Australian Credit Law Bulletin - Vol 1, No 1, July 2000

A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: aus-bulletin-join@mailman.hattaways.com

Plain language disclaimer:
This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.

In this issue:

Brothers' guarantees may be like those of wives (very hard to enforce)
Yessss!!! Court accepts reality on the use of statutory demands
Getting a fair price in a mortgagee sale
Okay to fund liquidators' legal actions
One from the crazy numbers department
Bankrupt's right to travel overseas
Bankruptcies decrease

1. Brothers' guarantees may be like those of wives (very hard to enforce)

Equuscorp Pty Ltd v Worts [2000] VSC 179 (10 May 2000)

Alan Worts' company had borrowed from Equus. Alan and his brother Syd guaranteed the loan. When Equus came to enforce the guarantee, one of the defences Syd raised was along the lines of that in Garcia.

In Garcia the court decided it would be unconscionable to allow the guarantee to be enforced against Mrs Garcia when she had merely trusted her husband and signed where he told her to sign. Would this defence apply where the guarantor and debtor were siblings rather than spouses?

The Judge didn't rule out the possibility of the defence applying, but found that it couldn't apply in this case on the facts. Syd was told everything directly by the lender (it was not left to Alan to explain it to him) and Syd was also experienced in business and understood what he was signing.

2. Yessss!!! Court accepts reality on the use of statutory demands

Switz Pty Ltd v Glowbind Pty Ltd, Glowbind Pty Ltd v Switz Pty Ltd [2000] NSWCA 37 (10 March 2000)

Switz served a statutory demand the first step in the process of winding up a company on Glowbind. Glowbind served an application to set aside the statutory demand at the Plaintiffs usual place of business not at the Plaintiff's solicitor's office as specified in the demand, nor at the company's registered office. Because of this, its attempt to set aside the statutory demand failed.

Failure to pay on a statutory demand creates a presumption of insolvency. At the winding up application stage, Glowbind again tried to dispute the debt, but found that the grounds for disputing at this point are very limited and the argument failed.

The really interesting thing is the judge's comments on the purpose of the statutory demand process. The courts have always said that the process is not to be used for debt collection, which was something of a nonsense. Except in very rare cases, there's no other reason for using it. NSW Chief Justice Spigelman recognised this reality. He said, "The purpose is to minimise the transaction costs which the law imposes on creditors seeking to enforce debts. The threat of winding up is often effective to ensure that a recalcitrant debtor does not seek to exploit the delays and costs that legal disputation may impose on commercial transactions. That threat is rendered ineffective to the degree to which such delays and costs are permitted to intrude into the statutory procedure itself."

3. Getting a fair price in a mortgagee sale

Nilrem Nominees Pty Ltd & Ors v Karaley Pty Ltd [2000] WASC 82 (31 March 2000)

The plaintiffs had loaned $386,000 to Karaley under a mortgage. When they weren't repaid they sold the property, for $270,000. They then sued for the shortfall. Nilrem had tried to auction the property but ultimately sold it privately, after advertising seven times in the Sunday Times and in the magazine Homebuyer between February and September 1999. They didn't obtain a valuation.

A mortgagee has to try to obtain the best price reasonably available in all the circumstances of the case. Karaley claimed that Nilrem did not take all reasonable precautions to obtain the true market value.

The Master said that he would allow the plaintiffs to avoid liability under a clause of the mortgage, which provides that "the mortgagee is not liable for any loss caused by the exercise, attempted exercise, failure to exercise or delay in exercising any mortgagee's power, whether by reason of negligence or otherwise." If he's correct, this looks like a good clause to have in a mortgage.

Perhaps more interesting are his views on the sale process. Creditors be wary. This is a complex area, fraught with difficulties.

The Master considered that not obtaining a valuation is an indication of lack of prudence, particularly when the property was not sold by public auction. The number of advertisements and the long period of advertising made up for the lack of a valuation. A lack of a valuation would be most significant if a property was sold for a low price after an inadequately advertised auction or private sale.

The advertisement in the Homebuyer was inadequate, as the property was a large vacant lot, while the magazine is directed at homebuyers. The other seven advertisements in the Sunday Times were adequate in number and content and the Sunday Times was a suitable publication for them. It was okay to say in some of the advertisements that it was a mortgagee sale. While it could depress the price it could equally stimulate interest and produce competitive bids, especially if such an advert was place after a long period of unsuccessful advertising. The plaintiffs were justified in rejecting a high offer which hinged on them buying some properties off the buyer.

4. Okay to fund liquidators' legal actions

Elfic Limited (ACN 007 606 206) & Ors v Peter Ivan Macks & Ors and GIO Insurance Limited (ACN 052 179 647) and The Commonwealth Bank of Australia Ltd

This is a case which deals with the right of a liquidator to use outside "investors" to fund legal action which might end up benefiting creditors. Essentially this is an example of what is called "maintenance and champerty" selling the right to conduct litigation. Australian law generally prohibits this practice, more or less on the grounds that we don't want to end up like the USA where ridiculous claims, funded by third parties, are sometimes taken against rich defendants in the hope of striking the jackpot. However, there is an important statutory exception for liquidators which applied in this case.

With tens of millions of dollars at stake, 10 plaintiffs and 68 desperate defendants involved, this case doesn't make for light reading. The Judge noted that the need for a liquidator to be able to conduct litigation for the benefit of the winding up may outweigh the public policy considerations which might otherwise make the arrangement void as champertous. "Of course," he said, "the courts would prevent trafficking or speculating in causes of action, but this is not such a case."

5. One from the crazy numbers department

Somes v Duke Group Ltd [2000] FCA 248 (13 March 2000)

Somes was served with a bankruptcy notice for more than $182,000,000 (which allowed for payments or credits of $6,825,000). He was perturbed that no allowance was made for the payments totalling $6,825,000 made by his co-directors in the failed company. Because of this 3.75% error, the bankruptcy notice was set aside.

6. Bankrupt's right to travel overseas

Mayger v Prentice, in the matter of Mayger [2000] FCA 99 (9 February 2000)

Mayger, a bankrupt, obtained a passport, and applied to the Trustee to travel overseas. The Trustee said no, and Mayger applied to the Federal Court for a review of that decision. The Trustee took the view that the passport should be surrendered (as is required of all bankrupts), and then he would consider the normal reasons for approval business and compassionate reasons.

New information came out at the hearing and the question was sent back to the Trustee for reconsideration. The judge said that if the bankrupt is not being charged with any criminal offence, the Trustee's discretion is not to be used as a further punishment. He noted that the bankrupt should've sought the Trustee's consent to getting a passport before doing so, and so the Trustees' requirement that it be surrendered was not unreasonable. He said that business and compassionate grounds would be just two of the grounds for approving and that if there is no pressing reason for the bankrupt to be in touch with the trustee over the period of the overseas travel, then that should be taken into account.

7. Bankruptcies decrease

The number of individual bankruptcies in the first quarter this year were at their lowest levels since 1995, according to Australia's leading source of credit information Credit Advantage.

There were 4,552 bankruptcies recorded on the Credit Advantage database for the period ending March 2000 - the lowest figure since the fourth quarter in 1995 when there were 4,382 new individual bankrupts registered.

The latest figures move away from a four-year trend of an increase in bankruptcies, with the number of new bankruptcies peaking at 6,928 in the first quarter last year. There were a total of 25,836 bankruptcies in 1999, compared with 16,609 in 1995.

The Credit Advantage figures show a continuation in the rise of the proportionate number of female bankruptcies.

Female bankruptcies represented almost 45% of the total number of bankrupts last quarter, compared to 40% for the first quarter in 1995 and almost 43% for the three-month period ending March 1999.

Although the 40 and over age group has continued to record the highest number of bankruptcies over the last five years, the under 30 and 30-39 age groups have both increased their proportion of total bankruptcies by 7% since 1995.

The under 30 age group constituted for 18% of all total bankruptcies in the first quarter of 1995, 25% came from the 30-39 group and approximately 36% from the over 40 category.

Compare that to the peak quarter over the last five years January-March 1999 and 26% of total bankrupts were aged under 30, 32% were aged between 30-39 and 38% were from the over 40 age group.

This last quarter, 25% of all total bankrupts were under 30, 32% were aged between 30-39 and approximately 40% represented the over 40 age category.

David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
David Francis

Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.

Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
Alan Liddell

There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.