Opes conducted an active margin lending business which operated in a number of different ways. An integral part of this business was obtaining securities in listed companies from clients who would, it appears, either be categorised as lenders to Opes, or borrowers, depending upon whether Opes provided cash to the clients or purchased additional securities for the clients.

Documentation

There has been a flurry of litigation since the appointment of receivers to Opes by ANZ Banking Group Ltd which has focused on the form of the documentation entered into by Opes clients and the representations made by Opes to their clients.

The major issue that has been identified concerns what rights are retained by clients of Opes who have provided securities to Opes in the form of shares or options in listed companies under Opes' standard form margin loan documentation.

Many Opes clients may have been of the view that they retained legal and beneficial ownership of the shares and options provided by way of security to Opes so that at any time they could, if not in default, repay their loans and retrieve their securities.

It appears ANZ take a different view and contend that as lenders to Opes who hold a charge over Opes' assets and undertakings, they have obtained clear and unencumbered title to all of the shares and options provided by clients to Opes under the margin lending agreements.

The court cases that have been initiated by numerous Opes' clients will test the proper construction to be placed upon the documentation used by Opes and the rights of clients.

Risks of Margin Lending

There are different forms of margin lending documentation in use in Australia. There is the form used by Opes, which casts doubt on whether clients retain any legal or beneficial ownership at all in the securities pledged to Opes. Under this documentation, legal and beneficial ownership of the clients' securities may have been transferred to Opes (and by Opes, in turn, to third parties) and there is a clear risk that any rights they have in this insolvency situation may be contractual only, in which case any secured creditor of Opes will have a superior claim to both the securities provided to Opes by those clients and any resulting proceeds of sale from those securities.

The other form of documentation involves a more traditional form of borrowing and mortgage of securities by a client, so that title to the securities provided in relation to a margin loan remain at all times with the client unless, of course, default occurs by that client under the margin lending facility.

We strongly recommended that if you have margin lending facilities you should investigate the precise nature of these facilities. If in doubt, we suggest you seek advice at the earliest opportunity.

Opes appears to have engaged in the practice of providing the securities pledged to it by clients, in turn, to third parties such as hedge funds. Clients may also want to inquire with any margin lenders with whom they have facilities as to the precise nature of their business practices. The passing of title of clients' securities to an infinite number of third parties puts at risk the claims of the clients to have those securities returned, particularly where insolvency takes place and the client must compete with claims by third parties who may have taken ownership of the securities unaware of the clients' interests.

Recommendations

Any clients affected by the Opes collapse should examine their own margin lending documentation with Opes and consider taking advice as to their position. As a secured creditor, the conduct of ANZ in continuing to sell any securities held by them received from Opes places all clients who had securities with Opes at risk.

Clients who have margin lending facilities with other lenders are well advised to examine the precise nature of their facility and determine whether ownership of their securities pledged to the lenders is at risk if the lender were to become insolvent.

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