New Zealand Credit Law Bulletin - Vol 8, No 4, August 2008
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
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:
- Prohibited director appeals against imprisonment
Punishment for “a most dishonest man” - Guarantors attempt to escape liability
The sort of case finance companies are likely to see a lot, over the next few years - Problems when your husband borrows from your boss, then goes bankrupt
It ends in tears for all concerned - The “get-out-of-jail-free card” – the No Asset Procedure eight months on
A quick summary of the outcome of the introduction of a new bankruptcy option
1. Prohibited director appeals against imprisonment
The Queen v Butler [2008] NZCA 173 (19 June 2008)
Mr Butler had a number of fraud related convictions between March and October 2003. They were two charges of intent to defraud, 13 charges of defrauding by false pretences, six charges of using a document with intent to defraud, and four charges of altering a document with intent to defraud. These offences are all crimes of dishonesty in terms of s 2(1) Crimes Act 1961. As a result, under s382(1)(b) of the Companies Act, he was prohibited from being a director of a company for five years after the convictions unless he obtained the leave of the Court.
Despite this, between October 2003 and June 2005 Butler became a director of six different companies without obtaining the leave of the Court. In the case of three of the six companies he signed a form of consent and certificate stating he was not disqualified from being a director when he knew that statement to be false.
The penalties for being a director when prohibited were substantially increased in 1993 to a maximum of five years’ imprisonment or a fine not exceeding $200,000 under s 373(4). The legislation also provides that, upon conviction for an offence under s377(1)(a) (False statements). An offender is further prohibited from becoming a director of a company for five years from the date of conviction (s382(1)(b)).
Two of the companies later went into receivership with debts said to total $174,000. Butler was prosecuted in the Invercargill District Court.
The Judge told Butler on 5 February 2007, four or five months prior to his trial for the Companies Act breaches, that if he were to plead guilty, the appropriate sentence would be six months’ imprisonment. The Judge also indicated that he would grant Mr Butler leave to apply for home detention. He was found guilty after a trial later that year.
The Judge treated Butler’s offending as serious noting the maximum penalties and observing that the legislature saw this type of offending as striking at the heart of the commercial world. The Judge referred to Butler’s substantial list of previous convictions on fraud-related charges for which he was sentenced to 12 months imprisonment in March 2003. An examination of Butler’s record shows that he was first convicted for fraud in 1999 when he was 20 years of age. Against that background, the Judge was entitled to conclude that Butler was “a most dishonest man”.
The Judge noted the extent of the losses sustained by two of the companies which had harmed a number of innocent people. He accepted a submission made on behalf of the Crown that Mr Butler’s conduct amounted to a breach of trust to the extent that persons dealing with companies should be entitled to assume that directors are not disqualified persons. The Judge accepted the assessment of the Probation Officer that Mr Butler was of medium to high risk of re-offending having regard to his “patent and continuing acts of dishonesty”.
The Judge sentenced Butler to nine months prison on top of the two years he had been sentenced to in March (for an unrelated matter – intentional damage). Home detention was expressly ruled out, though it wasn’t possible anyway, given the earlier two year sentence.
Butler appealed the sentence.
The Court of Appeal said, “We are not persuaded that the sentence was manifestly excessive having regard to the totality of the offending. Mr Butler engaged in multiple offending over a period of 20 months when he must have been well aware that the law prohibited him from being a director of companies. His previous convictions on a substantial number of dishonesty charges were a serious aggravating factor to which the Judge was entitled to give weight. There were no mitigating factors to which the Judge could have attached any significant weight. For these reasons, the appeal against sentence is dismissed.”
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2. Guarantors attempt to escape liability
Bishop and others v Financial Trust Limited [2008] NZCA 170 (18 June 2008)
In 2003 Securities Registry Ltd (SRL) as trustee for Securities Registry (No. 3) Trust entered into agreements to lend approximately $10.5 million to BFA Development Company Limited. BFA used the money to buy and develop properties at Webb Street and Willis Street in Wellington. The loans were secured by a mortgage over the properties and guarantees provided by Joan and Donald Bishop, Emma Fursman, and David Tobin.
Late in 2003, Financial Trust Limited replaced SRL as trustee of the trust concerned. BFA defaulted on the loan, the properties were sold, and there was a shortfall of $3,379,023.69, together with accruing interest and costs.
Financial Trust sought and obtained a summary judgment in the High Court against the guarantors. A summary judgment can be obtained when the matter is straightforward enough that, without going through a full hearing, the judge can conclude that there is no viable defence.
The guarantors appealed, questioning the effectiveness of the assignment of the loan from SRL to Financial Trust Limited, and in particular whether proper notice of that assignment had been given. The associate judge in the High Court said that a letter from FTL’s then solicitors, dated 28 November 2003, was sufficient notice. The letter said:
...This letter is to advise you that SRL has entered into a deed of removal and appointment dated 18 December 2003…
It advised that a Deed dated some three weeks after the date of the notice had already been entered into, and that various steps had been taken when the Deed made it clear that none of those steps would be effective until 18 December 2003.
The Court of Appeal said this couldn’t be good notice. However, it said that subsequent deeds of variation, signed in 2004 and 2005, when read in tandem with the 28 November 2003 letter, were sufficient notice.
FTL also cross-appealed against the costs awarded in the High Court. FTL’s Deed of Guarantee and Indemnity allowed it to recover its actual costs, but the associate judge in the High Court awarded a lesser amount. The Court of Appeal said that in normal circumstances, the relevant clause in the Deed would have entitled FTL to its actual costs and disbursements in the High Court, but “the unusual feature of this case was that the difficulties FTL had in enforcing the guarantees arose from the doubt created by the untidy manner of effecting the assignment... In light of that unusual feature of the case, we do not consider that all of FTL’s costs can fairly be characterised as properly incurred in enforcing its rights under the guarantees. We consider that the award of costs on a [lesser] basis yields a fair outcome in the circumstances and we do not therefore allow the cross-appeal.”
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3. Problems when your husband borrows from your boss, then goes bankrupt
Andrew Yong T/A Yong & Co Chartered Accountants v Chin [2008] NZCA 181 (25 June 2008)
Mr Yong employed Ms Chin in his accounting practice. Ms Chin was a hardworking and valuable employee. Without Ms Chin’s knowledge, her husband, Mr Chan, borrowed money from Yong. Yong and Chan agreed at the time of their transaction that they would not tell Ms Chin about it. Chan did not repay the debt and was later declared bankrupt.
Chan also borrowed money from one of the firm’s clients, Mr Lee, without Ms Chin’s knowledge and did not repay that either. Ms Chin dealt with a tax dispute which Mr and Mrs Lee had with the Inland Revenue Department. The outcome was, from the Lees’ point of view, a good one, and in gratitude the Lees invited Ms Chin and Mr Chan to dinner, and they reciprocated. Chan borrowed money from Mr Lee following these social contacts.
Yong was upset when Chan did not repay the money which he owed him. However, he accepted that Ms Chin knew nothing about the loan arrangement and was not responsible for Chan’s debts.
Yong and his associate brought up Chan’s failure to repay the loan in the course of discussions and correspondence ostensibly about a proposed reorganisation of Mr Yong’s business a year later. Ms Chin felt that she was being placed under pressure to meet her husband’s debt to Mr Yong. Then, early one evening Yong and his associate arrived unannounced at Ms Chin’s home while she was on sick leave. They wished to speak to Chan about the debt. Ms Chin took exception to this and the police were called. Ultimately, she resigned her position at the firm and brought a personal grievance against him, on the basis that she had been constructively dismissed. Constructive dismissal is the situation where an employee, though not actually dismissed, is forced to resign by an employer's actions.
The Employment Relations Authority (ERA) upheld her claim. It ordered Mr Yong to pay Ms Chin compensation including $5,000 for loss of dignity, hurt and humiliation. On appeal, the Employment Court confirmed the ERA’s orders, but increased the compensation from $5,000 to $8,000. Yong sought leave to appeal to the Court of Appeal.
The Court of Appeal had some difficulties in understanding the grounds for appeal raised by Yong’s lawyer. “Ultimately, what seems to underpin [his] various arguments is this. On the facts Mr Yong was entitled to suspect that Ms Chin was involved in her husband’s loan transaction with him. Accordingly, he was entitled to investigate the position and treat Ms Chin as having some responsibility for the debt. But the Judge [in the Employment Court] rejected that view of the evidence. His conclusion was open to him, given that …Mr Yong accepted that Ms Chin knew nothing about it, and was not responsible for her husband’s debts.”
The only point on which the Court felt there might be grounds for appeal were over the fact that “the Judge increased the level of compensation, even though, [apparently], Ms Chin did not seek an increase and [Mr Yong’s lawyer] was not put on notice that this was in contemplation. If that is so, we consider that the Judge should have given express notice in advance that he was contemplating increasing the compensation award so that [Mr Yong’s lawyer] had the opportunity to make submissions ... However, given the small amount at issue ($3,000) we do not consider that this is a basis on which we can properly give leave [to appeal].”
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4. The “get-out-of-jail-free card” – the No Asset Procedure eight months on
In December 2007, New Zealand got a new, easy bankruptcy option for people with debts of less than $40,000 and no assets or income. They could go into a simplified form of bankruptcy, the No Asset Procedure or “NAP”, and come out after 12 months, rather than the usual three years. They could use this option only once. Because there were no assets or income there was no administration required of the Insolvency & Trustee Service.
After a slow start, people have now discovered the process. Add in the effects of a recession, and, as we predicted, there will eventually be huge numbers of people “taking a NAP”. Television One News did a feature on the NAP and the rising numbers of people using it, on 28 July. (I originally included the link from the TVNZ website so people could view this item, but it the link now shows a three-minute Robert Harris coffee ad - an interesting, if someone sneaky, marketing trick.)
The Insolvency & Trustee Service was inundated the next day by people asking how they can use the “get-out-of-jail-free card” they saw on the news the night before. They also took many calls from people who had used the ordinary three-year bankruptcy option, and now wanted to change (which isn’t possible).
In a nutshell, here are the pros and cons of the process from a societal viewpoint.
The arguments for: in this consumer society we live in, lots of stupid (or unlucky) people with no worthwhile income or assets get themselves hopelessly indebted. There’s little point in punishing them with a three-year bankruptcy. Many people ruin their lives trying to stay out of bankruptcy. Better to give them an easier option so they can get it over with and then get on with their lives.
The arguments against: of course, in some respects, NAP rewards the people who have been the most financially irresponsible - those with no assets and no income, only debts (albeit debts of less than $40,000). And unfortunately, if you give the weak and hopeless a way out, the dishonest and devious will find ways to use it. An unsupervised process depends on honesty more than a supervised process does. Add to this the fact that some budget advisers see creditors, particularly finance companies, as “the enemy”, and are encouraging their clients to, in the words of one budget adviser, “stick it to the finance companies.”
Lastly, there is an argument that any option which reduces responsibility, reduces the stigma of bankruptcy, and makes it easy and painless to avoid debts will simply encourage financial recklessness and recidivism.
At the same time that the NAP option was introduced, the Summary Instalment Order, an option which allows debtors to pay all or part of their debts, under supervision over a three-year period, was revamped to include those with debts of up to $40,000. There has been almost no uptake for this more responsible option.
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