Australian Credit Law Bulletin - Vol 2, No 8, Christmas 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:
- Mareva injunctions - a tool you should know about
- Bill of sale not registered? Sue the lawyer!
- Do the current partners equal the former partners?
- The benefit of a well-drafted guarantee
- Security for costs and a plaintiff with no money
- Bankrupt could not get out of paying creditor's costs
1. Mareva injunctions - a tool you should know about
Wise v Icons Worldwide Marketing Pty Ltd [2000] FCA 1800 (8 December 2000)
Wise and Rawlyk traded as the Australian Cancer Prevention Directory. Icons agreed to provide marketing services for them, which included obtaining sponsors and advertising for a booklet about cancer. Only one advertiser was found and in the resulting contractual dispute Wise and Rawlyk claimed they suffered losses totalling $1,714,400. Mediation was attempted but eventually Wise and Rawlyk sued to recover their losses.
During the failed mediation they discovered that the Icons office had been closed, its telephone number was no longer listed and that Icons's director (Shale) had sold the family home. Fearing that Shale's assets would not be available even if they were successful in their action, they applied to the court for a Mareva injunction.
This is an "asset freezing order" that would prevent Shale from disposing of his assets until allowed to do so by the Courts. However, the Courts recognise that the granting of a Mareva order will have a significant impact on the property of the person against whom it is made. As the NSW Court of Appeal said in one of the leading cases, Cardile v LED Builders Pty Ltd: "a Mareva injunction ... is a drastic remedy which should not be granted lightly".
Wise and Rawlyk first had to show that they had a realistic prospect of succeeding in their contractual dispute, or at least a good arguable case. They then had to show that there was a real risk that Shale was trying to put his assets out of the reach of any potential creditors. Lastly, the Judge would take into consideration the "balance of convenience" in making his decision. That is, he would make an assessment based on whether the problems a Mareva injunction could cause one side would be outweighed by the benefits to the other.
Shale explained that he had no intention of transferring any of his assets beyond the Court's jurisdiction. He was trying to purchase a new home with his wife in joint names and was not trying to avoid a judgment against him. The Judge concluded that there was no real risk that Shale would squander his assets and the Mareva injunction was refused.
Creditors should be aware that this powerful tool exists. However, it is extremely difficult to convince a Court to grant a Mareva injunction.
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2. Bill of sale not registered? Sue the lawyer!
Hart v Mossensons [2000] WASC 295 (6 December 2000)
Hart purchased Windsor Station near Mt. Magnet in 1974. In 1987 he sold the station to the Cooks for $570,000. The Cooks paid $220,000 and Hart financed the rest. Payment was secured by a second mortgage on another property owned by the Cooks, a registered first mortgage over Windsor Station, and a registered bill of sale listing the stock and plant of Windsor Station.
"Bill of sale" is another term for "chattel security". The Cooks had possession of the property, but if they didn't pay Hart could take possession of the plant, equipment and stock covered by the bill of sale, and sell it. Hart asked his solicitors, Mossensons, to attend to the sale and to register the bill.
If not registered, the bill would still be valid between Hart and the Cooks. However, only a registered bill could make Hart a secured creditor and give him priority over other creditors.
Registration of a bill only lasted for three years from the date of registration. Registration could be renewed for further periods of three years. If Hart didn't renew before the first three years ran out, he would become an unsecured creditor.
The Cooks were to pay off the loan to Hart over five years. After three years, of course, registration of the bill ran out. However, neither Hart nor Mossensons did anything to renew the registration.
Early in 1993, Hart became aware that the bill was not registered. The solicitor he spoke to at Mossensons insisted that it was. However, this was not correct. Later in 1993 the Cooks went bankrupt. The Official Receiver claimed the plant and equipment covered by the bill of sale. The WA Bills of Sale Act 1899 deems an unregistered bill to be "fraudulent and void" in a case such as this as against the Official Receiver or the trustee in bankruptcy. Mossensons later accepted that by failing to renew the bill of sale, they had failed to protect the interests of Hart, their client.
Ultimately, Hart's claim upon the bankrupt estate was settled when he re-purchased Windsor Station from the Receiver. When Hart took possession, items of plant listed in the bill of sale were found to be missing. Hart then sued Mossensons and the Court ordered the firm to pay Hart for these and other resulting losses.
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3. Do the current partners equal the former partners?
Toorallie v Black [2001] NSWSC 1088 (28 November 2001)
In 1994, Carter, an employee of accountancy firm "Chapman & Eastway" gave some advice to Toorallie Pty. Ltd. The four partners in the firm at that time were Black, Chapman, Armstrong and McKeon.
The three partners in Chapman & Eastway in 2001 were Black, Chapman and Carter (the former employee). In that year, Chapman & Eastway sent a statutory demand on Toorallie for professional fees between 1999 and 2001. This is the first step to winding up the company.
Also in 2001, Toorallie sued the 1994 partnership, claiming Carter's advice in 1994 was negligent. Toorallie then applied to set aside the statutory demand on the grounds of its offsetting claim against the 1994 partners for Carter's negligence. If this claim was considered genuine, the statutory demand could not be used to wind up Toorallie. "Genuine" here meant that there was a real, arguable case.
The 2001 Chapman & Eastway partnership argued that the offsetting claim couldn't be used to prevent the winding up, in part because the partners in that claim (Black, Chapman, Armstrong and McKeon) did not correspond with the parties by whom the statutory demand was issued ( Black, Chapman and Carter.)
However Carter, as an employee, actually gave the advice which Toorallie claimed was negligent. This meant that he could be added to the claim against the four 1994 partners. The Judge decided that, providing Toorallie amended its offsetting claim to include Carter, it was to be treated as genuine. This meant Chapman & Eastway couldn't wind up Toorallie until after the claim had been tried.
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4. The benefit of a well-drafted guarantee
Ghiradi v Allregal Corporation Pty Ltd [2001] WASCA 366 (23 November 2001)
In 1997, Mr Lawless, Mr Chapman and the Mr and Mrs Ghiradi decided to open a restaurant, which would be owned by their family trusts. NAB provided an overdraft facility and took personal guarantees from Lawless, Chapman and the Ghirardis.
Chapman's parents also provided guarantees. They were secured by a mortgage over a property they owned. Liability was limited to the extent of their liability under the mortgage. That is, the bank agreed that the Chapmans were liable for no more than that property fetched.
The restaurant was unable to earn enough to pay running costs. When the overdraft was fully drawn, Mr and Mrs Chapman took steps to protect their interests. They paid off the overdraft, withdrew their guarantee, and obtained a discharge of the mortgage over the property. They arranged for the debt to be assigned by the bank to Allregal Corporation Pty Ltd, a company they controlled.
Allregal demanded payment of the debt from the company which was trustee of the Ghirardis' family trust. When that demand was not met, demand was made on the Ghiradis personally. Allregal then applied for summary judgment against the Ghiradis to force payment.
The Ghirardis argued that the bank's release of the Chapman's security disadvantaged them (the Ghirardis) and therefore released them. However, the express terms of the guarantee allowed the bank to release any security without affecting the obligation of the other guarantors.
The drafting of guarantees is a very difficult job, full of traps which can let the guarantor off the hook. In this case, the guarantee was sufficiently well-drafted to cover the situation. Summary judgment was awarded against the Ghiradis.
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5. Security for costs and a plaintiff with no money
Scanlan v Greenport Nominees Pty Ltd [2001] WASC 307 (9 November 2001)
In 1994 Scanlan, an architect, got together with Jermyn, a businessman, to develop the Indiana Teahouse restaurant on the beachfont in Cottesloe.
Greenport Nominees was the company formed for the venture. The development experienced some difficulties and Scanlan and Jermyn's relationship soured. In 1998, Scanlan sued, claiming unfair conduct by Jermyn and Greenport.
In November 2001, a matter of days before the much-delayed case was due to heard, Greenport sought an order against Scanlan for provision of security for court costs in the event that Scanlan lost. The judge looked at Scanlan's financial situation and said, "in my opinion, the evidence shows that [Scanlan] is unlikely to be able to meet any order for costs that may be made against him."
However, the Court has complete discretion whether or not to order the provision of security for costs. It takes into consideration the circumstances of the case before it. An order may be refused when the application is not made until the person making the claim has run up considerable costs in bringing the action. It will also be refused if it can been seen as having the effect of holding up the litigation. (In this case, ordering costs may have completely prevented the case proceeding.) Delay can also be seen as a major factor against the making of an order.
The judge said that the delay in bringing the application had not been satisfactorily explained. If he ordered provision of security for costs at this late stage it could at the very least mean the adjournment of the trial yet again.
He said, "It has the potential to inflict injustice upon the first applicant who has incurred very substantial legal costs to date, of the order of $160,000 it appears." He stopped short of suggesting that Greenport was trying to obstruct Scanlan's case but the order for security over costs was refused.
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6. Bankrupt could not get out of paying creditor's costs
Lawindi, in the matter of Elkateb v Elkateb [2001] FCA 1527 (31 October 2001)
Lawindi had been trying for some time to get payment of a debt from Elkateb. Finally, Lawindi filed a creditor's petition, the last step in a bankruptcy action before the hearing at which Elkateb would be made bankrupt.
The petition was eventually delivered to Elkateb while he sat in the Law Courts Building in Sydney. Elkateb continued to resist the petition, claiming that it had not been delivered properly. However, it has been settled law for around 130 years that putting the document down, including throwing it down, in the presence of the debtor and telling him the nature of it will be enough. Furthermore, delivering documents in the area of a court does not make the delivery invalid.
The bankruptcy hearing took place on 12 June and the Judge was to announce his decision on 14 June. However, on 13 June, Elkateb, who had fought tooth and nail to avoid being made bankrupt, decided to become bankrupt on his own petition! This meant that the Court could no longer declare Elkateb bankrupt under Lawindi's petition.
However, Lawindi's petition had been fully heard and the costs incurred before Elkateb presented his own petition. As a result the Judge ordered that Lawindi's costs be given the same priority in Elkateb's bankrupt estate as if the bankruptcy had been made under Lawindi's petition.
