Australian Credit Law Bulletin - Vol 9, No 1, April 2008
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:
- Honest, your Honour, we didn’t know the company was insolvent!
Hard to convince the judge when the company had huge arrears and you’ve put it on COD terms - The perils of lending to a 93-year-old
And a salutary lesson about “purpose of loan” under the Consumer Credit Code - Personal Property Securities Bill like NZ’s soon – A-G’s speech
Revolutionary change for creditors is coming - Can you defame a person with a poor reputation?
An important point for credit managers to understand
1. Honest, your Honour, we didn’t know the company was insolvent!
TOLCHER & ORS v JOHN DANKS AND SON PTY LTD [2007] NSWSC 1207
Waddell & Son Pty Limited operated as trustee of the Waddell Family Trust, a trust of $100 from 11 June 2003. The trust bought a business at Kotara and opened an account with John Danks and Son Pty Ltd, supported by personal guarantees of Robert Waddell and his son, Jason Waddell, the sole shareholders. The company entered into a franchising agreement with Danks and commenced trading on 5 December 2003 as a hardware retailer under the business name Home Timber and Hardware, Kotara.
The company gave National Australia Bank
Limited a fixed and floating charge over all its assets in December 2003,
registered on 6 January 2004.
The total due to Danks as at 30 June 2004 was $122,454.71. After a small fall, the total rose steadily,
and by 30 April 2005 had reached $296,010.91.
In June 2005, the company was put on COD terms by Danks and began
regular weekly payments of $7,000 to Danks.
On 22 February 2006 the company went into administration by resolution of its directors. Messrs Tolcher and Whitton became its administrators. A month later they became its liquidators when its creditors voted to put it into liquidation. Robert Waddell became bankrupt two days later, and Jason Waddell went bankrupt in November 2006.
At the time of the administration, the debt to Danks was down to approximately $181,000. The liquidators sued to recover 20 $7,000 payments made in the six months before the company went into administration.
In general the law requires debtors to treat their creditors equally. It is not fair that one creditor is paid more than its share, immediately before the company fails, and the law allows the liquidators to claw back unfair payments. Within the “relation back period”, six months before the administration in this case, the onus is on the creditor which received the supposedly unfair payments to prove that they weren’t unfair, rather than the liquidators to prove that they were unfair. Liquidators often ignore the payments prior to the relation back period, as here, because during that period the burden of proof is on them, and the case is therefore much harder and more expensive to prove.
Danks argued that it had a defense under s 588FG(2) of the Corporations Act: the company was solvent when the payments were made, Danks became a party to the payments in good faith, and that at that time Danks had no reasonable grounds for suspecting that the company was insolvent, nor would any reasonable person have had such grounds for suspecting.
The two key issues were, first, whether Waddell & Son was insolvent, and if so, second, whether Danks knew or reasonably should have known.
The judge found an analysis of the balance sheet interesting. At 30 June 2004, the business owed the directors $456,625. However, a year later the balance sheet showed that the directors owed the business $108,683, which suggests that they had taken about $565,000 out of the business over that period. The judge pointed out that “the balance sheet shows a severely undercapitalised business…For an undercapitalised company, that so much money should according to its books have been lent to directors, or in some way treated as an obligation of the directors to it, is an indication that its circumstances were very severe. Whatever else the company might be doing with available resources, it was in no position to finance the directors in any way.” However, the judge indicated that Danks did not have access to these financial accounts!
The judge concluded that the company was insolvent at the point where it set up the $7000 per week and COD arrangement with Danks. He said that it was “correct that there is no clear and cogent proof of [insolvency] which can be attributed to any particular date [presumably because the accounts were in a mess]. [However, a] company which was solvent … would not need to make and would not ask to make such an arrangement, particularly on the basis that its major supplier with which it had a franchise arrangement would only give it goods COD.”
NSW Home Group Manager for Danks, Mr Back recalled the meeting which set up this arrangement. His recollection was that Waddell & Son would still obtain credit for half as much as it paid back, i.e. if it paid back $7000, it could buy $3500 on credit. However, this wasn’t the agreement that was formalized, and the judge didn’t accept that the credit terms were agreed. Two other Danks’ managers, Aylwood and Behoff, were present at this meeting, and were more involved in the process of collecting the money. The judge said it was unfortunate that Danks was not in a position to call or did not call either of them to give evidence. For each of them his actual state of mind in his respective circumstances was relevant to the question of whether the transaction was entered in good faith, and whether there were reasonable grounds for suspecting that the company was insolvent. Aylwood, the regional sales manager, left Danks “in somewhat strained circumstances when he was unhappy about a promotion decision.” However, the judge pointed out that it was open to Danks to compel his attendance if it wished to do so. Behoff, the NSW credit manager, had retired and returned to Germany.
He concluded that “any reasonable mind,
acting with the information before Mr Back in June 2005 and directing itself to
the question of solvency, must have seen that the company was insolvent.”
He awarded judgment against Danks for $140,000.00 with costs.
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2. The perils of lending to a 93-year-old
Waddingham v Australian Securities Limited (Credit) [2008] VCAT 265
Ivan Waddington Jnr had a trucking business. He asked his 93-year-old father to take out a loan to pay debts of his company and to assist him to buy a truck.
On 24 November 2004 Mr Waddington Snr signed a loan contract. Australian Securities Limited agreed to lend him $200,000 on the security of a mortgage over his home in Blackburn South. None of the documents referred to the purpose of the loan.
Before the contract was finalised, ASL received a certificate from Mr Waddingham Snr’s then-solicitor asserting that the borrower had had the documents explained, and that, in essence, he knew what he was doing. ASL also received a certificate from a financial adviser saying among other things, “that [the borrower] has capacity to make repayments under the loan contract, that [the adviser] approves and supports the loan application as a sound financial strategy in the borrower’s best interests, that there is no basis for the lender to refuse the loan, and that refusal of the loan ‘may cause financial hardship’ to the borrower.”
In September 2007, VCAT ordered that an administrator be appointed for Waddingham Snr’s estate. The administrator, State Trustees Ltd, applied to VCAT under s70 of the Consumer Credit (Victoria) Code, saying that at the time he entered into the loan contract and mortgage, he had Alzheimer’s dementia and major depression, was aged 93, and that his only income was an age pension which did not cover the interest payments.
Waddington’s trustee claimed that the credit contract and mortgage were unjust when entered into because ASL knew or ought to have known that he was unable to protect his own interests, and unable to understand the provisions and effect of the contract. He claimed that if ASL had made reasonable inquiries as to how Mr Waddingham would be able to make payments under the contract, it would have discovered (if it did not already know) that he was entering into the contract for his son’s benefit only. Mr Waddingham himself did not benefit from the loan and had no interest in any business or company or Ivan Jnr. It had been agreed between the father and the son that Ivan Jnr would be responsible for paying the payments under the contract.
In November 2007, ASL applied to have this matter dismissed or struck-out. ASL said that the claim that the contract and mortgage are unjust was manifestly hopeless.
However, the judge pointed out that “if when he entered into the loan contract in 2004, Waddington’s dementia made him incapable of managing his affairs, then it is also likely that he did not understand what he told his solicitor or financial adviser or what was contained in their certificates. In these circumstances, reliance on these certificates would be of little value. This dispute cannot be determined without a full hearing.”
ASL also submitted that the credit was provided predominantly for business purposes, because the bulk of the loan money was paid to Ivan Jnr’s company or to purchase a truck for Ivan Jnr. It said that, because of this, the Code did not apply and the claim should be dismissed because the Tribunal has no jurisdiction.
The judge (‘president’ of the Victorian Civil and Administrative Tribunal) said that “a party cannot simply choose not to inquire about the purpose or use of credit and then argue that the Code does not apply because a party did not know the purpose for which the credit was intended to be provided.”
The Tribunal held that a father borrowing for the benefit of a son’s business was not necessarily a loan for business purposes. It is the purpose of the parties to the transaction, and not of someone (the son) who is not a party to that transaction, that is relevant. The extent of ASL’s knowledge was a disputed matter which needed to go to a full hearing.
ASL’s application to have Waddington’s claim struck out was rejected.
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3. Personal Property Securities Bill like NZ’s soon – A-G’s speech
http://www.nswbar.asn.au/circulars/pps.pdf
The NZ Personal Property Security Act 1999 was a major change for New Zealand businesses to come to grips with. Many were embarrassed by their inability to understand that their contractual terms no longer determined priority. In one early case, the failure to spend a few dollars and a few minutes registering a security online, cost a business more than $1 million when it lost priority over a breeding stallion it had financed under a lease-to-own agreement with a stud farm.
Personal property is, broadly speaking, everything you can own other than land. In general this can be described as “goods”. In Australia, when a creditor holds a security (hire purchase, retention of title, bill of sale, etc) over goods (a car, a TV, the assets of a business, a patent, etc) the law as to registration is messy. In general, registration is notice “to all the world” that someone other than the owner has an interest in those goods, but not all securities need be registered. For those that must be registered, there are many different registers in different States, covered by different rules. This makes life difficult for creditors, and difficult for those buying goods who must work out which register to check. Most registers are not on-line, so checking the register is not always easy.
In a speech to the Institute for Factors and Discounters on 6 March 2008, Attorney-General Robert McClelland outlined the progress which has been made in reform in this area.
“On 20 December 2007, the Council of Australian Governments committed to pursuing an ambitious deregulation agenda. To do that, COAG established a Business Regulation and Competition working group to oversight reform in the regulatory “hot spots”. Those hot spots are areas where reform will deliver tangible economic benefits. PPS [personal property securities] reform is high on that hot spot list….
“Right now it’s not clear which Act or which register applies to some business transactions. Businesses need to ask: ‘Which is the appropriate register for my security interest?’ Or even: ‘Is there a register I can use to register my security interest?’ After the reform, there will be one single national register for all interests...
“Shortly, I hope to be able to release an exposure draft Personal Property Securities Bill for public comment. In preparing the draft Bill, the Government has been fortunate to have a number of models to draw on. For example, New Zealand under went reform in the early 2000s. It seems sensible that where possible we harmonise our business laws with those of New Zealand.”
In most situations, if a creditor puts goods into the hands of a customer but does not register a security, that customer’s other registered general creditors will end up with priority over the goods. The fact that a trade creditor’s contract says that it still owns the goods, or that a finance company’s contract says the goods were leased is largely irrelevant.
Registration on the online New Zealand Personal Property Securities Register initially cost NZ$5 but was later reduced to NZ$3. Registration takes a few minutes to do on-line. Australia will also be aiming to produce an easy-to-use, low-cost system.
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4. Can you defame a person with a poor reputation?
Ollis v Jenman & Anor [2008] NSWSC 67 (15 February 2008)
What happens if you defame a person with a poor reputation? Say you tell people someone is a ratbag but you say some things about him which turn out to be unjustified? You can prove he’s a ratbag, but you can’t prove everything you’ve said. Can he sue you for defamation? The answer is yes.
Victor Warren Ollis, who traded under the name Country House and Land Sales, sued Neil Alfred Jenman and The Neil Jenman Group Pty Limited for damages for defamation arising out of an item published by the defendants on a web site on the Internet in June 2004.
At the trial, the jury found that the website had said:
“(a) The plaintiff has served three prison sentences for property and company related crimes.
(b) The plaintiff is likely to rip off everyone he comes in contact with.
(c) The plaintiff has habitually failed to pass on rent payments to landlords of the properties he manages.
(d) The plaintiff forces some of his tenants to live in atrocious conditions.
(e) The plaintiff often does not pay tradespeople for the work they do for him.
(f) The plaintiff is likely to defraud investors and business associates of their savings,
(g) The plaintiff arranges for criminals to visit his critics at their homes to intimidate them.
(h) The plaintiff took $7900 from a woman by fraud.
(i) The plaintiff kept a $7900 deposit when he should have returned it.
(j) The plaintiff is a crook.”
For most of these, Jenman argued that they were “…substantially true and related to a matter of public interest.” However, Jenman’s lawyers accepted that “no evidence had been led in justification of imputations (d) [tenants in atrocious conditions], (e) [doesn’t pay tradespeople], (g) [criminals visit his critics] and (h) [took $7900 by fraud]. It was, however contended that imputations (a) [3 prison terms] and (j) [plaintiff is a crook] had been proven to be true and that in these circumstances imputation (h) [$7900 fraud] occasioned no damage (or no further damage) to the plaintiff.”
Among other things, the case looked at the fact that, “from 17 February 2004 onwards Mr Ollis drew a series of cheques on his business account which led to the personal account being overdrawn because it replenished the business account, the amount of such overdrawing exceeding $11 million by January 2006. Despite Westpac freezing the personal account, on it becoming overdrawn, the faulty system which Westpac employed continued to result in the business account being replenished. This only stopped when the business account was frozen on 12 January 2006, being marked "post credits only"…. Mr Ollis exploited the situation for his benefit and to the detriment of Westpac as he must have known and continued to do so until 12 January 2006.”
The judge said that in respect of NSW defamation law, “imputation (h) [took $7900 by fraud] does not further damage his reputation… [and] further damage to the plaintiff's reputation by imputation (e) [doesn’t pay tradespeople] is inconsequential, if not non-existent. The judge specifically concluded that “he has the reputation of a crook… The plaintiff has a poor reputation and has had a poor reputation for a long time. His financial fraud and dishonesty has overshadowed all else…”
[However] “taking into account the lack of justification as to four imputations in the States and Territories other than New South Wales, the position in New South Wales … and the poor reputation of the plaintiff I assess the plaintiff's damages as $20,000. This is primarily because of imputation (g) (arranging for criminals to visit his critics) and to a lesser extent imputation (d) (forcing some tenants to live in atrocious conditions).”
