Australian Credit Law Bulletin - Vol 8, No 5, June 2007 (Bonus Issue)
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:
- Romalpa clause not effective under VIC Chattel Securities Act against financier which buys the goods
ROT a "security interest" under the Act - an important High Court case - How does a trustee assess a "contribution" from an "uncooperative" bankrupt?
Bankrupts on high incomes have to contribute during their bankruptcies ... in theory - A credit manager's worst nightmare - the death of Folole Muliaga
This article by Peter Hattaway on the death of Auckland electricity customer, Mrs Muliaga, appeared in MG Business, June 11 2007
1. Romalpa clause not effective under VIC Chattel Securities Act against financier which buys the goods
General Motors Acceptance Corp Australia v Southbank Traders Pty Ltd [2007] HCA 19 (16 May 2007)
Southbank Traders Pty Ltd is a motor vehicle wholesaler. In late 2002, Southbank sold ten vehicles to Kingstrate Pty Ltd, then trading as "Dandenong Suzuki". The sale agreement contained what is sometimes called a "Romalpa clause" or retention of title (ROT) clause. Under this clause, Southbank retained title to the goods until the purchase price was paid.
While the purchase price was still unpaid, Kingstrate purported to sell the vehicles to a financier, General Motors Acceptance Corporation, Australia (GMAC). GMAC in entered into a floor plan agreement (a type of security agreement) which allowed Kingstrate to display them to the public. In December 2002, GMAC registered a security interest under the Victoria Chattel Securities Act 1987. Southbank had not registered a security interest. It did so in January 2003.
In May 2003, Southbank sued GMAC for wrongfully taking ("conversion") or detaining ("detinue") the vehicles. The key question was whether the ROT was a "security interest" under the Chattel Securities Act. If it was, it was "extinguished" by the purchase of the vehicles by GMAC. Section 7 of the Act provides that, in general, an unregistered security interest (and even a registered security interest over inventory) is extinguished if the goods concerned are not in the creditor's possession and are sold for value in good faith and without notice. (The claim covered only nine of the vehicles, the other having been sold to a member of the public. Arguably, it is sales like this, to genuine customers rather than financiers, that the section aims to cover.)
In the County Court, the judge said it was a security interest so Southbank lost. However, the Court of Appeal held that it wasn't a security interest so GMAC lost. GMAC appealed to the High Court.
"Security interest" is defined in s 3. It includes "any interest in or power over goods of a lessor, owner [of goods subject to a hire-purchase agreement] or other supplier of goods".
The judgment of the High Court said, "A conclusion that the definition of "security interest" includes conditional sales is consistent with the purpose of the legislation, the statutory context, and the text, understood in the light of the potential width of the language used. It is to be preferred to the conclusion reached by the Court of Appeal. On this issue, the appellant succeeds."
It was arguable that GMAC's purchase from Kingstrate was not for value in good faith and without notice. However, GMAC argued that since it had registered its security interest ahead of Southbank's, its interest took priority in any case. These matters were sent back down to the Court of Appeal for further consideration.
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2. How does a trustee assess a "contribution" from an "uncooperative" bankrupt?
Pattison v Schiffer [2007] FMCA 319 (16 March 2007)
Horst Dieter Schiffer employed 300 employees and had an engineering and manufacturing business with a turnover of $20 million per annum. He had a substantial dwelling in Toorak and was the owner of a houseboat worth more than $200,000, moored on Lake Eildon.
The business borrowed from Commonwealth Bank of Australia to buy machinery. Soon afterwards, a major customer invested in its own machinery and stopped using Schiffer's company. The business went into liquidation and Schiffer, a guarantor, was made bankrupt on 17 May 1995. His trustee in bankruptcy was Paul Anthony Pattison.
Pattison found Schiffer "obstructionist, uncooperative, misleading and deceptive." He failed to disclose significant assets (including, for example, the ownership of the houseboat on Lake Eildon) and was involved through his corporate activities in significant financial dealings. Schiffer held directorships in at least four companies while bankrupt, (in one case as a "shadow director", replaced by family members but to all intent and purposes running the manufacturing company himself) in breach of the Bankruptcy Act.
In 1998 Pattison objected to Schiffer's discharge from bankruptcy, and Schiffer remained bankrupt until 13 July 2003 - eight years rather than the usual three.
Bankrupts on relatively high incomes are required to make contributions (see current amounts for current income threshold amounts) to their bankrupt estate from their income. Schiffer gave very few answers to Pattison about his employment and level of remuneration while bankrupt. His few responses indicated that he was employed as a fitter and turner at $200 per week. Subsequently, Schiffer filed "taxation returns which disclosed over a lengthy number of years income of only $6,500 per annum" on which no tax was payable.
Pattison didn't believe what Schiffer said about his income, so he set a contribution amount based on his assessment of the reasonable remuneration Schiffer might be expected to have received from his work. He concluded that "Chief Engineering Executive" was a fair description of the work Schiffer was qualified to do and was comparable with the work he was actually doing at the time. The average income for a Chief Engineering Executive in the manufacturing Metal and Auto Industry was $74,665. Pattison assessed Schiffer's contribution over the period of his bankruptcy as $96,961.74 and applied to the Federal Magistrates Court for judgment for this amount.
Schiffer defended the matter, claiming bad faith, capriciousness and arbitrariness on Pattison's part.
However, the judge said, "I have formed the view, without qualification, that [Pattison] is a credible and reliable witness and I have no hesitation in accepting what he says as accurate and truthful." He was less impressed with Schiffer. "After observing [Schiffer] in the witness box and evaluating the conflict and inconsistencies in his evidence, his evasiveness, his professed poor memory when it suited him and his generally belligerent attitude to the administration of his estate by the applicant, I am of the view that [Schiffer] is not a credible witness ... Also I find that [Pattison] was clearly justified in not accepting the little information provided by [Schiffer] during the term of his bankruptcy as accurate or truthful... [and] in ignoring that information... "
He said that it was surprising that Schiffer did not exhibit any residual disabilities in mobility and speech from the three severe strokes that he claimed were affecting his memory. No medical evidence was presented in support of his alleged condition.
He gave judgment against Schiffer for $96,961.74 plus interest.
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3. A credit manager's worst nightmare - the death of Folole Muliaga
My heart goes out to the family of the late Folole Muliaga, and also to the people at Mercury Energy and its contractors, who I know will have wept many tears for Mrs Muliaga, and who, right or wrong, are being blamed for her death. The death has made headlines in media around the world, and needs to be understood.
Here's the story, in simple terms. The Muliagas had come to Auckland from Samoa, six years ago. They were living in a rented house in Mangere. Folole had been in hospital in April and was discharged on 11 May. The Herald on Sunday (3 June 2007) says that she was "fatally ill when she left hospital and not expected to live much longer." She had a ventilator to help her breathe. The family was relying on her husband's wage. Mercury Energy's power bill had an overdue amount of $168.40. The family's phone had already been disconnected, which presumably meant Mercury had been unable to contact them by phone, as they try to do before all disconnections.
On Tuesday 29 May, a contractor working on behalf of Mercury called at the house and disconnected the power. (It's easy to be wise after the event, but this case does call into question the practice of contracting out aspects of this delicate operation.) The family says that Mrs Muliaga had a tube hanging from her nose, that she begged him to leave the power on, and that the machine beeped to show that it was about to shut down for lack of power. Her 20-year-old son said that the contractor said he was just doing his job. The contractor, now on stress leave, claims not to have been made aware that she was dependant on the ventilator.
Perhaps 999 people in 1000 would have called Mercury Energy at that point. Or, if they, almost immediately, became unwell, they would have called an ambulance, or plugged in the ventilator at the neighbours. However, I can understand that a humble Samoan woman with poor English and a strong faith in God might be the one out of 1000 who would take no action. It is often very difficult for Pacific Island immigrants to adjust from village life to the complexity of living in New Zealand society.
Mrs Muliaga told her family not to call the ambulance. They did so after she passed out, about 2 hours later, by which time it was too late. She died.
It's now public knowledge that Mercury Energy has procedures in place to ensure that where it knows someone needs electricity for medical reasons, that information is recorded to ensure that the company doesn't cut off the power, even if the bill isn't paid. The Herald on Sunday article says that, "[t]he obesity-related heart and lung disease which was killing Folole Muliaga, 44, was being kept at bay by a cocktail of powerful medication - not the electricity-powered machine which helped her breathe." However, be that as it may, this was clearly a case where the power shouldn't have been cut off. And it wouldn't have been cut off, if Mercury's credit department had been told of the issue.
This appears to be a series of inexplicable, tragic, human errors, either by the contractor or Mrs Muliaga or both. It's not, as has been suggested, a cold-hearted corporate conspiracy to extract payment even if it kills people. It has been depressing to see people with a political axe to grind trying to take unfair and malicious or (at best) misguided advantage of this sad situation.
Here are three key points about the process of collecting unpaid power bills:
1. It is not in the interests of a power company to cut off power so of course they try very hard not to.
2. However, only in exceptional cases can power companies just give away power to people who don't pay.
3. Power companies (and in fact all consumer creditors) do customers a disservice if they fail to act quickly on unpaid accounts.
1. It is against the interests of a power company to cut off power so they try very hard not to. Disconnection costs money and time and grief; it upsets and inconveniences customers; it's bad PR at the best of times (and catastrophic in this particular case); it loses the power company business, both from annoyed customers who pay the bill, then switch, and from customers who give up trying to pay at that point. Power companies make money from customers from using power; they don't want to stop them doing that. The goal of a power company credit team is to collect without having to disconnect.
2. However, only in exceptional cases can power companies simply give away power to people who don't pay. Ultimately, the threat of disconnection is the sensible and feasible way to make people put the payment of the power bill to the top of the list. Most pay when they receive the warnings. More than 95% of those who ignore the warnings and are disconnected will pay in response to disconnection.
3. Power companies are remiss if they fail to act quickly on unpaid accounts. They must make customers face up to their problems early, while they are still small enough to be manageable. Criticism of Mercury's actions "when the bill was only $162.40 in arrears" is therefore misguided. Food, rent, and power should be at the top of most people's normal "payment hierarchy." There are lots of other temptations for consumers to spend their money on. It's common to find immigrant Pacific Island families, many from villages where there is no electricity, with quite different views on the payment hierarchy. The most obvious example of this is church tithing, paying 10% of weekly income - generally more - to the church. (This usually comes ahead of everything else and a spokesperson for the Muliaga family admitted that this was the case here.) Better to make a customer face reality when the debt is a manageable $100 than when it is an unmanageable $1000.
The general public is probably unaware that every day, collection staff in all sorts of businesses deal with customers desperate to avoid the consequences of non-payment. These are difficult situations. Customers routinely claim that the impending actions of the creditor will cause death or disaster. Often the claim is exaggerated, but not always. It's not unknown for depressed debtors to kill themselves.
(Of course, when a customer attacks someone from the power company with an axe, as happened a few years ago in Timaru, it's not big news.)
For credit staff in general, this case shows how vital it is to work to communicate with and understand customers when bills aren't paid. Every time you take action, right or wrong, against a customer, it has the potential to backfire on your business and on you personally. The other lesson from this case is just how bad that harm can be, for all concerned.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting. This article appeared in the New Zealand publication, MG Business (Mercantile Gazette) Volume 131/Number 5517, June 11 2007
