A recent decision of the Supreme Court of New South Wales has confirmed that rehypothecation rights granted by a borrower to a lender under a secured margin lending agreement are not of themselves an impermissible clog on the borrower's equity of redemption. However, in certain circumstances it may be unconscientious to rely on them.
Participants and advisers in the prime brokerage industry are likely to be pleased with the decision of the Supreme Court. It clarifies that rights of rehypothecation, which are commonly found in both Australian and international prime brokerage agreements, are not of themselves unenforceable under Australian law. However, the decision does serve as a useful reminder that disclosure of the presence and operation of these kinds of provisions is important and especially so when dealing with retail clients.
The case is likely to be of even greater importance for international counsel as the bankruptcy of Lehman Brothers...