Australian Credit Law Bulletin - Vol 8, No 3, March 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:
- Why were you paid $2.1 million?
Mareva injunction against company owned someone who can't remember "that sort of detail" - If your old debt wasn't included in a bankruptcy, are you bound by a vote to annul that bankruptcy?
Creditor tries to bankrupt the debtor again - A comedy of errors?
How many mistakes can laymen and lawyers make in one debt collection matter? - When an ex-lawyer gets out of prison, what does he do for a job?
Set up a debt collection business!
1. Why were you paid $2.1 million?
Elderslie Finance Corporation Limited v Newpage Pty Limited [2007] FCA 61 (6 February 2007)
n June and September 2006, Elderslie Finance Corporation Limited lent $2.6 million to Newpage Pty Ltd. Newpage was apparently to advance the money to a company called Penthouse Concepts. On 29 December 2006, Elderslie appointed Mr Hamilton as receiver and manager of Newpage Pty Ltd. A receiver and manager has the power to run the company and collect the money that is owed to the secured creditor (here, Elderslie). At that point Elderslie was owed $3 million plus interest. Hamilton found that Newpage had $1949 in its bank account.
On 2 January, Elderslie applied to the court to have Newpage wound up. Mr Hamilton was appointed as provisional liquidator on 5 January. On 25 January, Newpage was wound up and Hamilton's role changed from provisional liquidator to liquidator.
Hamilton had been trying, since 9 January, to work out why $2.137,000 of the money advanced to Newpage had immediately been transferred to the bank account of Casino Busters International. He rang Mr Roumald Parson (sometimes referred to as Mr Roumald Parsons), the sole director, shareholder and company secretary of both Casino Busters and Penthouse Concepts. "Mr Parson's response was belligerent and replete with expletives. His attitude was unco-operative... [He said] that he dealt with sums of money in the millions 'every day' and couldn't remember 'that sort of detail'. Over another two conversations in January, he still apparently couldn't remember or find out why the money was transferred. He said that over the past 10 years Mr Yii, (the director of Newpage), and his other companies, had paid him over $100 million, so he couldn't recall specific transactions.
Once appointed liquidator, Hamilton immediately applied for an order that money held in Casino Busters' bank account be frozen, while this matter was sorted out. This type of asset preservation order is often known as a Mareva injunction. It is made "ex parte", meaning that the other side isn't present to argue its case. For this reason, courts are very cautious about granting such orders. However, here, there was a good case made that the payment by Newpage to Casino Busters was a voidable transaction under s.588FE of the Corporations Act - money which could be clawed back. The law tries to prevent insolvent businesses from giving their assets away, rather than paying their creditors.
The judge froze the bank account of Casino Busters (in respect of $2,137,000) and required Mr Parson to explain why Casino Busters received the payments.
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2. If your old debt wasn't included in a bankruptcy, are you bound by a vote to annul that bankruptcy?
Nicodemus v Ductmaster Pty Ltd [2006] FMCA 1669 (15 November 2006)
Rico Nicodemus is an air-conditioning engineer. Between 1998 and 2002 he was in partnership with Scottish Dravo Refrigeration and Air-Conditioning Pty Ltd in a business called Seven Star Air-Conditioning. He was a director, for a year, in Scottish Dravo and guaranteed payment by Scottish Dravo to various suppliers. Ductmaster Pty Ltd was one supplier for whom Nicodemus signed a guarantee.
In 2002, he left the business and dissolved the partnership. Ductmaster sued Scottish Dravo and Nicodemus in the NSW Local Court for $10,950.16 in September 2002. Judgment was entered. Apparently, the documents were served by post at an address that Nicodemus had left over a year before. Nicodemus later claimed he never knew this debt existed.
However, other creditors to whom he had given guarantees had more up-to-date address details it seems, and in April 2003, Nicodemus went bankrupt. He gave his trustee in bankruptcy a list of creditors. Ductmaster wasn't included because he didn't know of their debt.
In 2004, Nicodemus offered his creditors a compromise under s.73 Bankruptcy Act 1966. He owed $189,676.37, (excluding the Ductmaster debt). He offered $80,000 in full settlement, including trustees costs. His creditors voted to accept, the money was paid, and his bankruptcy was annulled.
In February 2006, Ductmaster issued a Bankruptcy Notice - a step on the path to making someone bankrupt – against Nicodemus. The notice was based on the 2002 judgment. Nicodemus applied to set aside the Bankruptcy Notice on the grounds that the debt had been discharged by the s.73 composition which bound all his creditors who had provable debts at that date. Ductmaster's debt was a provable debt at that time.
Even though it was unaware of Nicodemus' bankruptcy, did not vote on the compromise arrangement, and received no payout under that compromise, Ductmaster was bound by it. It had the option of applying to set aside the compromise (which its lawyers said it would not do), but it could no longer pursue a pre-bankruptcy debt. The Bankruptcy Notice was set aside.
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3. A comedy of errors?
JARGON PTY LTD -v- GOOD EARTH GARDEN PRODUCTS PTY LTD [2006] WASC 282 (15 December 2006)
Good Earth Garden Products Pty Ltd supplied Jargon Pty Ltd with goods on credit terms. In May 2006, Good Earth sued Jargon in the WA Magistrates Court for $44,403.73 plus interest for goods supplied between February 2004 and March 2006.
Jargon's director, Mr Van Straalen, lodged a notice of intention to defend. That notice, which is in a standard form, says, among other things, that within 14 days of receipt of the notice the claimant (Good Earth) must file and serve a statement of claim, and within 14 days of receipt of the statement of claim the defendant (Jargon) must file and serve a statement of defence. However, Van Straalen said he wasn't aware of the time limit. When he later asked the Court how long he had in which to file his defence, he was told judgment had since been entered against him by default. Judgment was for $55,802.55.
Van Straalen instructed solicitors and applied to have the judgment set aside. Among other things, he disputed the amount (saying Jargon had paid cash-on-delivery since September 2004), and disputed the right to charge interest (saying he had never seen terms of trade from Good Earth which might allow it). However, at the hearing to set aside the judgment, there was no appearance for Jargon and the matter was dismissed.
A second application was made. At that hearing, in September 2006, the judge said he would set the judgment aside, provided Jargon paid $44,000 into court by 3 October 2006. This didn't happen so the application was dismissed.
In August 2006, Good Earth served statutory demand on Jargon. In the statutory demand, Good Earth said that "the amount of $50,000" is owing to it by Jargon. The debt is described in the schedule to the statutory demand as "Magistrates Court Judgment obtained on 19.07.06 $50,000". In fact, judgment was for $55,802.55. Good Earth's solicitor apparently became confused over the fact that the Magistrates Court has jurisdiction only up to $50,000. He or she therefore decided to reduce the amount demanded. However, the $50,000 limit only applies to the principle sum (here, $44,403.73). According to the judge, the fact that interest and costs took the judgment over $50,000 was not a problem.
Jargon applied to set aside the judgment on three grounds. First, Good Earth's address for service on the statutory demand - their solicitors' offices - was wrong. The correct address was 326 Hay Street. The address on the form was 326 Hill Street. This wasn't enough to make the judge set aside the statutory demand. Clearly, Jargon knew the correct address.
Second, Jargon argued that if a statutory demand is not for the specific sum for which judgment was given, it must be accompanied by a verifying affidavit. However, the judge said this wasn't necessary where the difference was "obvious and plainly unrelated to any issue as to the amount or existence of the debt." The demand was not "defective in any sense that would warrant it being set aside."
And third, Jargon claimed there was a genuine dispute over the debt.
In general, a judgment means that a court has said, in effect, "this money is definitely owed to the creditor." However, a default judgment (where the merits of the case have not been argued, but judgment has been entered on the basis purely that the debtor didn't defend) may not be conclusive evidence that the money is owed. But that doesn't mean that a default judgment is worthless. In this case the judge said, "In the light of the existing judgment and the two failed applications to set it aside ... I do not consider that ... there can be ... any genuine dispute as to the debt."
The application to set aside the statutory demand was dismissed.
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4. When an ex-lawyer gets out of prison, what does he do for a job?
LEGAL PRACTICE BOARD -v- FRICHOT [2006] WASC 230 (4 October 2006)
Maurice Eugene Frichot was a partner in the law firm, Kott Gunning. He was also a member of the Board of the Australian Paralympics Committee. On 24 November 2000 he pleaded guilty in the WA District Court to stealing $291,422.75. He used the money to pay personal expenses and to subsidise his gambling addiction. He was sentenced to 3 ½ years prison with eligibility for parole. The Legal Practitioners Disciplinary Tribunal concluded that he was not a fit and proper person to practice law and he was struck off the Roll of Practitioners of the Supreme Court.
Released from prison, in January 2002 he started a debt collection business called "All Debts Process". He also carried out what appeared to be legal work for a number of clients, charging his time out at $70 an hour. The Legal Practice Board found four examples of Frichot preparing legal documents, giving legal advice, and charging out his time for doing so. The Board asked the Supreme Court to punish him for contempt.
A fifth issue related to his debt collection business. Frichot set up an arrangement, in July 2002, with Andrew Read, a lawyer in practice on his own. Where debt collection matters needed the involvement of a lawyer, Read would be briefed. Frichot do the clerical and non-legal work. Read would sign the legal documents.
Read signed two court documents for Frichot. Then in September 2002 he received notice from the Local Court that two other matters, neither of which he knew anything about, were being defended. It appeared that Frichot had issued the plaints using Read's name and without his consent, in breach of their arrangement. He ended the relationship with Frichot and filed the relevant documents at the Local Court ensure that he was no longer the lawyer in these two cases. Frichot didn't appear to defend or respond in any way to these allegations so the judge proceeded in his absence. He was satisfied beyond reasonable doubt that the respondent was guilty of contempt in each case. The penalty suggested by the Legal Practice Board was a suspended period of imprisonment and a substantial fine. The matter of penalty was postponed to allow Frichot an opportunity to be heard before penalties were imposed.
