New Zealand Credit Law Bulletin - Vol 8, 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: 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:
- Only the second Minors Contract Act 1969 case to reach the High Court
The judge finds that the lender was “careless” - Bankrupt’s compromise proposal rejected in Court of Appeal
$50m case founders for lack of $7000 payment - The importance of mentioning the Construction Contracts Act on building-related invoices
Failure costs construction company - Hydraulicing houses – a valuer gets his sums wrong
An interesting explanation of the crime, which works particularly well in a rising property market
1. Only the second Minors Contract Act 1969 case to reach the High Court
Mr Raynor, who was aged 17 years and 9 months, and Ms Tahua, who was aged about 17 years 6 months wanted to buy a car. The car dealer filled in an application form and Raynor and Tahua took it to Wine Country Credit Union’s office. The loans officer looked at their dates of birth and miscalculated their ages, concluding that they were 18. Their incomes were shown as $460 and $350 per week. Tahua’s income, in reality, was $60, and Raynor’s was also overstated. They claimed to be living in a de facto relationship, though it later came out that this was probably untrue. They had known each other for 3 weeks. Subsequently, Tahua had Raynor’s baby and they separated. The instalments were $103. The credit union lent them $15,612 to buy the car.
No payments were made. Three weeks later the car was impounded by the police when Raynor was caught driving without a licence. They had no money to pay the release fee of $470 so they applied for another loan of $2000. This was rejected. It was eventually repossessed and resold. Following resale, a balance of $11,969.47 remained.
Under the Minors’ Contract Act, a contract with a minor under the age of 18 years is unenforceable against the minor, unless the Court is satisfied that the contract was fair and reasonable, in which case it is given a discretion to enforce the contract in whole or in part.
The Judge was unimpressed by Raynor and Tahua as witnesses. However, he concluded that ... while the making of the contract may have been fair in the sense that it was an otherwise ordinary contract, it cannot be said … that it was reasonable at the time it was made. He was therefore unable to exercise in favour of the creditor the discretion he had under the Act. The Judge gave particular weight to the fact that Ms James ought to have correctly ascertained the respondents' ages (she had the relevant material before her). If she had done so, he thought, she would have made further inquiries about the respondents' means. She would have found out the respondents' true financial position. Had that been done, the Judge found, the loan would never have been made.
On appeal the High Court judge said that the District Court Judge “was quite entitled in his consideration of all of the factual material, to lay primary stress upon the errors made by Ms James. Quite simply the [creditor] was careless…”
He also pointed out that, “a finding of deliberate dishonesty [i.e. a minor lying about his or her age] is likely to lead to a finding that the contract was enforceable...”
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2. Bankrupt’s compromise proposal rejected in Court of Appeal
Fava v Zaghloul and others [2007] NZCA 594 (21 December 2007)
Philip Fava was ordered to pay $3,255.04 to Mrs Ekhlas Zaghloul, his landlord, for repairs and rent arrears by the Tenancy Tribunal. The dispute was very bitter and he refused to pay. Fava’s companies (Churchill Group Holdings Ltd and others) of which he was the sole director, were suing Aral Property Holdings Ltd and David Leung on an unrelated matter for $50 million. His lawyers were operating on a contingency fee basis, meaning that if Fava won, they got a share.
Zaghloul threatened to bankrupt Fava. Fava wrote to her lawyers that: “… in the unlikely event the High Court do not stay your client’s judgment I can always compromise with my creditors. This is an area of the law in which, from a company perspective, I have much experience ... I can assure you a creditors [sic] compromise has a 100% chance of success...”
On 6 December 2006, 31 days into the Churchill litigation Fava withdrew his opposition to the bankruptcy and was adjudicated bankrupt on the petition of Zaghloul (who, with legal fees, was now owed $7000). Once he became bankrupt, he could no longer be a director. The lawyers for Churchill and the other plaintiff companies had no-one to instruct them, so they withdrew from the case. Judgment was awarded against Fava’s companies. By this point, the defendants had spent over $3 million in legal fees. They indicated that they would be seeking costs against Fava and his solicitors personally.
Fava then proposed a compromise with his creditors which would have taken him out of bankruptcy and might have allowed him to recommence the corporate litigation. It involved immediate payment of 2.5 cents in the dollar, payment of another 7.5 cents in three years, and full payment from the proceeds of the Churchill case, once won. Fava’s family trust was the largest creditor by far and many of the other creditors were family or friends. The proposal was approved by the required majority of Fava’s creditors but rejected by the High Court.
The High Court judge rejected the proposal. There was no independent assessment of the probability of success of the case, or any indication of how Fava’s companies would fund the case, or how any money paid to the companies, if they won, would reach Fava’s creditors.
The judge found Fava’s own actions in relation to the Churchill proceedings very difficult to explain. Why did Fava not fight the bankruptcy in order to continue proceedings for Churchill? He speculated that perhaps Fava expected that ‘the bankruptcy to be annulled [through the compromise process] and the Churchill proceedings to be reinstated. ‘On that reasoning Fava could “have his cake and eat it too”, i.e. both avoid paying his creditors and pursue the Churchill litigation.’ In addition, there was no indication of where the money for the dividends would come from.
The Court of Appeal accepted Fava’s argument that submitting to bankruptcy was simply a mistake due to exhaustion. The Court also accepted that many of the creditors involved in the Churchill case had already assessed its chances of success.
However, the only creditors who the Court of Appeal regarded as truly independent were the banks, and they opposed the proposal. (Zaghloul’s lawyers in the Court of Appeal were apparently funded by the defendants in the Churchill case.) There wasn’t enough information provided for the Court to be confident that the proposal was reasonable. In particular, where was the money for the 2.5 cent dividend coming from (Fava wouldn’t say) and why was it not forthcoming earlier, to pay Zaghloul’s debt? The amount of money apparently available to meet the initial payments was not particularly large. Better for Fava to get a job and make contributions to his creditors from his earnings. Overall, Fava had not shown restraint in his dealings with other people. He forced Zaghloul to resort to bankruptcy proceedings over a small debt. The Court said that, “Fava was remarkably insouciant about the consequences for other people” – his lawyers and the defendants in the Churchill case – of his bankruptcy.
The terms of the composition were not reasonable and it was not approved.
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3. The importance of mentioning the Construction Contracts Act on building-related invoices
Gunac South Auckland Ltd was asked to remove cladding from a dwelling owned by Pathway Investments Ltd, a company of which Thomas and Lynley Welsh were the directors, and install waterproofing membranes, particularly around the decking areas. Gunac gave an estimate of $50,000-$70,000, based on other work they had done in the same apartment complex. The company was asked to proceed in February 2006.
Gunac sent three invoices to Mr and Mrs Welsh to for $24,699.98, $27,596.84, and $6,540.57. The invoices were not paid.
The Construction Contracts Act 2002 allows businesses carrying out building work, or supply related to construction, to get judgment easily in cases where a customer fails to follow the dispute processes set out in the Act. In essence, a debtor who fails to raise disputes in the manner set out in the Act can’t later raise those disputes in court. The second and third invoices said, “This Invoice is made under the ‘Construction Contracts Act’.” The first invoice contained no reference to the Act or to the fact that the invoice constituted a payment claim under the Act.
Gunac, relying on the Construction Contracts Act, sought and was awarded summary judgment for $58,837.39 in the District Court. The Welshes, who had a various allegations regarding matters such as costs and workmanship, appealed to the High Court. They argued that because the first invoice didn’t mention the Act, Gunac could not use the processes in the Act for that invoice.
Section 20(2)(f) of the Act says that the payment claim "must ... state that it is made under this Act". Gunac was therefore unable to rely upon it for the purposes of the making of a claim pursuant to the provisions of the Act. If Gunac had made its claim for the first invoice outside of the Act, it might have succeeded, but it hadn’t. The judgment for the amount of the first invoice, $24,699.98, was set aside. Gunac got judgment for only $34,137.41, meaning presumably that it would have to go back to the District Court and issue new proceedings for the $24,699.98. Those proceedings could now be defended.
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4. Hydraulicing houses – a valuer gets his sums wrong
The Queen v Findlay [2007] NZCA 553 (3 December 2007)
Mr Findlay was a registered valuer operating a private practice in Hamilton through his firm, Findlay and Co at the start of this decade. He was accused of prepared inflated valuations for a fraudster named Miles McKelvy and his associates who were operating in that area at the start of this century.
In one example (out of 15 that were used in Findlay’s trial in the District Court), Findlay provided a company associated with McKelvy with a valuation report assessing the value of 15A Lasenby Street, Rotorua, at $74,000 and the fair sale value at $76,000. In contrast, [shortly before] in 2001, the property had been valued by a different registered valuer as having a current value of $30,000 and an expected sale yield of between $22,000 – $24,000. Mr Findlay had described the property as a three-bedroom dwelling, when in fact it only had two bedrooms, and he had used what the Judge described as “demonstrably inappropriate comparable sales”… McKelvy, having purchased this property, then sold it to a Mr Tane. Using Mr Findlay’s valuation, Mr McKelvy applied for loan finance for himself and Mr Tane. Although Mr Tane understood that he was purchasing the property for $52,000 plus fees and insurance, the sale and purchase agreement was expressed to be for $76,000. Mr McKelvy applied for $59,200 in finance on behalf of Mr Tane.
Another property, at Herbert Street, Kihikihi was valued by Mr Findlay at $121,000 with a fair sale value at $123,000. The valuation was provided to a finance company to obtain bridging finance. The property’s value at the time was closer to $95,000. Mr Findlay had given an earlier valuation of the property at $101,000. The increase was attributed to fictional improvements.
Findlay was convicted in the District Court of fraudulently or dishonestly using a document and sentenced to 12 months prison, with leave to apply for home detention. Findlay appealed to the Court of Appeal against his conviction, largely on the grounds that property valuation is inherently subjective. Some valuers are more conservative than others and different valuers have differing opinions. The Crown appealed against the length of the sentence.
Findlay’s appeal was dismissed. Valuations are subjective but among other things, Findlay increased valuations as a result of non-existent improvements and miscounted the number of bedrooms. His sentence was increased to 18 months with leave to apply for home detention.
The case is interesting for its explanation of the crime which the judge refers to as a “price hydraulic fraud”. “The offenders would identify property that was either for sale or due to be sold by public mortgagee sale. The parties would obtain the property under contract... However, they would not be in a position to fund the original agreement for sale and purchase, so would enter into an agreement for a contemporaneous on-sale. The on-sale agreement would be drawn up between the perpetrator and a related party at an inflated price, often supported by a valuation obtained from another associate (a compliant registered valuer [in this case, Findlay]). The perpetrators would then apply to a lending institution to borrow up to 80 percent of the inflated purchase price, on the strength of the contemporaneous sale and purchase agreement and fraudulent valuation. The lending institution would thus unwittingly finance the entire open market transaction…
“… In these circumstances the purchasers were able to obtain property without providing equity and the lending institution were left with a security of lesser value than that relied on by them in deciding to advance loan funds.
“Relying on a rising property market, if all goes to plan the perpetrator of the fraud would sell the property at a greater value than what it was purchased for, meaning the entire loan from a financial institute could be repaid with some to spare (i.e. a profit for the fraudster). Of course, if the property did not appreciate in value, then the financial institute could lose money.”
McKelvy, the ringleader of the group, was said, in sentencing, to have caused losses of about $4.4 million, (though this may have involved other types of offending as well). See http://www.nzlii.org/cgi-bin/sinodisp/nz/cases/NZHC/2006/785.html
