Australian Credit Law Bulletin - Vol 2, No 5, September 2001

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:

Running accounts de-mystified
When is a ranch not a farm?
Trying to postpone the evil day
Can you bankrupt a debtor 10 years after judgment?
Risk-taking creditors rewarded
Draft New Zealand Privacy Code
Rights of the unemployed in New Zealand

1. Running accounts de-mystified

Sydney Appliances Pty Ltd (in liq) v Eurolinx Pty Ltd [2001] NSWSC 230 (30 March 2001)

Preferences and the running account defence are complex law and confuse many lawyers, let alone non-lawyers. Because of this, some credit managers get bulldozed into paying back money when they shouldn't. In the next 400 words we'll try to make it easy.

The liquidator of Sydney Appliances claimed that over the six months before it went into liquidation, the company paid Eurolinx $565,146.80 which was an unfair preference and should be paid back. (On the basis that it was unfair that Sydney Appliances should pay Eurolinx ahead of other creditors who missed out.)

Eurolinx tried to prove the "good faith" defence within s588FG(2) of the Corporations Law. In simple terms this is, "we didn't know they were insolvent. No reasonable person would have. Honest! So we should be allowed to keep the money."

Justice Santow concluded that "Eurolinx either did have, or should have had, suspicion of the Defendant's insolvency ... I consider it suffices to negate `good faith'."

He then looked at the "running account" defence under s588FA(3). The judgment helpfully notes that "this is a very verbose section and the concatenation of words is sometimes difficult to comprehend." To simplify: the basis for the defence is that it would be unfair to claw back money from a creditor who supplied more goods to the same value and whose debt didn't actually reduce overall. So if the creditor received $1 in payments, but supplied goods of $1, there is no unfair preference. If only 90 cents worth of goods were supplied, there is a preference of 10 cents.

The question was, could the running account defence apply to Eurolinx if the company suspected the debtor was insolvent? According to Justice Santow, the majority judgment in the leading case in this area, Airservices v Ferrier, makes it clear that the answer is "yes".

He said that knowledge of insolvency does not stop a creditor relying on the running account defence provided that the main concern was continued supply rather than getting the previous accounts paid. In Airservices the creditor had knowledge of insolvency when all 10 payments were made, but only the last was set aside. This last payment was made the day before the company folded. The creditor's only concern at that stage was to get as much of its money as it could, rather than to keep trading with the debtor.

To reiterate, the running account defence applied to Eurolinx even though its management had been found to suspect that Sydney Appliances was in trouble.

This case was drawn to our attention and summarised by David Francis, a partner at Watkins Tapsell and co-presenter of our Advanced Law of Credit Management course. See www.hattaways.com for details of upcoming seminars.

2. When is a ranch not a farm?

Lawloan Mortgages Pty Ltd v Hancock & Ors [2001] NSWSC 607 (20 July 2001)

Mr and Mrs Hancock were the directors of H Ranch Pty Ltd. Lawloan Mortgages lent the Hancocks and H Ranch $390,000, and later a further $1,070,000 for a one year period. H Ranch was described in its annual returns as a "trustee-horse riding, accom. and function centre operation". It had no animals except for 20 riding horses. The Hancocks expected to sell the property before the $1.07 million fell due. This didn’t happen.

The lenders sued for their money (a total of $1,343,431.59) and for possession of the property. The only defence was that the Farm Debt Mediation Act 1994 (NSW) applied, in which case the requisite notices had not been served by Lawloan.

For the defendants to be covered by the Act, one of them had to be a farmer which meant “solely or principally engaged in a farming operation.” On the facts, no-one was a farmer so the Act didn’t apply.

3. Trying to postpone the evil day

Miric v Braams Group Pty Ltd [2001] NSWSC 736 (20 August 2001)

A financier obtained judgments for $744,792.30 against both Mr Braams and his company, the Braams Group. The judgment debtors appealed but did not ask the Court of Appeal for a “stay” or hold on enforcement actions.

So the judgment creditor served a statutory demand on the Braams Group. Mr Braams, a director of the Braams Group, failed to apply to set aside the demand within 21 days. Because he was “in the middle of trying to deal with stressing personal financial problems ... he did not give to the demand the attention it should have been given.” He then asked the Supreme Court to adjourn or stay the winding up application to give him time to get a stay from the Court of Appeal.

The judge said that there was an “inherent power in the Court to police its own process and to stay winding up proceedings which are an abuse of process, including cases where there is a bona fide disputed debt.” However, “if a statutory demand is not challenged in the appropriate way within 21 days, then the Court should not be particularly free with exercising its inherent power.”

The company had no assets, and debts to its accountants and lawyers which it did not seem to be able to meet. Therefore, even if the finance debt was set aside, the company was still insolvent.

“...Is there then any substantial reason for postponing the evil day?” the judge asked rhetorically. “I cannot really see sufficient reason.”

Having said that, the judge then made an order to wind up the company but put a stay on the winding up order (rather than the application to wind up the company) to give the directors one last chance to apply to the Court of Appeal.

4. Can you bankrupt a debtor 10 years after judgment?

Reasonable Endeavours Pty Ltd v Dennehy [2001] FCA 188 (9 March 2001)

Reasonable Endeavours obtained a judgment against Dennehy in the Supreme Court of Victoria on 28 November 1991. Over eight years later, in 1999, the company applied for the issue of a bankruptcy notice against him for $564,303.76. The bankruptcy notice was not satisfied and so, the next step, a bankruptcy petition, was taken. Could they bankrupt the debtor so long after the judgment? If they had followed the right procedure, yes. However, in this case, the judge held that the creditor, "had not taken all steps necessary to entitle it to reap the fruits of its judgment. One of those steps was the application for leave to apply for a warrant of seizure and sale."

Section 41(3)(b) of the Bankruptcy Act 1966 prevents a creditor from issuing a bankruptcy notice if "execution of the judgment or order to which it relates has been stayed."

In Victoria (and most other States and Territories) you need the court's permission if you wish to issue a warrant of "execution" of the judgment (in Victoria a warrant of seizure and sale) after more than six years have passed. That permission had not been applied for or granted. Until the creditor got that permission, execution was stayed. The petition was therefore dismissed and costs awarded against the creditor.

5. Risk-taking creditors rewarded

State Bank of NSW & Anor. v. Brown & Ors [2001] NSWCA 223 (10 July 2001)

When Parkston Limited went into liquidation it owed about $200 million to its four main unsecured creditors. After Parkston’s parent company won a judgment against CIBC (Australia) Ltd the liquidator became aware that Parkston and a sister company of which he was also liquidator had potential multi-million dollar claims against CICB.

He approached three creditors, all of whom were owed tens of millions of dollars, asking for funding of the litigation. He did not ask SBNSW or Bankwest who were owed $27.5 million and $11 million respectively. One of creditors - Gibraltar - agreed to fund the action and provided nearly $500,000 before ceasing funding in 1996. At that point, another creditor - Tricontinental - took over and provided another $770,000 to conclude the matter. Parkston ultimately won a much smaller judgment than had been hoped for. The funding creditors’ costs came off first, leaving $1.85 million to be distributed to the creditors. Who should receive it?

The banks argued that as Gibraltar had withdrawn from the action, it shouldn’t get any advantage. They also argued that as they (the banks) had not been asked to fund (and may well have funded if they had been asked) they should get a share of the money.

The judge in the Supreme Court disagreed. All the money went to the funding creditors, Gibraltar and Tricontinental.

The NSW Court of Appeal confirmed that decision. In essence, the creditors who took the risk deserved the money. Hodgson JA, presenting the majority decision, said that the banks might have convinced the court “had they made out a case that ...they would have funded if asked, especially if the proceedings had appeared to involve little risk. However, merely to show that they would have considered such a request on its merits is marginal, at best.” He also noted that as a general rule all significant creditors should be given an opportunity to join in funding recovery claims.

6. Draft New Zealand Privacy Code

New Zealand creditors should be aware of the existence of a draft Credit Information Privacy Code. The draft code does not reflect any fixed view of the Privacy Commissioner and is not intended to be formal notification in terms of the Act. However, the draft is causing considerable criticism to those in the credit industry who are aware of its content.

The industry has operated under the Privacy Act 1993 without any significant issues. Some in the industry argue that the additional regulation is therefore unwarranted. A significant innovation in the draft is that no personal information can be collected unless it is authorised in writing by an individual (Rule 2(2)(b)). This would prohibit any kind of telephone or electronic authorisation and would change the way many businesses operate.

Under the draft, no information that relates to fraud cannot be disclosed or accessed, and information that might help better identify one individual from another (e.g. an employer or place of employment) cannot be disclosed or accessed.

7. Rights of the unemployed in New Zealand

N v E - Complaints Division (W31/99) - 26 October 1999

A case study on the New Zealand Human Rights Commission's website will be an eye-opener for some creditors. A woman complained of direct and indirect discrimination when her application to become a customer of an electricity supplier was declined because she did not have a credit card, did not own her own home, and was unemployed. The power company accepted that it should not have been basing decisions on whether the customer was employed (in clear breach of the Human Rights Act 1993). The woman was accepted as a customer and the complaint was withdrawn.

Despite this, the case was still considered by the Complaints Division, a committee of Human Rights Commissioners. Its views are not binding but do show the Commission's attitude. This committee is not a tribunal and merely considers whether the complaint has substance. If it is not settled, it may go on to a hearing at the Complaints Review Tribunal.

The company had an application scoring system of sorts. Applicants had points deducted if they could not supply a work telephone number, did not hold a credit card, rented rather than owned their home, or had income of less than $10,000 per annum. The Commissioners considered that the first of these directly discriminated against unemployed people.

The other three, they felt, indirectly discriminated against the unemployed because they are more likely to not have a credit card, to rent rather than own a home, and to have low incomes. The Complaints Division strongly urged the company to remove the criteria.

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.