New Zealand Credit Law Bulletin - Vol 7, No 4, June 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: nz-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:
- Dealing with construction-related debtors? You need to know about this Act!
An opportunity which many creditors are unaware of - Setting aside a default judgment
An unfortunate exercise in debt collection for all concerned - Bankrupt claims he is solvent and tries to annul bankruptcy
Not convincing enough for the Court of Appeal. - Commerce Commission doesn't like redundancy insurance for the unemployed
Finance company to refund $788,000 to borrowers - Disclosure penalty - $146,000 payout over Auckland car loans
Second prosecution under Credit Contracts and Consumer Finance Act
1. Dealing with construction-related debtors? You need to know about this Act!
An attendee at one of our recent seminars was the credit manager of a business supplying temporary staff to building companies and other contractors. She didn't know that the Construction Contracts Act 2002 could help her to get paid. If you are involved in the construction industry either as debtor or creditor you need to know about this Act, as this recent case shows!
TGC Properties Limited contracted for Freemont Design And Construction Limited to construct a commercial building on the North Shore of Auckland for $663,000 plus GST. They used a standard format construction contract.
On or about 1 November 2005 Freemont served on the applicant an invoice for $150,123.86. The document was headed "this is a payment claim made under the
Construction Contracts Act 2002". A few days later, Freemont issued a variation claim which increased the total claim to $179,865.52 including GST.
Section 22 of the Construction Contracts Act required a response by TGC in the form of a payment schedule "within the time required by the relevant construction contract; or if the contract does not provide for the matter, 20 working days after the payment claim is served." The contract provided for a response within 7 working days. On 25 November 2005 – outside of the 7 working day period – TGC responded with a payment schedule which accepted only $104,085.82 of the claim (which TGC paid shortly afterwards). The rest was disputed.
On 5 December 2005, Freemont served a statutory demand on TGC for the balance of the claim. A company which fails to pay a valid statutory demand may be wound up as insolvent. TGC applied to have the demand set aside on the grounds that it wasn't insolvent and that the debt was disputed. The application was dismissed, with costs against TGC. If you don't respond to a payment claim in time, section 23 of the Construction Contracts Act says that the company serving the payment claim (Freemont) can recover the debt in any court. By not responding in time, TGC became liable to pay the claimed amount. End of story!
To repeat, this is a tool that credit staff dealing with the construction industry need to understand.
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2. Setting aside a default judgment
DORIC INTERIORS V HAYS PERSONNEL HC AK CIV 2006-404-4058 [2006] NZHC 1136 (28 September 2006)
Doric Interiors and Construction Ltd is a construction contractor which carries on business in Auckland. Its sole director is a Mr Tony Prasad. The respondent is a recruitment consultant. It carries on business throughout Australasia.
Doric advertised a vacancy for a position as a quantity surveyor. A Hays consultant rang Prasad and offered an applicant. Doric had apparently dealt with Hays before. Hays' records contain an entry in relation to this call which was accepted in evidence as a business record:
"Asked our fee and confirmed 15%."
According to Prasad, Doric took on Hays' candidate, Mr Donn, on a 3-month trial at $25 an hour. He was not satisfactory and left without giving notice in the third month. Hays accepted (in court) that Donn was an unsuccessful placement, but said that under its Terms and Conditions, it was entitled to its fee. Had the invoice been paid on time, Doric would have been entitled to ask Hays to try to find a suitable replacement.
Hays invoiced Doric $10,968.75 at its street address, based on 15% of what it said was Donn's annual salary of $65,000. Doric either didn't get the invoice or ignored it. Hays sued. The court documents were served on a Doric employee but put to one side and not passed on to Prasad.
On 15 November 2005 Hays entered judgment by default against Doric in the Auckland District Court, for $13,405.81 inclusive of interest, costs and disbursements. Doric found out about the judgment and wrote to Hays' lawyers disputing the debt. Hays responded by serving a statutory demand on Doric.
In February 2006, Hays commenced liquidation proceedings in against Doric in the High Court. Doric applied to set aside the judgment.
Rule 473 of the District Courts Rules 1992 says that, "Any judgment obtained by default may be set aside or varied by the Court on such terms as it thinks fit if it appears to the Court that there has been, or may have been, a miscarriage of justice." The judge in the District Court declined the application based largely on the fact that there was no documentary evidence of the $25 per hour rate, merely Prasad's assertion. The delay in Doric's actions also counted against the company.
Doric appealed to the High Court. The High Court judge concluded that, although there was no evidence of the $25 per hour rate, there was equally no evidence of an annual salary of $65,000. This raised an arguable ground of defence. He concluded that it was just in all the circumstances to set aside the default judgment.
We note in passing that:
* Had the processes in the Construction Contracts Act been used, it would appear that Doric would not have had any opportunity to set the judgment aside;
* There was no mention in the judgment of anyone at Hays actually phoning Doric about the unpaid account;
* The legal fees for each side are likely to considerably exceed the amount of the original debt.
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3. Bankrupt claims he is solvent and tries to annul bankruptcy
Holdgate v Blocassa Ltd and anor [2007] NZCA 132 (17 April 2007)
Holdgate was an earth-moving contractor. He and his company were sued by Blocassa Ltd. Holdgate was held liable for $ 90,375.82 plus costs in April 2005. He appealed to the Court of Appeal but before this could be heard, he was served with a bankruptcy notice by Blocassa. He applied for a stay of execution but this was rejected in the High Court in September 2005. (The appeal wasn't pursued and was treated as abandoned in March 2006.) He was made bankrupt in December 2005. Two weeks later, he applied to have it annulled on the grounds that he was solvent and able to pay his debts. Holdgate provided various affidavits which suggested he had trade debtors of up to $300,000, earth-moving machinery with a net value of $400,000, cash of up to $175,000, and equity in two properties. In all, this apparently totalled approximately $1.6 million in value.
The Official Assignee's office said that, "he provided no details to the Official Assignee of the location of the cash or the equipment, and insufficient details of the trade debtors. [His] refusal to co-operate had made it very difficult to administer his estate." However, the OA said that the net equity in the properties was valued at $570,036 while his liabilities totalled $418,995.28, $130,000 worth of which was disputed by Holdgate.
At the High Court hearing, he apparently provided his counsel with bank cheques totalling $117,822.12, payable to the Official Assignee to meet Blocassa's claim and the Official Assignee's costs and disbursements. However, this cheque was not accepted because of uncertainty over the over debts. The equity in the properties wasn't sufficient to annul the bankruptcy. "No reliable evidence is before the Court to establish that the bankrupt could have promptly sold his land to meet his debts or that he had the ability to raise by borrowing against the land sufficient cash to meet the debts he owed."
In addition, the associate judge said, that "I would not be prepared to exercise my discretion in favour of making the order. [The appellant] has substantial debts, one of which is the subject of a High Court judgment. His actions make it clear he has no inclination to meet even that debt. He appears to be an intractable debtor. It would not be in the public interest for his bankruptcy to be annulled."
Holdgate appealed to the Court of Appeal on the grounds that the High Court decision was "plainly wrong". The judges couldn't see how machinery owned by a company could suddenly come into the possession of Holdgate. Holdgate's lawyer had previously acknowledged that the equity in the properties was not to be used to pay debts. The properties needed subdivision before sale. Holdgate had continued with this work despite his bankruptcy. It was unclear where the funds for this came from. Holdgate had not cooperated with the OA, providing no bank records. In fact, "he seems to have been deliberately obstructive."
The Court of Appeal upheld the High Court decision. The judgment said, "We conclude by noting that the appellant's failure to provide the necessary information to the Official Assignee has been allowed to continue for too long. The Official Assignee has the power to require the appellant to produce the necessary information (see s 68(1) of the Insolvency Act). Consideration should be given to the use of that power."
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4. Commerce Commission doesn't like redundancy insurance for the unemployed
http://www.comcom.govt.nz//MediaCentre/MediaReleases/200607/788000refundsoverredundancyinsuran.aspx
In an out-of-Court settlement reached with the Commerce Commission, Auckland company Club Finance has agreed to refund $788,000 to borrowers who were required to insure their car loans against the risk of redundancy, despite being unemployed at the time they took out the loans.
Over 1,500 of Club Finance's customers were unemployed when they took the loan, but were still sold insurance that ensured loan payments on their cars would be met if they were injured or made redundant.
A clause in the contract meant that, even if borrowers got a job after taking out the loan and were then made redundant, they would not be eligible for the redundancy insurance, so there was no possible way for them to benefit from the insurance.
In the settlement, Club Finance admits breaching the Credit Contracts and Consumer Finance Act by requiring that unemployed borrowers have redundancy and injury insurance. It has already refunded the full amount of unnecessary insurance purchased by its customers. Approximately 1,564 customers have received refunds averaging $504.
Commerce Commission Director of Fair Trading Deborah Battell said that enforcing the Credit Contracts and Consumer Finance Act is a priority for the Commission in 2007.
All customers who are entitled to refunds have had them credited to their Club Finance accounts. By June 17, all affected customers will have been notified by Club Finance of how much they have received, and they will also receive an additional refund of the interest they paid on the insurance amount.
The credit contracts related to cars purchased between 1 April 2005 and May 2007. Almost all the cars purchased by unemployed borrowers were bought from Great Wall Motors in Otahuhu.
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5. Disclosure penalty - $146,000 payout over Auckland car loans
http://www.comcom.govt.nz//MediaCentre/MediaReleases/200607/146000payoutoveraucklandcarloans.aspx
Dolbak, Dolbak Safeguard Limited and Fleetz Wholesale Cars Limited are three entities working from the same premises at 49 O'Rorke Road, Penrose. The three entities provide one-stop services in providing finance and insurance to customers who purchase motor vehicles from Fleetz Wholesale Cars Limited. Anthony Baker and David Dolbel, are the shareholders and directors of Dolbak Safeguard Limited. Anthony Baker is the major shareholder and director of Fleetz Wholesale Cars Limited. Both David Dolbel and Anthony Baker are actively involved in the operations of these three entities.Â
In the Auckland District Court, David Dolbel pleaded guilty to 22 charges of breaching the Credit Contracts and Consumer Finance Act and was fined $49,500. Anthony Baker pleaded guilty to 22 charges and was fined $50,500.
The pair has also been ordered to pay $46,600 to customers in statutory damages, meaning 100 borrowers will receive damages of around 5% of their total loan, ranging from $200 - $1,000.
Approximately 100 contracts were entered into when customers bought second-hand cars from Fleetz Wholesale Cars Limited in Penrose between April 2005 and June 2006.
Dolbel and Baker admitted breaching the Credit Contracts and Consumer Finance Act by :
* not telling customers what fees and charges applied, how interest was calculated, or how to pay the loan off early;
* not sending a copy of the contract to those who acted as guarantors of the loans; and
* wrongly showing interest in advance on the borrowers' accounts, rather than showing the interest only when it had been accrued.
Dolbel and Baker also admitted breaching the Fair Trading Act by threatening to repossess nine vehicles when loan payments had not been made. Credit contracts can only be enforced if they comply with the CCCF Act, so Dolbak had no right to repossess the vehicles.
"The Commission has told Dolbak twice that it was not providing the information required by law, but they chose to ignore those reminders," says Ms Deborah Battell of the Commerce Commission. On two instances in December 2005 and March 2006, Dolbak was advised by the Commerce Commission in writing of its potential breaches of the CCCF Act. The former letter also advised Dolbak that it could not enforce its contracts given the apparent non-compliance with section 17 of the CCCF Act. Ms Battell said that customers weren't told about fees and charges including a $5 fee per warning letter if a payment was missed, a $20 fee for sending out a repossession notice, or a $75 fee for preparing a repossession authority."
Under section 17 of the CCCF Act, every creditor under a consumer credit contract must ensure that key information (as set out in schedule 1 of the CCCF Act) that is particular to the credit contract is disclosed to the debtor either before the contract is made or within five working days of the day on which the contract is made.
This is the second prosecution under the CCCF Act. In November 2006 Senate Finance was the first company to be fined for breaching the Act. They were fined $59,000.
