Restrictions On Guarantees And Indemnities By Crown Entities


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Restrictions On Guarantees And Indemnities By Crown Entities

  2. 2. Scope <ul><li>1. What are Crown Entities? </li></ul><ul><li>2. Crown Entities giving guarantees and indemnities </li></ul><ul><li>3. Types of finance arrangements which have required consent and have been consented to </li></ul><ul><li>4. What happens when Act not followed? </li></ul><ul><li>5. Wider accountability issues </li></ul>
  3. 3. Part 1: What are Crown Entities? <ul><li>Statutory entities </li></ul><ul><li>Established under specific statutes (eg TEC and NZQA under the Education Act 1989, or DHBs under the New Zealand Public Health and Disability Act 2000) </li></ul><ul><li>Part of the Crown </li></ul><ul><li>Established by Government to undertake specific (generally operational) functions at a relative arm’s length from Government </li></ul>
  4. 4. Types of Crown Entities <ul><li>Five types: </li></ul><ul><ul><li>Statutory entities (bodies corporate established by or under an Act) – three different types </li></ul></ul><ul><ul><li>Crown entity companies (Companies Act 1993 companies wholly owned by Crown) </li></ul></ul><ul><ul><li>Crown entity subsidiaries (Companies Act companies controlled by Crown entities) </li></ul></ul><ul><ul><li>School Boards of Trustees </li></ul></ul><ul><ul><li>Tertiary education institutions (universities, polytechs, wananga) </li></ul></ul>
  5. 5. Types of Statutory Entities <ul><li>There are three types of statutory entities: </li></ul><ul><ul><li>Crown agents (must give effect to Government policy when directed by the responsible Minister) eg TEC, NZQA </li></ul></ul><ul><ul><li>Autonomous Crown entities (which must have regard to Government policy when directed by the responsible Minister) eg New Zealand On Air, New Zealand Lotteries Commission, New Zealand Film Commission </li></ul></ul><ul><ul><li>Independent Crown entities (generally independent of Government policy) eg Commerce Commission, Privacy Commissioner, Human Rights Commission </li></ul></ul>
  6. 6. Where to look <ul><li>Act establishing Crown entity in question </li></ul><ul><li>Crown Entities Act 2004 </li></ul><ul><li>Crown Entities (Financial Powers) Regulations 2005 </li></ul><ul><li>Treasury Guidelines, eg March 2006 Guidance on Financial Powers Provisions of the Crown Entities Act 2004 </li></ul>
  7. 7. Financial Powers Provisions <ul><li>The starting point is that certain types of transactions and/or powers may not be exercised, except with certain approvals or exemptions in place. These include opening bank accounts, acquisition of securities, borrowing, giving of guarantees and indemnities and the use of derivatives (see sections 159-164) </li></ul><ul><li>In essence, Crown Entities Act and the 2005 Regulations have standardised financial powers provisions for Crown Entities. Previously found in a wide variety of establishment statutes. </li></ul>
  8. 8. Part 2: Guarantees / Indemnities <ul><li>Section 163 </li></ul><ul><li>Crown entity must not, with or without security, guarantee or indemnify another person </li></ul><ul><li>But lawful if certain approvals or exemptions are in place (ss 160 and 163) </li></ul><ul><li>Carve out if the other person is an employee, etc, of the Crown entity being indemnified in relation to any claim or proceeding under section 122 of the Act (an excluded act or omission claim) or section 162 of the Companies Act or the entity’s natural person powers or other powers in the entity’s Act </li></ul><ul><li>Also, does not apply to any guarantee or indemnity that is implied at law </li></ul><ul><li>Exempted Crown entities include ACC, Public Trust, CRIs and TVNZ </li></ul>
  9. 9. Why the Prohibitions and Statutory Restrictions? <ul><li>Crown very sensitive to risk and contingent liability. Does not want to be exposed without thoroughly understanding transaction </li></ul><ul><li>Fiscal prudence </li></ul><ul><li>Also note obligation of Crown entity to Board (collective duty) to ensure that entity operates in a financially responsible manner: </li></ul><ul><ul><li>prudently manages its assets and liabilities </li></ul></ul><ul><ul><li>Endeavours to ensure its long-term financial viability and that it acts as a successful going concern. </li></ul></ul><ul><li>(Section 51) </li></ul>
  10. 10. Crown Entities (Financial Powers) Regulations 2005 <ul><li>Detail around the financial powers provisions in the Crown Entities Act. </li></ul><ul><li>Sets out a range of permitted guarantees and indemnities: </li></ul><ul><ul><li>guarantee that is limited to a covenant perform personally another entity’s non-monetary covenant to perform </li></ul></ul><ul><ul><li>indemnity relating to, and contained in, a loan agreement lawfully entered into by the Crown entity as a borrower </li></ul></ul><ul><ul><li>a contract to lease real property </li></ul></ul><ul><ul><li>a contract to settle litigation against a Crown entity </li></ul></ul><ul><ul><li>a contract of bailment </li></ul></ul><ul><ul><li>a contract of insurance </li></ul></ul><ul><ul><li>a contract for the sale and purchase of goods </li></ul></ul><ul><ul><li>a contract for the procurement of services </li></ul></ul><ul><ul><li>a contract for the purchase of an intangible </li></ul></ul>
  11. 11. Part 3: Types of finance arrangements which have been approved by responsible Ministers under section 160(1)(b) <ul><li>NZ On Air – to acquire shares by way of entering into income sharing arrangements as part of its funding of the producers </li></ul><ul><li>Crown Health Financing Agency – to enter into foreign exchange and interest rate derivative transactions, subject to conditions </li></ul><ul><li>New Zealand Film Commission – to borrow by way of overdraft for no longer than five working days </li></ul><ul><li>Any District Health Board – to enter into finance leases from sources other than, and including, the Crown </li></ul>
  12. 12. Applying for an approval <ul><li>Apply to responsible monitoring Department </li></ul><ul><li>But realistically, all routes lead to Treasury. They will review whether it is prudent or whether the outcome can be achieved another way </li></ul><ul><li>Low appetite for risk – not lender’s problem, but Crown entity’s </li></ul>
  13. 13. Treasury <ul><li>Need to ensure that you look at the relevant Treasury guidelines, including the guidelines on the Crown Entities (Financial Powers) Regulations 2005 </li></ul><ul><li>Again, a helpful level of detail </li></ul>
  14. 14. Part 4: What happens if not: <ul><li>Authorised by Crown Entities Act </li></ul><ul><li>Authorised by Regulations </li></ul><ul><li>Authorised by responsible Ministers? </li></ul><ul><li>Transaction likely to be ultra vires </li></ul><ul><li>Is it still enforceable? </li></ul><ul><li>It is an invalid act if contrary to, or outside the authority of any Act, including the Crown Entities Act (section 19) </li></ul>
  15. 15. What happens if not (continued): <ul><li>However, some natural person acts are protected (section 20). Statutory indoor management law, ie a third party dealing with a Crown entity, may enforce a transaction unless that third party had, or ought reasonably to have had, knowledge of the prohibition on so acting </li></ul><ul><li>Section 20 is very narrow and a major lender, etc, dealing with a Crown entity will find it difficult to argue this </li></ul><ul><li>In reality, ultra vires actions can be tidied up. Lenders, etc, will not simply be left with a claim in unjust enrichment. </li></ul><ul><li>It is possible to tidy up ultra vires actions after the event, either through an Appropriations Act (of which there are several each year) or through simply securing the relevant consent of the responsible Ministers (again, this happens ex post facto quite frequently) eg NZQA and finance leases for photocopiers </li></ul>
  16. 16. Part 5: Wider Accountability Issues <ul><li>Minister </li></ul><ul><li>Auditor-General </li></ul><ul><li>Parliament (Select Committees) </li></ul><ul><li>SSC </li></ul><ul><li>OIA / Ombudsmen </li></ul><ul><li>Media (Public) </li></ul>