Australian Credit Law Bulletin - Vol 8, No 1, January 2007
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:
- Was the sale of the failing business unfair? Director tries to set aside DOCA
A tale of the death throes of one business, and the rising of a new one from the ashes - Does borrowing to discharge a bankruptcy fall under the Consumer Credit Code?
Ordinarily, yes, but is this an exception? - Past president of Company Directors Association disqualified for insolvent trading
$3.5 million in debt incurred - judge finds "elements of unconscionability and moral turpitude" - Australian Law Reform Commission privacy review
Your chance to have your say about privacy
1. Was the sale of the failing business unfair? Director tries to set aside DOCA
1. Was the sale of the failing business unfair? Director tries to set aside DOCA
Mr Vijay is a Malaysian lawyer and businessman who was granted permanent residency in Australia as a business migrant. ACIB Accumulus Pty Ltd was a company owned by the Siebel family, Michael and Dianne. Their son Leon was chief operating officer and the business was described as "his baby". ACIB, trading as "Global Rags", sold men's and ladies' apparel through eleven shops in Victoria and New South Wales. In July 2003, to meet Australian immigration requirements, Vijay invested in ACIB.
He was appointed a director of ACIB. He put in $1.25 million, $100,000 as cash contribution, $150,000 as a loan, and $1 million as securities for other borrowing. (Ultimately, the company borrowed on $540,000 from Firm Finance on this security.) The money was to be used to expand the chain to 40 stores, strengthen its own clothing brand, commence exporting to New Zealand, Malaysia, and Britain, and seek a joint venture partner to commence franchising the chain.
Vijay also entered a put and call option agreement with Michael and Dianne Siebel, his fellow directors. This gave him the option, at any time after 28 July 2004, to require them to buy all of his shares for $100,000.
The directors fell out and in August 2004 Vijay served notice on Michael and Dianne Siebel exercising his option requiring them to repay his loan to the company, purchase his shares, and release the security which he had provided for the $540,000 loan. They didn't immediately do so.
In October 2004, a directors' meeting was informed that the company was insolvent. Liabilities exceeded assets by somewhere between $680,000 and $880,000, depending on how old stock was valued. Vijay raised concerns about insolvent trading - the fact that the directors might be held liable for debts incurred when they knew or should have known the business was insolvent.
It was agreed that the best option was to sell the business. The meeting was adjourned to Friday, 12 November. There was some dispute about what happened but the judge accepted that when the meeting resumed, Leon Siebel said that he was making a formal offer to purchase the business. The matter was put aside to be dealt with after all other business. Vijay proposed that the company be placed into voluntary administration. This puts an administrator - an insolvency practitioner - in charge of the company to see if the business is salvageable. It also releases directors from the risk of further insolvent trading.
However, the Siebels voted against the proposal and Vijay's nominee as administrator. They said that they had arranged a meeting with another administrator, Andrew Yeo, for the following Monday. Vijay apparently said, "You do whatever you like then. I don't want to be involved with you lot anymore." He left the meeting. Michael and Dianne Siebel then voted on and agreed to Leon Siebel's proposal.
Early on Monday morning, before ACIB was put into administration, a sale agreement was signed by Michael and Dianne Siebel on behalf of ACIB and Leon Siebel on behalf of his new company, Brands Direct (Aust) Pty Ltd. His company paid $30,000 and assumed liability for the majority of trade creditors, employee entitlements and superannuation obligations. It was a condition of the sale that the company appoint an administrator and that the administrator ratify the agreement within 14 days.
The sale agreement omitted $2.7 million worth of debt. Of this, $1.7 million was related party loans, (mostly money put in by the Siebels, but also $150,000 put in by Vijay), nearly $800,000 loaned by Westpac, and $220,000 of unsecured creditors, ($209,000 of which was tax owed to the ATO).
Messrs Yeo and Rambaldi were appointed administrators that day. Yeo told Vijay he had every opportunity to provide the administrators with grounds to overturn the sale and, if so, he could either purchase the business for himself or identify a party willing to purchase the business for a price greater than that paid by Leon Siebel. Vijay left Australia that day and did not return until 9 December 2004.
Yeo concluded that while the sale may have been under value by about $35,000, the chances of a better result by voiding the sale and either trading on or selling to another buyer were slim. The matter was further complicated by the fact that he couldn't advertise the business for sale because the assets were nominally owned by Brand Direct, which would have applied for an injunction to stop such advertising.
Yeo ratified the Sale Agreement but reserved his right to apply to the Court to void the transaction under s.588FB (uncommercial transactions) of the Corporations Act 2001, if the creditors resolved to wind up the Company.
Under a proposed Deed of Company Arrangement (DOCA), the Siebels promised to pay Westpac in full, and contribute $150,000 to paying other creditors. The deed was approved by a majority of creditors by number (16 - 2) and by value ($822,153.92 - $407,231.22). The ATO and Vijay voted against. Firm Finance, the company which had lent $540,000 and whose debt Vijay had secured, was not represented at the meeting.
Vijay applied to set aside the DOCA on various grounds. The assets were sold to a related party after a minimal attempt to advertise the business for sale; there was no independent ascertainment of the value or price of the business; the sale was authorised and then contracted after Mr Vijay left the directors' meeting and without his knowledge or approval. The assets passed out of ACIB's control, leaving behind selected and substantial liabilities, thereby probably benefiting those selected trade creditors (and employees) who were paid by Brands Direct.
However, the judge concluded that it didn't prejudice the interests of Vijay or the ATO to an unreasonable extent (Corporations Act 2001 - section 600A), nor was it unfairly discriminatory (section 445D). "It was most improbable that the Company could have found any other buyer or that the administrators could have achieved a better financial result or different terms for the Company or the creditors... The business was unlikely to have been saleable to anyone other than Leon Siebel."
The evidence of the administrator, Yeo, is also interesting. The sale to Leon Siebel assisted him because it meant that creditors weren't seizing their goods back. Yeo said it made a big difference to his attitude to overturning the sale. "One of the biggest issues... particularly in the rag trade, is ... the first thing I am confronted with is a long line of lorries out the front of all my shops from the creditors asking for their stock back under retention of title clauses ... That obviously greatly impacts on my ability to market and sell a business."
The fact that Vijay didn't do anything to stop the sale agreement during the course of the administration was also an important factor in the judge's eyes. "He stood by while the administrators deliberated and the agreement was ratified, and in circumstances where it could be foreseen that employees were about to be and being transferred, trade creditors were to be paid and leases were to be assigned."
He said, "In the end the commercial reality is that, despite the attitude of the plaintiff (and of the ATO ...), the creditors are far better off under the DOCA than they would be in a liquidation. For that reason, I would, if necessary validate the DOCA pursuant to s.447A of
2. Does borrowing to discharge a bankruptcy fall under the Consumer Credit Code?
First Mortgage Managed Investments Ltd v Oberlechner [2006] NSWSC 1397 (19 December 2006)
Alfred Oberlechner wrote software for the Commonwealth Bank. He bought a number of investment properties. When he was made redundant he became depressed and as a result, hasn't worked since 2000. His mortgage payments on the properties went unpaid. In August 2003, he was made bankrupt.
However, at the time of the bankruptcy, he was solvent. The total value of his realisable assets exceeded his liabilities. The value of his investment properties was greater than the money owed on the mortgages.
He tried to refinance. In May 2004, he borrowed $615,000 from First Mortgage Managed Investments Ltd on the security of new mortgages of two of his properties. Oberlechner signed declarations that he had received independent legal advice before signing the documents. The documents included a declaration that the credit provider was providing the credit "wholly or predominantly for business or investment purposes (or for both purposes)".
The loans from First Mortgage and his other refinancing allowed him to discharge the bankruptcy. However, he still had no income so he soon defaulted on the loan repayments to First Mortgage.
On 21 September 2005 orders were made by the NSW Supreme Court, by consent (i.e. with the agreement of both Oberlechner and First Mortgage). This gave First Mortgage judgment for possession of 8 Elizabeth St., Tura Beach, and permission to issue a writ of possession. However, both the judgment and the writ were stayed for 19 days to give Oberlechner time to try to refinance. From that point, Oberlechner obtained various orders continuing and extending the stay. A stay was still in place as at December 2006, over 14 months later.
Oberlechner continued to try to fight First Mortgage's attempts to gain possession of the properties. One of his arguments was that the Consumer Credit Code applied. If this was so, the various requirements of the Code were unlikely to have been followed, given that First Mortgage believed they were dealing with a borrower for business or investment purposes.
The onus lies on the lender to show that the Code doesn't apply. The judge said that "ordinarily, the purpose of a loan provided to discharge a person's bankruptcy would be personal, domestic or household. Such a loan would relate to the status of the person ... , to the person's characteristics and to the circumstances of her or his domestic or household situation."
However, he said that here, the circumstances were exceptional because Oberlechner was actually solvent. His bankruptcy would have been discharged anyway if the trustee in bankruptcy had been permitted to sell his properties. He concluded that Oberlechner refinanced, not "wholly or predominantly" to discharge the bankruptcy, but to ensure that he could keep the investment properties.
He therefore concluded that the mortgage was not wholly or predominantly for personal, domestic or household purposes and that the Code did not apply. This meant that he didn't have to deal with the effect of the declarations of purpose made by Oberlechner.
Any and every stay preventing First Mortgage from proceeding was set aside from 8 January.
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3. Past president of Company Directors Association disqualified for insolvent trading
ASIC v Edwards [2006] NSWSC 376 (5 May 2006)
Malcolm Leslie Edwards was a businessman and director of Murray River Pty Limited. He was a past director and national vice-president of the Australian Institute of Company Directors and federal president of the Australian council of the Company Directors Association.
The NSW Supreme Court found, in an earlier decision, (Australian Securities and Investments Commission v Edwards (2005) 220 ALR 148) that at various times during 1999, Murray River Pty Limited was insolvent, and that there were reasonable grounds for suspecting that it was insolvent, and Edwards knew this. He breached section 588G(2) of the Corporations Act 2001, in that he failed to prevent Murray River incurring debts of approximately $3.6 million to Colin Joss & Co Pty Limited. He allowed building work to start and to continue. He led his fellow-directors to believe that funding was "within grasp (so that it was always just a matter of a short time until all would be well)."
The Australian Securities and Investment Commission asked the court to disqualify Edwards from being a director for 12 years.
The judge found that "[h]is conduct was morally wrong." It benefited the interests of the company he represented and his family company which was a shareholder in Murray River. "There were elements of unconscionability and moral turpitude in what the defendant allowed to happen. He did not act honestly."
The judge said, "I am not satisfied that the defendant is remorseful or contrite about having breached the law and caused financial loss. ... In his cross-examination, he is careful to say, in effect, that he accepts the decision of the court but does not agree with it; ... The concessions on the defendant's part do not represent contrition in the relevant sense. He does not acknowledge his wrongdoing."
He also noted that "liquidators and receivers, in three diverse situations, [made] formal submissions to an enforcement authority calling into question the defendant's standards of corporate behaviour and his probity; also that a judge of this court made findings in 1992 critical of his commercial judgment and the standard of his corporate behaviour."
He banned Edwards from managing corporations for 10 years. He said, "I am conscious of the fact that disqualification for that period is likely to put an end to the defendant's commercial career. That, however, is an inevitable by-product of his conduct."
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4. Australian Law Reform Commission privacy review
Issues Paper 31 Review of Privacy
Issues Paper 32 Review of Privacy: Credit Reporting Provisions Reviewing Australia's Privacy Laws: Is Privacy Passe?
case in our January New Zealand Credit Law Bulletin which dealt with a New Zealand radio station which advertised on radio to find the person behind an extremely dodgy company which owed it money for advertising. The individual concerned brought an action against the radio station under the New Zealand Privacy Act.)
