New Zealand Credit Law Bulletin - Vol 7, No 6, September 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:
- The director of a debtor company has assets but may try to give them to a spouse or partner. What do you do?
Part 1 of a set of cases with some important lessons for creditors - The director of a debtor company has assets but may try to give them to a spouse or partner. The Official Assignee’s appeal
Part 2 of a set of cases with some important lessons for creditors - Mistake in water metering enriches lawyers
High Court judge imposes increased costs on claimant who appeals from Disputes Tribunal - Commerce Commission investigates south Auckland lenders
There seem to be lenders who still don’t understand the CCCFA - Blenheim car dealer gets lending process wrong
Dealer uses another lender’s application forms for its own loans
1. The director of a debtor company has assets but may try to give them to a spouse or partner. What do you do?
Felton v Johnson [2006] NZSC 31 (27 April 2006)
Mr Johnson ran a painting contracting company. He became involved in another company, Ritec (NZ) Limited, which marketed a product called Clear-Shield. Ritec franchised the distribution of a product called "Clear-Shield". By 1993 the franchisees were expressing dissatisfaction with the product. In October 1993 Mr and Johnson entered into a matrimonial property agreement to split their considerable assets – shares in his businesses, house, rental unit, a number of factory units, two motor vehicles and a yacht. Such an agreement, under the Property (Relationships) Act 1976, as it is now known, aims to provide for a just division of the relationship property between the spouses or partners when their relationship ends by separation or death. The agreement can be made at any time, not just when the relationship is ending.
In the agreement, broadly speaking, Mr Johnson got the shares in his companies, while Mrs Johnson got the rest. The matrimonial property agreement created an imbalance, on its face, in Mrs Johnson’s favour of $45,000. If the shares were worthless, the imbalance was very much greater.
The franchisees sued in 1997 – more than two years after the matrimonial property agreement. Even though they had dealt with the company rather than Mr Johnson, they wanted damages against him personally. Damages of more than $800,000 for deceit were eventually awarded against Mr Johnson, who was made bankrupt on 31 October 2001.
The creditors also wanted to have the matrimonial property agreement set aside under s 47 of the Act. In essence, s 47 says that any agreement intended to defeat creditors is void against those creditors and the Official Assignee. However, under s 47(2), an agreement that was not intended to defeat creditors “is void against such creditors and the Official Assignee during the period of 2 years after it is made…”
The Judge held that Mr Johnson’s shares were virtually worthless, so that there was an imbalance of $552,250 between what was received by Mrs Johnson and her actual entitlement under the Property (Relationships) Act. The agreement therefore had the effect of defeating creditors. The judge rejected a claim under s 47(1) that the agreement had been entered into with the intention of defeating the husband’s creditors.
The judge said, “The disquiet expressed by the franchisees (whose contracts were with Ritec not Mr Johnson personally) and Mrs Johnson’s wish to confirm her personal position caused the Johnsons to take [legal] advice.
“I conclude that at the time the matrimonial property agreement was entered in October 1993 Mr Noel Johnson’s dominant intention was to separate his business assets from his personal assets to ensure the protection of matrimonial and other assets as far as possible against the future failure of the businesses. It was not however to defeat creditors. There is no evidence that creditors were threatening Mr Johnson or that Mr Johnson had any reason to consider he would be sued personally. In October 1993 he still considered Ritec was viable. Although the franchisees had a number of issues, they were not threatening to take action against Mr Johnson personally.”
However, the judge in the High Court concluded that as the creditors were creditors within that 2 year period, they qualified to recover the $552,250 from Mrs Johnson. He interpreted s 47(2) as saying that the agreement was void against creditors who were owed money at the time of the agreement or within the 2 year period. The agreement would not be void against those who became creditors (or the OA if appointed) outside that period.
A majority of the judges of the Court of Appeal disagreed with this verdict. They held that the creditors needed to commence legal action within the two years in order to make the agreement void. They thought any other conclusion would be unfair on the partner or spouse who would have set up a new life. The dissenting judge, on the other hand, thought that this approach would be unfair on the creditors. The Supreme Court agreed with the majority of the Court of Appeal. The creditors were unable to recover from Mrs Johnson’s share of the matrimonial property agreement.
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2. The director of a debtor company has assets but may try to give them to a spouse or partner. The Official Assignee’s appeal
The Official Assignee brought a separate appeal in the Court of Appeal. This was the most recent case decided. The OA argued that since Mr Johnson was guilty of deceit, he “must have known he was only telling half the story,” and “it would be reasonable to infer that Mr Johnson knew that ‘his time of reckoning would come’.”
However, the Court of Appeal held that despite the fact that he was “reckless in his dealings with those who purchased franchises for Clear-Shield, it is not established that he knew (or should reasonably have known) that his dishonest activity would come home to roost.”
Also, Mrs Johnson had brought a house to the marriage, so her wanting to protect the family home was understandable, as was his wanting to ensure that he kept control of the business in the event of a split. The marriage had apparently been through “a rocky period.”
The previous year, Mr Johnson had sold shares in the business to the CEO of the business who “had paid good money for [them and]… was [still] behaving in October 1993 [at the time of the matrimonial property agreement] as if he had obtained a valuable commodity. There is not a factual basis upon which, by direct evidence or available inference, the Court could conclude that in signing the [agreement] Mr Johnson was seeking to defeat his creditors.
What this means for creditors is that if your debtor gives his or her spouse or partner him or her more than half their assets (which you might find out about through a title search on their home, for example) you have to take action within two years of the split. Note also that it was significant that the creditors hadn’t threatened action against Mr Johnson personally. The decisions imply that if even one of the creditors had said to him, “we will be looking at taking action against you personally,” before the agreement was made, the agreement might have been found to have intended to defeat creditors. In that case, the 2 year time limit wouldn’t have applied.
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3. Mistake in water metering enriches lawyers
CRUICKSHANK V DISPUTES TRIBUNAL AND ANOR HC AK CIV 2006-404-3966 [2007] NZHC 768 (9 August 2007)
Mr Cruickshank and Alandra Court Body Corporate No. 96987 own adjoining properties in Remuera. Alandra is a body corporate under the Unit Titles Act 1972. Body corporates are typically the legal entities for apartment buildings and the like, managing the building in the interests of the various apartment owners. The Auckland City Council repaired the pipes supplying water to both properties. The council made an error with the metering. Over a long period, Alandra was charged for, and paid for, water supplied to Cruickshank.
Eventually the error was discovered and Alandra asked Cruickshank for reimbursement in October 2002. In December 2005, Alandra filed a claim against Cruikshank in the Disputes Tribunal. The Tribunal ordered that Mr Cruickshank pay $7,037.83 plus interest from the time of Alandra's had asked Cruickshank for reimbursement, a total of $8885.20. Interest is excluded from the $7,500 limit on the Tribunal's jurisdiction.
If you are unhappy with a Disputes Tribunal decision, there are limited procedural grounds for appeal to the District Court – essentially that the referee’s management of the hearing was unfair. Here, instead of appealing to the District Court, Cruickshank filed application to the High Court for judicial review.
He argued that Alandra had suffered no loss. The loss was suffered by its members of the time, so any payment under the judgment would simply confer a windfall on current members.
The judge concluded that this argument “is simply wrong… Whether or not Alandra's loss has been made good by the owners it undoubtedly suffered the loss by making over-payment to the advantage of Mr Cruickshank by making its over-payment to Metro Water.”
Cruickshank also argued that the claim was outside the Limitation Act period of 6 years because Alandra discovered that the water rates were excessive in 1996, but it did not issue proceedings until December 2005. However, s 28 of the Limitation Act says that when the action is for relief from the consequences of a mistake, “the period of limitation shall not begin to run until the plaintiff has discovered [it] or … could with reasonable diligence have discovered it. The judge said that “the Referee's finding that Alandra was diligent in seeking an explanation for the overbilling is not only [legally] unreviewable by this Court but obviously right.”
The judge pointed out that the “legal fees will soon dwarf the sums at stake. The reality of this case is … that … costs [to Alandra] in resisting the application for review over a debt of $8,000 are no less than $15,000.”
The application for review was dismissed. The judge felt that the matter should not have gone to the High Court. “There is no merit whatever in this proceeding.” He said, “the Court retains discretion if there is some truly significant issue at stake to exercise its powers of review with such intensity as the nature of the case may warrant. But there is nothing about this case that would suggest such a course.”
The Disputes Tribunal is designed to give quick cheap decisions. The judge ordered that Cruickshank pay increased legal costs to Alandra as a “deterrent against [someone who deprives another] of the advantage of the costs control procedures of the Disputes Tribunal.”
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4. Commerce Commission investigates south Auckland lenders
The Commerce Commission advised in August that it has warned six south Auckland credit providers, and will prosecute a seventh, for allegedly failing to provide important information to customers taking out personal loans. Adequate disclosure is required under the Credit Contracts and Consumer Finance Act (CCCF Act).
The six credit providers that have been warned by the Commission are: Mana'ia Financial Services, Sala Multi Services Ltd, Winston's Finance, Houmatetefa Finance, Mizpah Trading Co. Ltd, and Funaki Enterprises. The Commission will not be commenting further on the prosecution of the seventh credit provider at this stage.
The credit providers predominately target Pacific Island consumers by advertising in Pacific language newspapers. They provide short term cash loans, usually of relatively small amounts. Traditional Tongan mats are often used as security for the loans.
The Commission found that the six warned credit providers allegedly failed to:
1. Advise customers of their statutory right to cancel the loan within a certain period of time;
2. Disclose the annual interest rate and the amount of interest payable;
3. Advise customers of the costs of full prepayment;
4. Describe adequately property subject to security interests.
“Disclosure of information is the cornerstone of the CCCF Act,” Graham Gill, Fair Trading Manager Auckland said. “It gives consumers the ability to make informed choices about the true cost of credit, to compare competing credit offers and be aware of both their rights and obligations under the contract.”
Credit providers who breach the Act risk damaging their reputation and incurring financial penalties, Gill warned. “Breaches of the Act can result in a criminal conviction, fines and statutory damages. Repeat offenders can be banned from providing credit.”
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5. Blenheim car dealer gets lending process wrong
Blenheim car dealer, The Motor Centre, has admitted that it breached the Credit Contracts and Consumer Finance Act and Fair Trading Act. It used loan application forms from a reputable credit provider and a number of customers were misled into believing that the loans were with that company. “The law is very clear about what borrowers should be told when they take out a loan,” said Graham Gill, Fair Trading Manager, for the Commerce Commission. “This includes the basic information of which company it is that is lending them the money.” This was a breach of both Acts.
It also failed to tell customers about their rights and obligations, and charged fees for services it did not perform. The Motor Centre charged fees between $3.00 and $35.00 to check the Personal Properties Security Register, but it didn’t actually do the checks; it just kept the money, in breach of the CCCFA. Gill said: “It should be obvious that companies cannot charge fees for services that they do not provide.”
The company also breached the disclosure provisions of the CCCF Act by failing to disclose how interest would be calculated and debited, the annual interest rate, what would happen if the loan was paid in full, and information about the right to cancel the contract.
The business has reached a settlement with the Commerce Commission. It will refund 37 customers a total of $1,039.
