Australian Credit Law Bulletin - Vol 3, No 1, January 2002
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:
- Trying to take property out of reach of creditors
- "It was the bank's fault for bouncing our cheques"
- When is a debt incurred and why is this important?
- Exactly how much did the debtor have to pay?
- Lesson for director - you have to pay creditors!
- Claimant reinstating wound-up company
1. Trying to take property out of reach of creditors
Lumsden v Snelson [2001] FCA 83 (14 February 2001)
In 1989 Mr Snelson was involved in a car accident. At the time of the accident, his car was not registered or insured. The Transport Accident Commission made payments to the injured persons in the other car. In mid-1997 the Commission wrote to Mr Snelson telling him that they wanted repayment.
Since August 1986 the Snelsons had jointly owned a family home. Mr Snelson had no other assets with which to pay the debt. Late in 1997, he transferred his share in the property to Mrs Snelson. Mrs Snelson did not pay him anything for this. The house was sold in mid-1999. The proceeds were used by Mrs Snelson to buy shares in offshore companies and a caravan.
By late 1999 the Commission had obtained a court judgment against Mr. Snelson for $250,759.05 and in April 2000, he was made bankrupt.
Under section 120 of the Bankruptcy Act 1966, an undervalued transfer within 5 years of bankruptcy will be void against the trustee in bankruptcy. Section 121 is an even more useful section for creditors. Under section 121 a transfer of property is void, no matter how long ago it happened, if the Court believes its main purpose was to take the property out of reach of creditors.
Mr Snelson claimed he had transferred the house for health reasons. However, he couldn't explain how his health would be improved by this action. He also made the mistake of admitting in an interview in May 2000 that the transfer was "because I knew I had the judgment coming".
The judge concluded that he was trying to prevent the Commission
from recovering the amount he owed it. The trustee was able to trace Mr Snelson's share of the house through to the offshore investments and the caravan, and to recover his half interest in these assets.
Sadly for the Commission, the investments had not done well. An outlay in June 1999 of AUS$235,000 was, by February 2001, apparently only worth US$1,900.
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2. "It was the bank's fault for bouncing our cheques"
Narni Pty Ltd v National Australia Bank Limited [2001] VSCA 31 (30 March 2001)
Narni ran a 70-bed private nursing home in Carrum. By the end of 1988 Narni's assets were almost all funded by loans and the business was in serious difficulty. Cash flow was a constant problem.
Early in 1988 Narni had applied for an overdraft facility with NAB. Formal approval, with a limit of $65,000, was not given until November. Nevertheless, the account was regularly in debit over the whole period as NAB honoured cheques drawn by Narni even though there were no funds to meet them. NAB repeatedly refused requests to extend the overdraft facility to $100,000. In fact, the Bank regularly tried to get Narni to keep within the agreed limit but at the same time supported the account by continuing to honour any cheques drawn.
In June 1989, NAB began to dishonour Narni's cheques. When their wages cheques bounced, the staff went on strike. A debenture holder took possession and soon sold the business.
Narni sued NAB for damages, claiming that NAB had caused the failure of the business by removing its support under the overdraft agreement without giving any notice to Narni. It also claimed that NAB's continued support for Narni's account implied that such support would continue as a matter of course.
The Court confirmed that borrowing and lending remain a matter of contract, whether it was expressly written down or could be implied by the actions of the companies concerned. A term will be implied only where it is necessary, in a business sense, to ensure that a contract will operate properly or where the term is one which the parties must obviously have intended. Allowing unauthorised overdrafts was not necessary for the operation of Narni's account. The Court also decided that the conduct of the parties did not give rise to any obvious inference that they intended to vary the agreement between themselves.
The standard "notice of authority" signed by Narni when the account was first opened acknowledged that any overdraft facility was to be the Bank's choice. No bank is under a legal obligation to permit a customer to overdraw his account. Furthermore, even if a bank has allowed its customer to overdraw on previous occasions this did not mean it had a legal obligation to continue to do so.
Where a bank chooses to allow an overdraft limit to be exceeded, this does not mean that there is also agreement that the bank will give special notice that it intends to dishonour further drawings. The bottom line: Narni's claim for damages failed.
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3. When is a debt incurred and why is this important?
Harrison v Lewis [2001] VSC 27 (23 February 2001)
Wine Bank International Pty Ltd sold wine to investors and stored it for them. Lewis was the sole director. It went into liquidation in June 1998. Under the Corporations Law, Lewis would be personally liable for its debts if the company had either been insolvent at the time they were incurred or became insolvent by incurring that debt.
The liquidator claimed the sum of $134,400 from Lewis, relating to a Wine Bank debt to Brian McGuigan Wines. The liquidator's view appears to have been that the company only became insolvent or could only be shown to be insolvent at 31 January 1998. The key
question was _ when, exactly, did the company incur the debt?
The Judge said it could be argued that the debt was incurred when the wine was ordered. In October 1997 Wine Bank told Brian McGuigan Wines it would take 6,000 dozen cabernet and 3,000 cases of shiraz. Wine bank's licensees had started selling this wine to investors. On 5 January 1998 Wine Bank requested that ordered wine be bottled and packed. The order was one of these two dates.
Another option was that the debt was incurred when the wine had been bottled and packed for Wine Bank's order and an invoice raised. On 31 January McGuigan raised an invoice to Wine Bank.
Lastly, it could have been incurred when the wine was delivered. Between 6 and 25 February, 3,360 cases of cabernet were delivered.
The judge said that a company incurs a debt when, by its choice, it does something which makes it liable for a debt it otherwise would not have been liable for. Where sale of goods is concerned this will, in some cases, be when the order is placed. In other cases, it will be the actual delivery. And it may be some time in between.
The focus must be on the conduct and choice of the insolvent company. In this case the Judge decided that commercial reality meant the debt was incurred no later than 5 January 1998 when McGuigan was instructed to bottle and pack the wine. By that stage, the wine had been on-sold to investors and Wine Bank had no alternative but to organise delivery of the investors' wine.
The judge went on to say that the company was insolvent at the start of February and that Lewis either knew that or should have known. However, because the debt had been incurred before then, Lewis wasn't personally liable.
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4. Exactly how much did the debtor have to pay?
Vereker & Ors, in the matter of Timbs v Timbs [2001] FCA 1776 (14 December 2001)
Mr. Timbs owed money to a law firm, Verekers Solicitors. On 30 January 2001 the lawyers issued a bankruptcy notice against him. A bankruptcy notice requires payment within 21 days or the act of
bankruptcy will be established. When he didn't pay, Verekers proceeded with a creditors' petition, in order to bankrupt him.
The debt owed to the creditor must be specified in the bankruptcy notice in a fixed dollar and cents amount as the sum "due and payable". The regulations make it plain that this is an essential requirement. Form 1 of the Bankruptcy Regulations is the form to be used for this. The template form says, among other things: "you owe the creditor a debt of $ , as shown in the Schedule." Vereker's notice however, said, "you owe the creditor a debt of $23,282.79 at 9 January 2001 and accruing at a rate thereafter of $6.84 per day."
Furthermore, the amount of interest which the Bankruptcy Notice required to be paid (from 9 January until discharge of the Notice) was left to be calculated by the debtor.
The Court decided that the creditor was not entitled to impose these obligations on the debtor.
The Judge declared that the Bankruptcy Notice was null and void. The Creditor's Petition which was relying on it was thrown out.
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5. Lesson for director - you have to pay creditors!
Sunarto v Zurich [2001] NSWSC 422 (16 May 2001)
Zurich Australian Workers' Compensation Ltd sent a statutory demand for an oustanding debt to Hyvan Pty Ltd. The debt wasn't paid so Zurich applied for and was granted an order to wind up Hyvan. Sunarto, the sole shareholder and director of Hyvan, did not appear at the winding up hearing due to language difficulties and a misunderstanding over the implications of the threatened winding up.
After the winding up order was made Sunarto paid the Zurich debt and their costs plus the costs of the liquidator. Hyvan had six other creditors; Sunarto's lawyer brought to the court bank cheques to pay all of them, and gave his undertaking that they would be delivered within 24 hours. Sunarto therefore sought to have the winding up order terminated.
The Court can order the winding up to be stopped. To do so it considers six factors:
1. the application must be brought promptly;
2. the liquidator, the creditor who obtained the winding up order, and any creditor who appeared at the hearing must all be notified;
3. the evidence must show an explanation for non-appearance by the debtor at the winding up hearing;
4. there must be consent, or at least no opposition, to the termination of the winding up from the liquidator and the creditors;
5. there must be nothing in the liquidator's investigations showing a reason for the company to be stopped from trading;
6. the Court will also consider the commercial effects of stopping the winding up.
In this case all these requirements were met. The judge said, "I also have the impression that Mr Sunarto now sufficiently understands that the payment of legitimate creditors in a timely way is an important responsibility of company directors." The winding up of Hyvan was ordered to be stopped.
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6. Claimant reinstating wound-up company
Hutchinson v Australian Securities and Investments Commission [2001] VSC 465 (30 November 2001)
In 1997 Hutchinson was injured outside a property where SEF Construction was building. In 1999 he sued SEF for damages for his injuries. At the time of the accident SEF had public liability insurance.
SEF had been placed in voluntary administration in late 1998 and was soon to be wound up. This could not be completed until all the affairs of the company, including Hutchinson's law suit, had been dealt with. However, the liquidator mistakenly proceeded with SEF's dissolution and did so without informing the company's insurer.
The Corporations Act allowed Hutchinson, as the final recipient of an insurance payout, to sue the insurer directly, without having to have the company reinstated. However, in order to stop any further delays the Judge ordered SEF to be reinstated so that Hutchinson could pursue them directly.
David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
Seminars: Law 1 (Australia), Law 2 (Australia)
David Francis
Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.
Seminars: Psychology 1 (Australia)
Elke Meyer
Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.
Seminars: Law (NZ), Law for Finance Companies (NZ) New Zealand Law for Australian Creditors (Australia)
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