Australian Credit Law Bulletin - Vol 8, No 6, July 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:
- Unhappy debt collection saga for a painting company
A creditor goes through numerous processes, recovers $60,000, then loses most of it - Car buyer asks court to ignore declaration of purpose of loan that he signed
A victory for used car salesmen everywhere - the judge believes them! - Sheriff's poundage on sale of debtor's land
Creditor organises sale of land but sheriff claims a cut of the money recovered - Lenders often get the blame when debtors can't pay - this article seeks input from creditors
This article first appeared in NZ publication, MG Business, Vol 131/No 5519, 9 July 2007
1. Unhappy debt collection saga for a painting company
Sandos carried out painting services as subcontractor to Southern NSW Maintenance Pty Ltd. A dispute arose in relation to a claim by Sandos for variation works. The matter went to adjudication under the Building and Construction Industry Security of Payment Act 1999 (NSW) and an adjudication certificate was issued against Southern for $131,943.22. Sandos entered judgment against Southern in the District Court of New South Wales at Wollongong, on the basis of that certificate.
Sandos served a garnishee order on the Commonwealth Bank of Australia, where Southern had a bank account. A garnishee order instructs someone who is believed to owe money to the judgment debtor to pay that money to the judgment creditor. The bank paid Sandos $59,158.53 - the money in Southern's bank account - on 13 November 2006.
In February 2007, Rathner and Coyne were appointed as administrators of Southern. At the second meeting of the creditors of Southern, held on 2 March 2007, the creditors resolved that Southern be wound up and that Rathner and Coyne be appointed as liquidators.
The liquidators wrote to Sandos, demanding repayment of the garnisheed funds. In a liquidation, all creditors are supposed to suffer equally. It's not fair that one unsecured creditor gets paid while others miss out. The law therefore allows the liquidators to claw back money paid to a creditor such as Sandos, which was paid by the insolvent company in the period (usually 6 months) immediately before the company went bust. That money is spread proportionately amongst all unsecured creditors (if it doesn't go to pay the liquidators' fees and other priority debts).
When Sandos failed to pay, Southern issued a statutory demand against Sandos for $49,171.53 - the amount garnisheed, minus an allowance of $10,000 for the costs of the garnishee process. A statutory demand, if not paid, is the first step in the process of winding up a company. Sandos tried to set aside the demand on various grounds. Among these was an argument that but for Southern's trickery or abuse of process, the garnishee proceeding would have been completed more than six months before the commencement of the winding up. The judge would have none of it. Even if there was such trickery or abuse of process, he had no power to set aside the demand on this basis.
Sandos was required to repay the garnisheed money (minus the $10,000), or face liquidation itself.
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2. Car buyer asks court to ignore declaration of purpose of loan that he signed
Fishburn v Land Rover Financial Services & Ors (Commercial) [2007] NSWCTTT 230 (8 May 2007)
Fishburn bought a vehicle from Purnell Motors Pty Limited which was financed by Primus Automotive Financial Services Australia Ltd trading as Land Rover Financial Services. He signed a declaration under the Consumer Credit Code stating that the loan was for business or investment purposes. He later found problems with the vehicle and sued Purnell Motors and Land Rover Financial Services seeking his money back. It was alleged that vehicles had been damaged in a hail storm and repaired, and the buyers hadn't been told about this. The proceedings were halted while a separate action against the dealer by the Office of Fair Trading for misleading and deceptive conduct was completed. http://www.austlii.edu.au/au/cases/nsw/supreme_ct/2007/19.html
Land Rover Financial Services argued that the case did not fall under the Consumer Credit Code because it was for business purposes. Fishburn now claimed that "the vehicle ... was intended and in fact used wholly for personal or domestic purpose, and has never been used, either wholly or predominantly, for business or investment purposes."
The relevant test for deciding what use the credit was to be put to was "what a reasonable person would have understood the predominant purpose for which the credit was provided was". Evidence was presented from car salesman, Rodney Dale, about the discussion he had with Fishburn at the time of the sale.
Rodney Dale: Will the finance contract be for business or private use?
Craig Fishburn: What is the difference?
Rodney Dale: If a loan is for private purposes only, the borrower is covered by the Consumer Credit Code provisions as a regulated contract. If there is a significant business use you can enter into a Commercial Hire Purchase contract with slightly lower interest rate, but you have to have both a supportable business use and be prepared to make a declaration to the finance company regarding the business use.
Craig Fishburn: Well lets go business use? [sic] What are my repayments?
The Consumer Trader & Tenancy Tribunal noted that Dale was not cross-examined by Fishburn's lawyer. The Senior Member of the Tribunal also noted that Fishburn had 'declared that I (the Tribunal) would not believe them ... because "they were used car salesmen".'
However, he did believe them. "The bold assertion that I should prefer the applicant's paragraph 4 to the uncontroverted evidence of Messrs Dale and Chang on the basis that they are Used Car Salesmen and he (Mr Fishburn), is not, does not persuade me to his point of view." He concluded that "[o]n the facts before me the 'reasonable person test' can only lead to the finding that the Credit was to be applied wholly or predominantly for business or investment purposes (or for both purposes)." Fishburn's application was struck out. The Code did not apply.
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3. Sheriff's poundage on sale of debtor's land
NUNGATAH PTY LTD & ORS -v- BOYLE & ORS [2007] WASC 72 (29 March 2007)
Nungatah Pty Ltd sued Mr and Mrs Boyle. It obtained default judgment against them for $284,999.30 plus interest and costs. Nungatah issued a writ of fieri facias (commonly known as fi fa) and delivered it to the WA sheriff. This process, which these days is known by other names in some other States, orders the sheriff to seize the debtors' property. When writs were in Latin, the words of the writ of execution included the words, "fieri facias". This translates as: "that you cause to be done."
In this case, Mr Boyle's land was his only valuable asset. The writ was registered on the certificate of title. Solomon Brothers, Nungatah's solicitors, then asked the sheriff to ask the registered mortgagee of the property, Esanda Finance, if there was any equity in the property.
The sheriff told Solomon Brothers that there was a prior writ of fi fa against the defendants for $742,283 and that, if he took possession of and sold the property, he would pay all the proceeds of sale to the issuer of that prior writ in accordance with a ruling in a previous case (Emms, unreported, Wallace J, Supreme Court of WA, 13 Sep 1972). This prior writ was not registered on the title at any time during the course of this process.
Boyle entered into a private contract to sell the property. Boyle's settlement agent asked Nungatah to withdraw the writ of fi fa so the sale could take place. Nungatah agreed on the condition that the whole of the net proceeds of sale of the Property be paid to them. Solomon Brothers negotiated this agreement with Mr Boyle's settlement agent. As a result, $41,235.92 was paid to Nungatah. (This would appear to be something of a triumph, considering there was a writ for $742,283 ahead of Nungatah in the queue.)
The Sheriff had no involvement in arranging the sale, the withdrawal of the Nungatah writ of fi fa, or settlement of the sale. However, the Sheriff demanded payment of, ultimately, $1368.39 for poundage, from Solomon Brothers. Poundage is a fee charged by the sheriff for money collected as a result of the sale of the Property. It is based on the amount paid by the debtor. [In WA, we understand that poundage is considered an important incentive for bailiffs and is more significant to the collection process than in some other States.]
Solomon Brothers disputed the Sheriff's right to poundage. The matter ultimately ended up in the WA Supreme Court.
In the Supreme Court, the judge concluded that, "once the machinery has been set in motion by the delivery of the writ of fi fa to the Sheriff... the process of execution has commenced." If the moneys were received by the plaintiffs following the sale of the seized property "under or by reason of" the execution of the writ of fi fa, the sheriff was due poundage. "If a property subject to execution is sold by negotiation with the judgment creditor, as in this case, it is the payment of the price which makes the execution process effectual. Prima facie, the execution of the writ of fi fa is the reason the judgment creditor is paid."
(That might not be so if, for example, the sale had been negotiated before the process of execution commenced. Of course, in that case, the creditor would be unlikely to issue the writ.)
The sale, while not made by the Sheriff, was therefore "negotiated under the shadow of the writ of fi fa... [and] the money was received by the plaintiffs by reason of the process of execution... In essence, it is the price payable by a judgment creditor for the facility made available by the State to assist him to enforce his judgment."
Because Solomon Brothers requested the Sheriff to act, the sheriff could recover the money from the firm.
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4. Lenders often get the blame when debtors can't pay - this article seeks input from creditors
And the poor get poorer - part 1
"Hundreds of families have been forced to sell their homes, or lenders have repossessed and auctioned them, in Sydney's west and south-west in the past year... There were a record 1400 auctions in the region in the year to March 31."
"Surge in families forced to sell their homes", Sydney Morning Herald, 30/06/07
In consumer debt, what happens in Australia usually hits New Zealand eventually.
We see it with new lending products (payday lending, for example), debt and bankruptcy trends (always up, but hitting Australia first), and law changes to protect consumers (Australian Consumer Credit Code, 1994, New Zealand Credit Contracts and Consumer Finance Act, 2003).
So it seems to be inevitable that the flood of mortgagee sales and bankruptcies in the cheaper suburbs of Sydney will hit Auckland, Christchurch and Wellington at some point along the way. In fact, there are early signs that it's starting, with a 17% increase in bankruptcies in New Zealand in the 11 months to May 2007, after several years of relatively small increments.
In this case, most of the conditions in Australia apply in New Zealand. We've both had booms in big city housing prices. Sydney's started a lot earlier than New Zealand's, and at the bottom end, that boom has largely ended. New Zealand's still continues, but it will run its course too, at some point. Like the NZ economy, the Australian economy is still going from strength to strength on the back of a global boom. In both countries, unemployment is at record lows. Australian interest rates, like New Zealand's, have steadily risen as their government tried to manage the economy and inflation, meaning that the people who had borrowed to the hilt became more and more vulnerable as their repayments climb.
The chart below is what I call the "Table of Doom". It's the big picture of the interest Kiwi consumers have to pay on their debt as a percentage of disposable income. Note the scary upward trend in the last 4 years. It's now a third higher than in 1991 when mortgage rates were 15%. Expect to see some seriously bad news in the New Zealand bankruptcy and mortgagee sales statistics somewhere down the track.
There are two other factors the media talk about - unrealistic lifestyle expectations of consumers and easy credit. These, in my view, are the heart of the issue. I think they need to be discussed, (hopefully without too much finger-pointing).
Most of those involved with consumer debtors talk about the unrealistic lifestyle expectations which induce people on low incomes to spend up large on late model cars, big screen TVs, leather lounge suites, take-away food, and other non-essentials. For example, in another Sydney Morning Herald article ("Boom times, bad times", 30 June 2007), Felicia Fitzgerald, an Anglicare emergency relief worker, says some clients are unable to pay a bill to a phone company but when financial counsellors examine the account it includes an expensive subscription to a pay TV service.
"It's a general expectation in society that the kids have Foxtel [pay TV], the internet and mobile phones," she says.
Then there's easy credit. Dr Steve Keen, an economist at the University of Western Sydney, is quoted in the second Sydney Morning Herald article as saying that "easy debt is the main problem." So it's not just that they're buying things they can't afford, it's that they're borrowing to do so. Then they find they can't service the debts; then an increase in interest rates or the illness of a breadwinner becomes a financial crisis.
Easy credit is an easy target, but is that the fault of the creditors? It takes two to tango. The borrowers are in the best position to know if they can pay or not. And of course, borrowers often mislead lenders.
Then there's the fact, overlooked by some of the friends of the downtrodden, that few lenders make money lending to people who can't pay. Clearly, if they know they can't pay, they won't lend to them. However, lenders don't have a crystal ball. They base their decisions on the best information they can find.
Having said that, some lenders are poor at judging risk, and some charge high rates which allow them to tolerate high bad debt levels. Stories in the media suggest that even reputable banks push credit on people who don't need or want it. If the interest and penalties are high enough, some lenders may even make money lending to someone who ultimately leaves part of the interest as bad debt. There's certainly a good argument that some creditors bear some responsibility for the problem.
So in summary, Australians at the less successful end of society are making lots of poor spending and borrowing decisions, helped by some lenders. The bottom line: the poor get poorer, and the gap between haves and have nots widens. This has to be a bad thing for Australia, as it would be for any society.
I think there would be few people who would argue that the same phenomenon isn't occurring in New Zealand. The Table of Doom shows that borrowing is increasing dramatically as a percentage of disposable income. A 26 June story in the New Zealand Herald, "A nation in debt: When the wages never quite spread far enough", quotes data from the Federation of Family Budgeting Services that shows that debts owed on goods such as cars, furniture and appliances (38% of all arrears owed by budgeting clients) have displaced rent and power bills (32%) as the biggest amounts owed.
So there's the problem: too many low income people have unrealistic expectations and are able to borrow to fund them. Are there solutions? This is a question I've been asking people. I've been surprised at the level of emotion it inspires. A lot of people seem to know someone - a family member or friend - who just "shouldn't be allowed" to incur debt. But don't they have the same right to make a mess of their lives as anyone else? And anyway, how would you stop them? I've heard some interesting ideas, but what do readers of MG Business [and the Australian Credit Management Law Bulletin] think?
Email me at peter@hattaways.com with your thoughts, or your contact details if you want to discuss this. Your views will remain anonymous. I'll be seeking more opinions, and summarising them in part two of this article, next month.
Peter Hattaway - www.hattaways.com - is a director of Hattaways, specialists in credit management training and consulting.
