Australian Credit Law Bulletin - Vol 9, No 3, Mid-winter 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:
- A $240,000 company loan compounds to $11,588,845 in two years!
Unconscionable to take advantage of our desperation, claim the guarantors; judge agrees - How do you serve documents on someone who doesn’t want to be served and lives overseas?
An example of an application for substituted service - Where a statutory demand is an abuse of the process of the Court
Judge finds the “creditor” gets it wrong in numerous interesting ways - Suspected criminal complains about law firm reusing adverse information about him
Limited circumstances where lawyers can share information about a defendant they have in common, but here, justice appears to be done
1. A $240,000 company loan compounds to $11,588,845 in two years!
Galadriel Lothlorien Pty Ltd v Station 1 Pty Ltd [2008] NSWSC 91 (15 February 2008)
Stojan Paceskoski, Antonio Saglimbeni, and Anna Maria Saglimbeni were all directors of Station 1 Pty Ltd. Station 1 owned a property which it wanted to subdivide, in Rockdale, Sydney. It borrowed $2.3 million from Perpetual Trustee Company Limited which took a registered first mortgage over the property.
It borrowed another $120,000 from Filmseal Pty Ltd under what is known in the finance industry as a “caveat loan”. This is where money is borrowed on a second mortgage, but that mortgage isn’t registered nor intended to be registered. Instead, it is protected by a caveat on the title. In Latin, “caveat” means “beware”. The caveat was sufficient to warn anyone dealing with the title about Filmseal’s interest in the property. The Filmseal loan was for three months, maturing on 5 December 2004. The interest rate was 3 per cent per month and the default interest rate was 4.5 per cent per month. Unpaid interest was capitalised monthly. The directors of Station all gave personal guarantees for both loans.
By early March 2005, the Filmseal loan was well past due and was unpaid. The payout figure was in the vicinity of $180,000. Station and its directors were desperately seeking a replacement short term loan. They were obviously not an attractive proposition to conventional lenders.
Working through a finance broker, they found another lender, Galadriel Lothlorien Pty Ltd. Station borrowed $240,000 for two months. The documentation provided in the conventional way for a higher rate of interest to be reduced to a lower rate on timely payment. The higher rate of interest was specified as 14.5 per cent per month. The lower rate of interest was specified as 7.25 per cent per month. Even the lower rate was substantially higher than the default rate on the Filmseal loan! Any arrears in interest compounded daily.
Even by the standards of the caveat lending trade, the rates are extremely high. On an annual basis they equated to 87 per cent and 174 per cent, even without the daily compounding.
Leon Angelopoulos, a finance broker who referred Station 1 to Galadriel, gave evidence that normal concessional rates in this market were around 5 per cent, but that the higher rate was not double, but generally 2 to 3 per cent more than the concessional rate. Previously Galadriel had generally charged 5 per cent as the concessional rate, although its higher rates had been double the concessional rate. Angelopoulos described the rates charged on the subject loan as “highway robbery”. Pamela Reading, the principal of Galadriel, agreed that it was “extraordinarily expensive finance”.
Station 1 defaulted on the loan and was unable to refinance because the amount required to refinance was so high. Galadriel sued Station 1 and the guarantors. Station 1 went into liquidation. Mr Saglimbeni went bankrupt and did not defend the matter. Paceskoski and Mrs Saglimbeni defended on the grounds that “the Court should, pursuant to section 7 of the Contracts Review Act (NSW) 1980, refuse to enforce the terms of the guarantee.”
In essence they claimed that the rate was extortionate and Galadriel took advantage of their desperate situation.
In an affidavit of 25 June 2007, Ms Reading stated the amount due under the loan of $240,000 advanced in March 2005 with interest calculated on the higher rate as $11,588,845.51 The judge said this was “a graphic example of the effect of a very high interest rate and the daily compounding provision.”
I am of the view that the interest rate imposed was extortionate, even by the standards of the market in caveat loans and all the more so in light of the daily compounding provision. The plaintiff was well aware of this and equally well aware that the defendants were in no position to bargain and would accept whatever interest rate, however extortionate, was stipulated by the plaintiff.
I find that the contract, insofar as it related to the guarantees given by the second defendant and the fourth defendant, was unjust within the meaning of the [Contracts Review Act].
The judge found that Galadriel’s insistence on the payment of the penalty interest destroyed Station’s chances of refinancing. “In the circumstances, I consider it just to refuse to enforce any of the provisions of the contract against the second defendant or the fourth defendant.”
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2. How do you serve documents on someone who doesn’t want to be served and lives overseas?
Freehills, in the matter of New Tel Limited (in liq) ACN 009 068 955 [2008] FCA 762 (26 May 2008)
Wainter Pty Ltd entered into an agreement with New Tel Limited in 2001. In December 2002 administrators were appointed in respect of New Tel Limited and on 13 January 2003 the company was placed in liquidation.
Wainter contended that it suffered loss as a result of that agreement and made a claim in respect of that alleged loss against New Tel and Freehills, a law firm. In 2004, Wainter obtained orders for summonses for examinations of members of Freehills.
Andrew Granville Waller is a director of Wainter. On 18 October 2007 a summons for examination of Waller was issued on the application of Freehills. This was said to be to determine the merits of the claim by Wainter against New Tel and Freehills.
Waller was also a director of Cable & Telecoms Limited (CAT). New Tel took over CAT in late 2001. The examination would also enable Freehills to determine whether there was a failure by the directors of CAT to reveal to New Tel the true worth of CAT and its assets and whether they may be guilty of civil or criminal wrong.
Freehills is a creditor of New Tel for unpaid legal fees and disbursements and is an eligible applicant pursuant to an authorisation from the Australian Securities and Investments Commission.
Freehills was unable to serve Waller. A Freehills lawyer, Andrew Ryan, attempted to make contact with Waller, leaving messages at various companies for which he was a director. Subsequently, Waller called Ryan. Freehills sought leave to serve the examination summons outside Australia and also by substituted service.
Freehills argued that the fact that Waller responded to Ryan’s messages meant the Court can be satisfied that he stays in contact with the companies. Freehills claimed Waller lives overseas, probably in Monaco.
The judge adjourned the case so that Freehills could adduce evidence as to the law of Monaco in relation to service of documents. When the case recommenced, he concluded that service in Monaco was not practical.
The court ordered that substituted service could be achieved by either serving the documents on one of a number of directors or employees in companies of which Waller was a director, or service on Waller’s father or Waller’s solicitors, or mailing it to his address in Monaco.
The examination was listed for hearing on 17 July 2008.
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3. Where a statutory demand is an abuse of the process of the Court
Vertical Telecoms Pty Limited v WRL Pty Limited [2008] NSWSC 558 (3 June 2008)
Vertical Telecoms Pty Ltd and WRL Pty Ltd had an arrangement between them under which Vertical was to supply data burst broadband wireless connections to Time On Systems Pty Ltd (“TOS). WRL later claimed that the plaintiff “illegally converted and used” internet resources belonging to an entity called TCR Holdings Limited (apparently incorporated in Hong Kong). Mr R. Williams, the sole director of WRL, was the chief executive officer of TCR. It is also asserted that the plaintiff illegally converted and used a router belonging to TOS "with no colour of right".
WRL served a statutory demand on Vertical. This is the first step in winding up an insolvent company. The demand claimed a debt owed to it of $1,576,000.
Vertical applied to set aside the statutory demand on the grounds that it was an abuse of process. The judge looked at a number of factors.
First, the evidence of Williams, who also appeared for WRL in court, established that the money was not in fact owed to WRL, it was owed to the Hong Kong entity. There had been no assignment of the debt to WRL. WRL was not the creditor and therefore had no standing to move for a winding up order. This, on its own, was sufficient to have the statutory demand set aside.
Secondly, the claim was for “the illegal conversion and usage of internet resources”. A debt for the purposes of a statutory demand is a liquidated sum in money apparently due and owing and payable by one person called the debtor to another person called the creditor. The judge said that “the claim here is one for unliquidated damages [damages for an amount which is not certain] arising out of an asserted tort [or wrong] committed by [Vertical] on, in the present instance, TCR Holdings. It is not a debt which can legitimately be the basis of a statutory demand.”
Thirdly, Vertical produced evidence showing that it was clearly solvent.
Fourthly, there was apparently correspondence in evidence that WRL threatened to request that other creditors join in the winding up application, an action which the judge frowned on.
Fifthly, “Williams candidly informed the Court that there was no present intention to rely on the WRL demand to found an application for winding up, but rather that what lay behind it was a desire on his part to bring the plaintiff to the table to negotiate an outcome of the dispute between them.”
For these reasons, moving to wind up Vertical constituted “an abuse of the process of the Court to bring about an outcome which those processes are not intended to achieve.”
The judge made an order restraining WRL and Williams from relying on the demand to commence winding up proceedings. Costs were awarded against WRL.
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4. Suspected criminal complains about law firm reusing adverse information about him
G v Law Firm [2007] PrivCmrA 9
G insured his home with an insurance company. Shortly afterwards, he made a claim and allowed the insurance company to undertake a number of investigations into his claim, including a criminal history check. The insurance company decided to reject the claim, and engaged a law firm to defend it in any resulting action.
The law firm was also representing a second insurance company which happened to be involved with a separate case involving G. Was the law firm able to us the information gathered by the first insurance company for the case of the second insurance company?
The law firm approached G’s solicitor for the second insurer case with a view to settling the matter before it proceeded to court. They informed his solicitor that they were aware of the information gathered by the first insurer.
National Privacy Principle 2.1 provides that an organisation must not use or disclose personal information about an individual for a purpose other than the primary purpose of the collection unless an exception in National Privacy Principle 2.1(a)-(h) applies.
This includes the belief that the disclosure is reasonably necessary to “the prevention, detection, investigation, prosecution or punishment of criminal offences, breaches of a law imposing a penalty or sanction or breaches of a prescribed law.” (National Privacy Principle 2.1 (h)(i))
The law firm claimed that it used and disclosed the complainant's personal information on the basis that it believed the complainant was engaged in unlawful activity by attempting to recover damages for an incident which did not occur in the circumstances which the complainant had alleged.
After consideration, the Commissioner was of the opinion that the law firm had reason to suspect unlawful activity had or was being engaged in. However, the disclosure was not a necessary part of an investigation into suspected unlawful activity or reporting it to the relevant persons or authorities. The law firm instead used the information to add weight to the second insurance company's legal argument in defending against the complainant's insurance claim. The Commissioner did not believe any other exception in National Privacy Principle 2 permitted the disclosure.
The matter proceeded to conciliation and the law firm offered a sum of compensation and an apology. G claimed a higher amount of compensation without substantiating the claim.
The Commissioner was satisfied that the law firm had adequately responded to the matter by making the offer of compensation and apologising. The complaint was closed.
