Australian Credit Law Bulletin - Vol 2, No 7, October 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:

Judge accepts "sexually transmitted debt" defence
Late payment charge trends - US survey
Romalpa and unfair preference recovery actions
The high cost of lawyers
What does it take to be a "de facto director"?
A businessman regrets not reading the document
Too late with defences to statutory demand
Remember Mrs Ribchenkov?

1. Judge accepts "sexually transmitted debt" defence

Southern Cross Interiors Pty Ltd v Deputy Commissioner of Taxation [2001] NSWSC 621 (31 Aug 2001)

Southern Cross Interiors went into liquidation. The ATO demanded that its directors, Mr and Mrs Clark, pay tax which was incurred when the company was insolvent.

Mrs Clark raised a defence under section 588FGB(5) which says, "it is a defence if it is proved that, because of illness or for some other good reason, the person did not take part in the management of the company at the payment time".

This is the same as the defence set out in section 588H(4) which is available to directors faced with an action by a creditor for insolvent trading under section 588G. The key phrase in this case was "other good reason". Mrs Clark's "other good reason" was she was inexperienced in business and was completely unaware of her responsibilities as a company director. She trusted her husband and was appointed as a director believing him to be honest and believing that he would manage the company. The judge found that this was a "good reason" within section 588FGB(5) for not participating in management.

It is established law that a wife may fail to appreciate the reality of her responsibilities as a director because of the trust and confidence she places in her husband to undertake all business judgments in relation to managing the company (see Garcia v National Australia Bank Ltd). His Honour referred to the notion of "sexually transmitted debt" which was examined in the Australian Law Reform Commission's Report, Equality before the Law: Woman's Equality (1994) report No 69 Part 11. This may arise where a woman is a silent partner or silent director.

In coming to his decision, His Honour said it would be a rare case in which a wife was able to set up such a defence on the facts.

2. Late payment charge trends - US survey

A survey of 380 members of the American Credit Research Foundation finds that 35.1% assess some sort of charge - generally called a service charge, a late payment fee, or interest - on customers who pay late. The responses were from a wide range of industries. Most of the businesses were substantial, with 83% having US sales greater than US$50 million. Success in collecting the charges was mixed; only 19.7% claimed to be collecting more than 75% of the late fees charged.

3. Romalpa and unfair preference recovery actions

Shirlaw & Anor v. Associated Alloys Pty Ltd [2000] NSWCA 224 (28 August 2000)

Many readers will be aware of the High Court decision of Associated Alloys v ACN 001 452 106 Pty Limited. In that case there was a retention of title (or Romalpa) clause between Associated Alloys and Metropolitan Engineering Fabrications (MEF) which created a trust over the proceeds of sale of the product MEF had made from Associated Alloys steel.

Another case, in NSW Court of Appeal, followed. In this case, the liquidator claimed $214,667.52 paid to Associated Alloys was an unfair preference.

Associated Alloys tried to rely on the High Court's finding that the proceeds trust wasn't a registrable charge. It argued that the payments were made out of money held in trust by MEF for Associated Alloys and not the payment of a debt. (The use of Romalpa clauses as a shield against attacks by liquidators on payments as unfair preferences is something that Hattaways covers in its Advanced Law of Credit Management course.)

In other circumstances this might have worked, but here the same factor which led to failure before the High Court also led to failure before the Court of Appeal. Under the wording of the clause, Associated Alloys had to be able to identify money paid to MEF which related to steel supplied by Associated Alloys under particular invoices. They couldn't do this. The relationship between MEF and Associated Alloys therefore remained that of debtor and creditor.

Secondly, in any event, the moneys the subject of the payment on 31 January 1996 were provided, not from any moneys standing to the credit of MEF with its bankers, but by increasing MEF's overdraft with its bankers. (Our thanks to David Francis of Watkins Tapsell for his assistance with this case.)

4. The high cost of lawyers

Lawyer's costing you too much? It could be worse. The Sydney Morning Herald (Bis-Tech 6 October 2001) reports that John Maconochie estimates his daily bill at around $25,000 a day. That works out at about $9,125,000 per year. The paper also reports that the case is not expected to finish until 2003, assuming no earlier settlement.

Mr Maconochie's company, JMG, and the now liquidated Market Holdings, are suing National Australia Bank for $50 billion. Some of the stages of this saga have been discussed in previous issues of this Bulletin.

5. What does it take to be a "de facto director"?

Natcomp Technology Australia Pty Limited v Graiche [2001] NSWCA 120 (30 April 2001)

Dr Graiche bought computer technology from Amtech Industries Pty Ltd for use in his medical practice in the early 1990s. He was so impressed he became involved in the company. When the company went bust, Graiche was sued for insolvent trading, along with the company's two directors, Le Gentil and Serra.

Graiche had not been appointed director. Was he a de facto director under s60(1)(a) or shadow director under s60(1)(b) of the Corporations Law? A de facto director acts as a director even though not formally appointed. A shadow director is someone who calls the shots for the actual directors. In either case, he might be personally liable for allowing the company to incur debts when he should have known it was insolvent (s588G of the Corporations Law).

There was no evidence that the directors of Amtech were accustomed to act in accordance with the Graiche's advice, directions or instructions, so the shadow director claim failed.

Was he a de facto director? Graiche never claimed to be a director but was introduced to various parties as "the financial backer of Amtech" , "the company's business adviser" and, "the brains behind Amtech." The doctor told two witnesses that he was the person who made the decisions at Amtech. He handed out an Amtech business card at a trade fair with the title "CEO".

Despite this, the trial judge found that he was not a de facto director. The role of director will vary greatly from company to company. He said that Amtech "was not a large public corporation... [but] was effectively a two-man company, run, not very efficiently ... by Le Gentil and Serra." His Honour concluded that even when such considerations were taken into account, the respondent's conduct "did not amount to his being involved in the affairs of Amtech generally". The main business was selling software. On the evidence, Graiche was only involved in the development and marketing of possible new products. The NSW Court of Appeal agreed.

6. A businessman regrets not reading the document

Tranchita -v- Retravision (WA) Pty Ltd [2001] WASCA 265 (30 August 2001)

Mr Tranchita was involved in a business which operated a Retravision store. He signed a guarantee to the Retravision franchisor without reading it. Later, when the business was failing, he was first demoted from managing director, then forced to resign from all management roles and the directorship of a company. He ended up being sued under the guarantee for just over $2 million.

Summary judgment was awarded against him. Tranchita appealed on a number of grounds, including undue influence and unconscionable bargaining. He said, "the guarantees were signed on the understanding that it was a condition of Retravision's support, without which the company simply could not have operated. Accordingly I had no choice but to sign."

Tranchita had no independent legal advice before signing the guarantee. However, complex legal structures and contracts were not new to him. Owen J., delivering the WA Court of Appeal's verdict said that "there is nothing in the relationship between the appellant and the respondent to take it out of the ordinary... It is therefore reasonable for the respondent to have seen no need to give the sort of advice given to people at arm's length... I am satisfied that the appellant entered into the transaction voluntarily and had the appellant read the document he was capable of understanding its provisions."

He quoted with approval the dictum of Latham CJ from a 1948 case. "Where a man signs a document knowing that it is a legal document relating to an interest which he has in property, he is in general bound by the act of signature... [I]t was for him to protect himself by abstaining from signing the document until he understood it and was satisfied with it. Any weakening of these principles would make chaos of every-day business transactions."

Ironically, had Tranchita read the guarantee at the time he signed, or at any time over the next ten years, he would have found that he was entitled to end his liability in respect of future transactions by a month's notice in writing. Had he given such a notice when he was demoted from managing director his liability would have dramatically decreased.

7. Too late with defences to statutory demand

Raffles Co Pty Ltd v. Cech [2001] QSC 129 (4 May 2001)

Raffles Co Pty Ltd leased a bottleshop from Mr and Mrs Cech. The Cechs served a statutory demand for $10,916.16 for money owing under the lease. This is the first step for winding up a company.

Within the 21 days allowed, Raffles filing an application to set aside the demand, raising two grounds for their application. Both those grounds were fatally flawed and were quickly swept aside by the judge. Outside the 21 day period allowed for making an application to set aside a demand (s 459G(2)), the applicant sought to raise three further grounds. These also appeared somewhat flimsy, but the judge did not in fact have to consider them; the company was not allowed to raise new grounds outside the 21 day period.

In any case, the company conceded that $7,683.57 out of the $10,916.16 was still owing. On this basis alone the statutory demand was valid. The application to set it aside was dismissed.

8. Remember Mrs Ribchenkov?

Sapuppo v Ribchenkov [2001] FCA 1428 (11 October 2001)

In our Bulletin for October 2000 we reported the case of Ribchenkov v Suncorp-Metway Limited [2000] FCA 835 (21 June 2000). This is an appeal from that case. The judge in the first case found that Mrs Ribchenkov had to pay the bank $190,079 under the mortgage she signed (mainly for the benefit of her daughter and son-in-law) even though it appeared she didn't understand what she was signing. The bank succeeded because her solicitor had confirmed to the bank that she had been advised. The judge ordered the solicitor, Mr Sapuppo to pay Mrs Ribchenkov $190,079 for his negligence.

Sapuppo appealed the decision that he was negligent and liable to pay Mrs Ribchenkov, and won. Mrs Ribchenkov's evidence was inconsistent and the judge in the original case found in her favour despite expressly stating that he didn't believe her. Mr Supuppo and Mr Agnew, the bank officer, were convincing witnesses. The appeal decision says, "there is no doubt that Mr Agnew believed that Mrs Ribchenkov understood what he was saying to her in the course of the meeting... [A]ny failure by Mr Sapuppo to inform her of the amount of the loan at that meeting had no consequence so far as she was concerned. She signed the documents knowing the amount of the loan." Mr Supuppo does not, therefore, have to pay Mrs Ribchenkov.

We can see it becoming hard to find law firms that will give the sort of advice Sapuppo was asked to provide, simply because of the risk of ending up being sued.

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.