; 9.3 allow MBIE officials to engage with industry participants such as banks, insurers, accounting firms and the Reserve Bank of New Zealand as necessary to obtain technical information to support the legislative drafting process. Part B recommendations 10. The Ministry of Business, Innovation and Employment recommends that the Commerce Committee agree to the following changes to the Bill: Departmental submissions Legislation Clause Recommendation Companies Act 25 Amend the timeframe in subsection 209(1B) to 20 working days to align with the current timeframe in section 209(1) Companies Act 29 Provide that where there is strong evidence that an overseas company no longer exists, the Registrar does not have to give public notice before the company is removed from the register. Financial Markets Conduct Act 91(2) Clause 91 of the Bill amends Schedule 4 (which contains transitional and savings provisions). The amendments relate to certain transitional and savings provisions in the Financial Markets Conduct Regulations 2014 (Regulations). Under section 547(4), those provisions would be automatically revoked on the date that is 5 years after the commencement of section 547 (14 September 2018). However, the effect of some of those provisions needs to continue after that date. The effect of the amendments to Schedule 4 is to preserve the ongoing effect of those provisions. Clause 91(2) reflects transitional regulations relating to banks regulatory capital made in the original set of regulations. However, later minor changes to the definition of former 2

4 enactments were made in the Financial Markets Conduct Amendment Regulations (No 2) 2016 to refer to exemption notices under which the convertibles were originally offered. Officials propose making the same amendment to former enactments to ensure consistency between the Bill and the Regulations. Transitional provisions - Some transitional issues have been identified. MBIE recommends that we work with the Parliamentary Counsel to determine whether any transitional provisions are necessary. We will brief the Committee on these provisions in early In response to other submissions Legislation Clause Recommendation Commencement netting provisions 2 Commence clauses 27 and 28 the day after the Bill receives Royal assent and, subject to consultation with Parliamentary Counsel, include transition provisions for existing liquidations. Companies Act New Subject to consultation with Parliamentary Counsel, amend subsection 203(3)(d) so that where a company has prepared a concise annual report it must comply with the requirements in that subsection (remove the requirement to state whether a concise annual report was prepared). Companies Act New Amend the Act so that large overseas companies with small New Zealand branches should not be subject to an audit requirement if there is no audit requirement in the home country. 3

5 Part A: Main issues 11. Part A addresses the following issue: Retention money in construction contracts proposed amendment to enable the use of financial instruments. Retention money in construction contracts proposed amendment to enable the use of financial instruments The New Zealand construction sector 12. New Zealand s commercial construction sector is characterised by a series of cascading contracts. Developers contract with head contractors, who subcontract much of the work to specialist trade contractors. The diagram below illustrates these cascading contracts. Developer / client Head contractor Subcontractor Subcontractor Subcontractor 13. It is common practice for payers to withhold retention money as security for the performance of the payee s obligations under the contract. Developers withhold retention money from head contractors, and head contractors withhold retention money from subcontractors. Payers often hold retention money until after a defects liability period (commonly 12 months) after the practical completion of the work. 14. It is also common practice for developers and head contractors to put retention money at risk by using it as working capital. In the event that their business fails, the retention money is seldom recovered. This ability to transfer risk gives payers an incentive to prefer withholding retention money over other ways of ensuring the performance of payees, such as accepting performance bonds from payees. Subcontractors often have limited bargaining position, finances and expertise to manage this risk or to negotiate alternative contracting arrangements. The definition of liquid assets in the Construction Contracts Amendment Act From 31 March 2017, the Construction Contracts Amendment Act 2015 (the CCAA) will require retention money withheld under commercial construction contracts to be held on trust. Clause 138 of the Bill will address a key concern of the construction sector by clarifying that the trust obligation will apply only to contracts entered into or renewed on or after 31 March This trust obligation will ensure that payers (developers and head contractors) protect retention money for the benefit of their payees (head contractors and subcontractors, respectively) rather than using it as working capital. The CCAA will therefore ensure a better allocation of risk in the construction industry. 17. The CCAA allows payers to hold retention money in the form of cash or other liquid assets that 4

6 are readily converted into cash. The intent of allowing liquid assets was to give payers flexibility to protect retention money in ways other than holding cash. 18. During 2016, MBIE received feedback about the CCAA from stakeholders including contractors, subcontractors, banks, accounting firms, legal firms and insurers. Having undertaken consultation relating to the term liquid assets, it has emerged that a conservative interpretation of liquid assets would limit the definition to cash and cash equivalents. This was not the original policy intent. In practice, most payers would need to hold any retention money in the form of cash. Holding retention money in the form of cash would generally require payers to obtain additional capital. This would be expensive, and difficult for some payers. 19. In submissions to the Commerce Committee, the Registered Master Builders Association (RMBA) and Civil Contractors New Zealand (CCNZ) sought clarity about how to comply with the retention money trust obligations of the CCAA. Their concerns are outlined in the following table. Submitter Submission Registered Master Builders Association of NZ It was never the Government s intention for all retention money to be held in cash. However building companies, applying a liquid asset definition, will be required to hold retention money in the form of cash. This will: result in a doubling up of retention money being held by a head contractor in a construction contract (who, in turn, may have performance payments withheld by the Principal) introduce an impost on capital and undermine cash flows contribute to pushing up costs that will be passed down the supply chain and add to housing affordability issues in New Zealand. Civil Contractors NZ There are concerns about how the retentions regime will operate from 31 March It needs to be clear what is included in the definition of liquid assets many industry participants have been waiting for more detail. Proposed amendment to allow the use of financial instruments 20. On 12 December 2016, Cabinet agreed to officials recommending an amendment to the CCAA to clarify that payers may use financial instruments such as bonds, guarantees and insurance products to comply with the obligation to hold retention money on trust. 21. This amendment is minor and clarifies the intent of the CCAA. It would provide flexibility for payers to protect retention money in ways other than holding cash, and is therefore expected to reduce the cost of complying with the trust obligation. In addition, payees would benefit through the improved security of payment as a result of the ability to seek payment from the third party (e.g. an insurance company) who provided the financial instrument. 22. Officials recommend that the Commerce Committee: agrees that the Construction Contracts Amendment Act 2015 should be amended to clarify that financial instruments such as retention bonds, guarantees and insurance products can be used to comply with the retention trust obligation; allows MBIE officials to engage with industry participants such as banks, insurers, accounting firms and the Reserve Bank of New Zealand as necessary to obtain technical information to support the legislative drafting process. 5

7 REGULATORY SYSTEMS (COMMERCIAL MATTERS) AMENDMENT BILL PART B: CLAUSE BY CLAUSE ANALYSIS General comments Item Submitter Submission Officials comments General comments 001 ANZ Bank Support the Bill, including all of the proposed amendments to the Financial Markets Conduct Act Buddle Findlay on behalf of the New Zealand Financial Markets Association (NZFMA) 003 Chapman Tripp 004 Civil Contractors New Zealand (CCNZ) 005 Freightways 006 Institute of Directors 007 IPENZ Engineers New Zealand, ACENZ 008 New Zealand Bankers Association (NZBA) 009 New Zealand Building Industry Federation (BIF) 010 New Zealand Post Group 011 Registered Master Builders Association of New Zealand Incorporated (RMBA) Strongly support the Bill s objectives of maintaining the effectiveness and efficiency of the regulatory systems established by the Acts amended by the Bill, and generally support all of the changes to the Companies Act 1993 and the Financial Markets Conduct Act

8 Commencement Item Clause Submitter Submission Officials comments ANZ, NZFMA Commence clauses 27 and 28 on the day after the Bill receives Royal assent, not two months later. Part 1 Commerce and consumer affairs Subpart 3 Companies Act 1993 Item Clause Submitter Submission Officials comments Institute of Directors Support the clarification that an overseas director must be a director of a body corporate that is incorporated under an equivalent law in an enforcement country Chapman Tripp Support the principle behind the proposed amendment. The proposed wording in subsection 80(1B)(c) should use the same wording as subsections 79(a) and (b) rather than the wording in subsection 80(1)(b) Institute of Directors Support the amendment that an annual meeting is not required to be held if nothing is required to be done at the meeting Chapman Tripp Remove the requirement on the board of a company to resolve that it is in the interests of the company not to hold an annual meeting (clause 5(b)) ANZ, Institute of Directors Support the financial reporting changes, including that the requirements are based on the size of the group of companies as a whole rather than the size of individual companies within the group, when an annual report is not required. 206 New Staples Rodway Accept financial statements of a large overseas company to comply with generally accepted accounting practice in the overseas company s own reporting jurisdiction. Agree to commence clauses 27 and 28 the day after the Bill receives Royal assent and, subject to consultation with Parliamentary Counsel Office, include transitional provisions for existing liquidations. No change. It is preferable to retain the current wording in subsection 80(1)(b). No change. MBIE considers that a board should actively consider whether to hold an annual meeting. Disagree. S203 already provides the Registrar with discretion to accept financial statements prepared in accordance with other countries GAAP. The Registrar accepts financial statements prepared in accordance with Japanese GAAP provided they are accompanied 7

9 207 New Staples Rodway Abolish the requirement to file audited financial statements for a large overseas company which is not required to be audited in its own jurisdiction. 208 New Staples Rodway Accept financial statements to be audited by an auditor not registered in New Zealand when a large overseas company is required to be audited in its own jurisdiction Departmental submission ANZ, Chapman Tripp, NZBA, NZFMA In new subsection 209(1B), if it is not necessary to hold an annual meeting, shareholders are required to be given the annual report within 10 working days after it has been prepared. Support the clarification that netting provisions apply to trusts. 211 New NZFMA Make it clearer that subsection 310B(2) is an exception to section 310D. 212 New NZFMA Expand the exception in subsection 310B(2)(b) to include situations where the secured party consents to the netting provisions applying and the security interest is created after the netting agreement is entered into. 213 New NZFMA Amend subsection 310H(b) to be consistent with the definition of bilateral netting agreement. Make identical amendments to section 239AEN of the Companies Act, subsection 42(7)(b) of the Corporations (Investigation and Management) Act 1989 and subsection122(7)(b) of the Reserve Bank of New Zealand Act NZFMA Make it clearer that section 309 is overridden by the netting provisions. 215 NZFMA Make it clearer that section 239AEN overrides sections 239ACM to 239ACX or a deed of company arrangement. by a memorandum in English. Agree that large overseas companies with small New Zealand branches should not be subject to an audit requirement if there is no audit requirement in the home country. Agree that there is a potential issue, but it relates to s36a of the Financial Reporting Act 2013, so is out of scope. It could be considered for inclusion in a future omnibus Bill. We recommend amending the timeframe in subsection 209(1B) to 20 working days to align with the current timeframe in section 209(1). Further analysis is needed on these proposals. Officials will provide a supplementary report to the Committee in early February. We will work with PCO on any drafting changes for consideration to ensure the Committee s work on the Bill is not delayed. See item 211. See item 211. See item 211. See item

10 216 Chapman Tripp Undertake a broader review of the insolvency regime that applies to trust including the enforceability of netting arrangements on the insolvency of the underlying trust fund. This is outside the scope of the Bill. The Ministry of Justice advises that this matter is outside the scope of the Trusts Bill. In 2013, the Law Commission noted that it is desirable to look at where the law of trusts interacts with insolvency law as part of its corporate trustee review. The corporate trustee review is on the Law Commission s longer term work plan; however, there is no timeframe for commencement on its formal work programme Departmental submission Under new subsection 341(5), the Registrar is required to give public notice that it is removing from the register an overseas company that no longer exists. This is unnecessary where the Registrar has concrete evidence that the company no longer exists (for example, notification from an overseas regulator). We recommend, subject to consultation with Parliamentary Counsel, that where there is strong evidential that an overseas company no longer exists the Registrar does not have to give public notice before the company is removed from the register Chapman Tripp Allow the board to choose the time by which postal votes and proxies must be provided irrespective of the constitution No change. MBIE considers that this information should be in the constitution, and that it should only be changed through an amendment to the constitution, so all parties are aware of the timeframes and are able to participate. 9

11 Subpart 7 Financial Markets Conduct Act 2013 Item Clause Submitter Submission Officials comments ANZ Support the amendments which allow a discretionary investment management service (DIMS) to continue to be provided (subject to certain other restrictions and conditions) even where defective disclosure has been made, and requiring the service provider to provide the investor with a new disclosure statement that is not defective & 70 NZBA Generally support the changes to defective DIMS disclosure. However, NZBA says there is a degree of uncertainty as the relevant detail is yet to be prescribed, and considers that it is unclear whether the licensee or authorised body can continue to provide the service without providing a new disclosure statement if no manner has been prescribed. Partially accept. Officials recommend an amendment to make clear that the DIMS provider must provide a new disclosure statement that is not defective, in the prescribed manner, if the manner has been prescribed ANZ Support these amendments which ensure that the specified time frames for compliance refer to the balance date of the scheme rather than the balance date of the manager. 304 Chapman Tripp Disclosure by Trustees, Executors and Administrators Amend section 288 (which provides an extended time for disclosure for trustees, executors, and administrators who become substantial product holders or begin to have substantial holdings) to provide further clarity by deleting the word merely. Extend the application of section 288 so that the extended time for disclosure applies when directors and senior managers become trustees, executors and administrators and are required to disclose relevant interests in quoted financial products (the obligations in No change. The section, as drafted, is sufficiently clear. Further, merely is used in preceding sections, and removing it in this section may affect the interpretation of other sections. Further analysis on this required. Officials will provide a supplementary report on this submission to the Committee in early February. We will work with PCO on any drafting changes to ensure that the Committee s consideration of the Bill is not delayed 10

12 Subpart 6 of Part 5). 305 Chapman Tripp Exclusion for employee share schemes Amend schedule 1 of the FMC Act to reflect the recently issued FMA class exemption to allow employee share schemes to be extended to family trusts and relatives associated with an employee. Amend schedule 1 of the FMC Act to extend the exclusion for employee share schemes to recognise a new class of non-voting product created specifically for an employee share schemes (usually restricted schemes). No change. The Financial Markets Conduct Act 2013 introduced significant changes to the exclusion for employee share schemes from that which formerly applied. The Financial Markets Authority has made further changes through its exemption power. It is important to allow time for the exclusion to bed in, and review it at a later point, before making amendments. Amend the definition of specified financial products to include options for the transfer of shares, so that these are included in the exemption for employee share schemes and provide greater flexibility for companies in being able to implement these share option schemes. Amend the definition of financial product to include provision for options for the transfer of financial products by the issuer (e.g. transfer of treasury stock) to be treated as a financial product of the same type for disclosure purposes (rather than being treated as a derivative). 306 Chapman Tripp Amend section 297(2)(a) to refer to 20 trading days rather than working days, making it consistent with other references to trading days in the section. 307 Chapman Tripp Understand that the purpose of the amendments to the limited disclosure document (LDD) regime for banks and the Crown in schedule 1 is to resolve a number No change. While the section has time limits based on working days as well as trading days, it is unlikely this causes problems in practice. Officials agree that a review of the operation of the LDD regime is desirable. It will be included as part of a future work programme. 11

13 of issues with this regime, and do not have issues with the proposed amendments at a technical level. Chapman Tripp consider however, that the LDD regime as a whole has become highly complex, and that the proposed amendments should only be a stop gap, with a more fundamental restructuring of the regime to be considered as a matter of priority. Subpart 9 Friendly Societies and Credit Unions Act 1982 Item Clause Submitter Submission Officials comments Southern Cross Medical Care Society Support the changes to promote more memberfriendly voting and meeting processes. Subpart 10 Insolvency Act 2006 Item Clause Submitter Submission Officials comments NZFMA Support the clarification that netting provisions apply to trusts. 502 NZFMA Update section 256 in the same manner as recommended for section 310B of the Companies Act. See comment on item 209. Subpart 12 Takeovers Act 1993 Item Clause Submitter Submission Officials comments Institute of Directors Support giving the Takeovers Panel the function to determine expense disputes. Part 2 Communications Item Clause Submitter Submission Officials comments New Zealand Post Supports re-defining a letter using size and weight dimensions, defining courier services and excluding items delivered via courier services from the definition of a letter. Also supports exclusion of Noted 12

14 Item Clause Submitter Submission Officials comments Freightways (including subsidiaries of DX Mail, New Zealand Couriers, Post Haste Couriers, NOW Couriers, SUB60, Kiwi Express and Security Express) 703 articles to be carried by a courier service from the definition of postal articles under the Postal Services Act. Supports proposed amendments (i.e. re-defining a letter using size and weight dimensions, defining courier services and excluding items delivered via courier services or items sent electronically from the definition of a letter). Noted Part 4 Building and Housing Item Submitter Submission Officials comments 801 Civil Contractors NZ Support the proposed amendment because: It will allow time for the additional liquid assets required by the industry to be built up over time as new contracts are entered into and work is completed this gradual increase in liquid assets will be more manageable than if payers had to hold liquid assets equivalent to the full amount of the retention money they were holding as at 31 March 2017 Parties to contracts underway might have agreed to different contract provisions had they been aware of the new requirements. Noted 802 NZ Building Industry Federation Support the proposed amendment because: It resolves uncertainty and is in line with previous assurances given by government. Noted 13

15 803 Institute of Professional Engineers NZ and Association of Chartered Engineers NZ 804 NZ Bankers Association 805 Registered Master Builders Association of NZ Support the proposed amendment because: It will provide greater clarity and certainty for all involved. Contractors and consultants will be able to consider the risk involved and include the associated costs in their tenders. Support the proposed amendment. Support the proposed amendment because: Previously there had been different views about whether the new requirements would be applied retrospectively the amendment makes this very clear. Noted Noted Noted 14

16 Matters not included in the Bill Item Submitter Submission Officials comments 901 Civil Contractors NZ, NZ Building Industry Federation, Registered Master Builders Association of NZ (RMBA) In relation to the retention money provisions of the Construction Contracts Amendment Act 2015 (CCAA), submitters are seeking clarification about what, if any, regulations will be made. In particular, submitters are seeking clarification about the following matters: De minimis amount of retention money: what de minimis (i.e. trifling) amount will be set, below which the retention money provisions will not apply. RMBA advised that some of its members, particularly those who are subcontractors, were supportive of applying the trust obligation to all retention money and therefore imposing no minimum amount. RMBA advised that, equally, there were members who believe that setting a minimum amount is appropriate to exclude lower amounts of retention money from trust obligations where the administrative burden outweighed the benefit for a relatively low risk. Definition of liquid assets : What is included in the definition of liquid assets? In particular, is upstream retention money (withheld by developers from head contractors) able to be treated as a liquid asset? Methods of accounting: What types of accounting mechanisms and processes will meet the requirements of the CCAA? RMBA commented that commingling retention money with other money is likely to increase administrative costs and introduce additional complexity. MBIE considers there is no current need to make regulations under the retention money provisions of the CCAA. MBIE carried out consultation during April and May 2016 about what, if any, regulations should be made. MBIE asked the following questions: De minimis: should there be a minimum amount of retention money to which the trust obligation applies, and if so, how much? Definition of liquid assets : what, if any, methods of accounting should be included in regulations to describe liquid assets? Methods of accounting: what, if any, methods of accounting should be included in regulations to cater for situations where retention money is mixed with other money? Although the consultation originally focused on potential regulations, the feedback from stakeholders led the Government to propose the following amendments to the CCAA: the amendment in clause 138 of the Bill so that the retention money provisions will only apply to contracts entered into or renewed on or after on or after 31 March 2017 the amendment proposed in Part A of this Departmental report, to allow the use of financial instruments such as retention bonds, guarantees and insurance to comply with the trust obligation. MBIE s views on how to respond to feedback received are set out below: De minimis: MBIE considers there is no need to set a de minimis amount. In practice, the industry typically withholds retention money regardless of the amount of the payment. These amounts of retention money are not necessarily trifling, in particular for small subcontractors who are likely to have the least control over the upstream risks. Definition of liquid assets : As discussed in Part A of this Departmental Report, the intent of allowing liquid assets was to give payers flexibility to protect retention money in ways other than holding cash. The amendment proposed in Part A of this Departmental Report would provide this flexibility by allowing the use of financial instruments such as retention bonds, guarantees and insurance. 15

17 Item Submitter Submission Officials comments MBIE considers that there is no need to explicitly state whether upstream retention money can be relied on for the trust obligation. MBIE understands that, as a general rule, upstream retention money cannot be used to comply with the trust obligation. This is because upstream retention money is unlikely to be recovered in the event that a head contractor becomes insolvent, and is not usually considered to be a liquid asset. Payers considering relying on upstream retention money would be advised to seek their own legal advice about this matter. 902 Chapman Tripp 903 Chapman Tripp 904 Chapman Tripp In the Companies Act, change the test for relevant interest in sections 146 and 147 to be the same as the test in sections of the Financial Markets Conduct Act. In the Companies Act, amend section 197 so that nothing in subpart 1 or 2 applies to financial statements that are prepared under Part 7, subpart 3 of the Financial Markets Conduct Act. In the Companies Act, amend section 203(3)(d) so the existing requirements apply if the company has prepared a concise annual report but the company does not have to say whether it has prepared one. Methods of accounting for retention money: MBIE considers there is no current need to prescribe methods of accounting for retention money (additional to those prescribed in the CCAA), and no need to prescribe the form in which retention money must be reported. MBIE understands that the requirement to keep proper accounting records of retention money, and make these available, will not be too onerous, as most accounting systems are able to capture the required information. MBIE understands that some payers already report on retention money in monthly progress payment certificates. These are certificates that payers issue to payees setting out details of claims submitted, approved and paid, along with details of project variations and retention money held. Payers would be advised to seek their own accounting and legal advice about this matter. No change. It will be considered as part of a future work programme. No change. It will be considered as part of a future work programme. Agree subject to consultation with Parliamentary Counsel. 16

18 Part C: Committee information requests Use of netting agreements Every country that uses derivatives also uses netting agreements. The international body, International Swaps and Derivatives Association (ISDA), has over 850 member institutions in 66 countries. ISDA promotes sound risk management practices and processes. Netting agreements and insolvency law In 1999, the Companies Act was amended to ensure that netting agreements are enforceable if a party to a netting agreement is placed in liquidation. Countries we commonly compare ourselves to (Australia, Canada, Ireland, England and the United States) have legislative provisions to ensure that netting agreements are effective in the event of insolvency. Our framework is well regarded internationally. Sections 310A to 310O of the Companies Act set out various requirements relating to netting agreements in a liquidation. There are similar provisions for voluntary administration and personal bankruptcy (in the Insolvency Act 2006). The netting legislation provides that the netted balance is the amount which is payable to the company, or claimable in the liquidation. It overrides other provisions in the Companies Act that may otherwise cast doubt on the enforceability of a netting agreement, including the mandatory set-off provisions (section 310) and the pari passu rule (section 313). The pari passu rule provides that in an insolvency, unsecured creditors are to rank equally and if there are not enough assets to satisfy all the claims, they will each receive a pro rata share of the pool of funds. The legislation provides that amounts payable by the company in liquidation must be calculated in accordance with the terms of the netting provisions. The netted balance then represents the amount payable to the company or claimable in the liquidation. Prior to 1999, it was unclear whether the contractual rights of set-off provided under netting agreements could be relied upon if the agreement dealt with matters outside of the mandatory set-off provisions. The legislation also allows netting to occur despite the statutory pari passu provision. There was uncertainty about whether a netting agreement might breach this rule, for example, where the appointment of a liquidator triggers the termination of a netting agreement as the netting would then occur after the commencement of the liquidation. The 1999 amendments did not change the ranking of the creditor. Any net amounts owing continue to have the same ranking that they would otherwise. 17

19 Annex 1: Copy of response to letter from Regulations Review Committee. 18