Australian Credit Law Bulletin - Vol 10, No 2, February 2009
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 Australian 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:
- Bonus incentives for debt collectors
Probably the first tax case we've ever included in this Bulletin - $100,000 improvement by contacting overdue customers via non-traditional means
ISP uses texting and instant messaging for internet customers - Dealing with the financial affairs of the insane
Courts give decisions, not justice, and after the decision you have to get on with your life - Does the law protect those who got poor financial advice and lent to a risky finance company?
A financial adviser tries unsuccessfully to avoid liability
1. Bonus incentives for debt collectors
Prushka Fast Debt Recovery Pty Ltd and Commissioner of Taxation [2008] AATA 762 (28 August 2008)
The Superannuation Guarantee (Administration) Act 1992 requires businesses to contribute a certain percentage of staff wages towards their superannuation. The Commissioner had made a ruling (SGR 94/4) that those wages excluded ex gratia payments to employees, (meaning payments that were a favour, not something which had to be paid out of legal necessity). Ex gratia payments were therefore excluded from the calculation of the superannuation guarantee contribution of the company concerned.
Prushka Fast Debt Recovery Pty Ltd (a debt collection business) and the Commissioner of Taxation disagreed on the amount of the superannuation guarantee contribution which Prushka should have paid for the financial years ended 2000/2001. Prushka claimed that bonuses paid to staff were ex gratia which would mean they should not be included in the earnings on which the contribution was based. The matter went to the Administrative Appeals Tribunal for resolution.
The tax issues are not something which is generally of interest to those involved in credit management and collection, but what is interesting is to see how the collection staff were incentivised.
As Prushka grew from a small business to something more substantial, Mr Mendelson, the founder and Chief Executive Officer of Prushka, developed a profit share bonus scheme that covered all employees based in the Mitcham head office. It included administrative staff but not sales staff and branch staff, who had separate bonus schemes.
The account controller’s job description quoted in the judgment stated:
After one month’s trial, the applicant will join the Team Bonus. To qualify each month, it is necessary to reach the minimum revenue target set. For the last six months, the bonuses for some one qualifying each month have been at the rate of $1,200 per month. As an indication, over 12 months, the bonuses would be expected to exceed $7,000.
The judgment doesn’t explain the bonus system particularly clearly, but it seems that the collection team as a whole had to reach certain targets in a given month, for the bonus – a share of profits – to apply. Individual collectors also had minimum targets to achieve. The greater the level of debts recovered by the collection team, the greater the bonus pool for collectors and admin staff.
The Tribunal said, “as best I can tell from the evidence, payments made to eligible employees were not differentiated on the basis of debt recoveries of each individual employee, assuming of course that [as individuals and as a group] they met the minimum requirement. The pool was simply shared out between eligible employees. If that is correct, then it cannot be said that the bonus received by the employees was related directly to the debts recovered by any individual employee.”
So, interestingly, it seems that star collectors didn’t generally receive more in bonus than other collectors who met the minimum requirement, (though the 2000/2001 Prushka staff manual also noted that the top tier of “members” would qualify for an additional one-off annual payment.)
Mr Mendelson made it a practice not to allow employees to share in a bonus pool, if it was available, where they were subject to any disciplinary action. According to Mr Mendelson, even if Mitcham collection staff members reached the required collections target to be eligible for the profit pool, they could nevertheless be excluded by management without reason. However, there were no examples of this referred to in the judgment.
Mr Mendelson maintained that Mitcham employees had no legal entitlement to a bonus scheme payment because it was entirely discretionary. However, he agreed that employees had come to expect the payment as part of their salary package. Mr Mendelson agreed that what generally happened was, if the group target figures were reached, bonus payments were made. The only times he exercised the discretion not to make a payment was if there was “misconduct” by the employee. Mr Mendelson also said in his written evidence that there were numerous instances where individuals at Mitcham did not meet the minimum daily commission figures to be considered for the bonus. However, in the exercise of his discretion, he granted the individual a share of the profit as an expression of thanks for their hard work.
Despite the view of Mr Mendelson and another witness that there was no legal obligation to make any bonus payment even where the bonus pool existed, the Tribunal said, “such a claim would be difficult to sustain were an employee minded to insist on his or her legal rights. The job description which was given to persons seeking employment with Prushka contained a very clear representation about the salary expectations should they gain employment. Under the heading Salary is included a brief description of the profit-share bonus scheme. I have little doubt that an employee, if minded to do so, could rely on that representation to legally compel payment, provided the employee was eligible for a bonus payment. I therefore disagree … that the payment could properly be described as ex gratia.”
“I am satisfied that bonuses paid to employees of Prushka were paid in respect of ordinary hours of work by those employees. Therefore, the bonuses must form part of those employees’ salary and wages. It follows that the bonuses must be taken into account when calculating the superannuation guarantee contribution. As they were not taken into account by Prushka, there must necessarily have been a superannuation guarantee shortfall and the Commissioner was correct in imposing a charge on that shortfall under the SuperannuationGuarantee Charge Act 1992.”
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2. $100,000 improvement by contacting overdue customers via non-traditional means
Ross, the man responsible for the clever technical things in our databases and websites, (and also responsible for the bugs), passed on this snippet from the Fiercevoip newsletter of 29 Jan 2009.
“[New Zealand] service provider - WorldxChange [an Internet service provider which also offers “voice over internet protocol” phone services]… implanted an application [i.e. made an enhancement to its billing system] to improve debt collection and improved collections by over $100,000 in the first month of deployment. Customers would get past due notifications in a variety of non-traditional ways, including SMS (i.e. texts to mobile phones) or IM (instant messaging – real time text chat over the internet), and they said they liked the "less intrusive" methods of communication, said Leslie Ferry, VP of Marketing at BroadSoft. Needless to say, other service providers are looking at that particular app more closely and WorldxChange is moving forward with two more products.”
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3. Dealing with the financial affairs of the insane
Re SAG, [2008] QGAAT 77 (29 October 2008)
SAG was born in 1947. He and his wife had two children. In 1994, his wife was very seriously injured.
In a judgment of the Supreme Court in 2000, SAG was awarded damages of $556,968.80. This was appealed by Suncorp Insurance and Finance and the judgment was reduced to $308,768.80.
Since the accident, his wife has been in a nursing home “in a persistent vegetative state.” Because of this, according to a psychologist’s report, “[h]e cannot complete his grief and mourning process and nor is he free to adjust to her death and get on with the rest of his life.”
Since the time of the accident, SAG has been involved in a persistent quest for increased damages. He has embarked on a campaign of letter writing questioning the legitimacy of Suncorp Metway and various agencies of government. His obsessive campaign extended to the Public Trustee, the various lawyers who had acted for him, members of the Police Force and the Australian Taxation Office.
Over the years he has lived in various shelters in supported accommodation and has often been asked to leave as a result of his violent behaviour. He remains very reclusive and paranoid.
In 2004, SAG came close to losing his remaining asset, a rental property, to a creditor owed money for unpaid storage fees over a period of many years. He was rescued by a third party – the case report does not specify who, but presumably it was his mother (who has since paid rates and insurance as well as meeting his accommodation costs) – who borrowed to pay $47,000 owing. At no time during this process did SAG take any action in relation to the debt collection or the auction of his property. When the tenants didn’t pay the rent, SAG ignored the matter. He has no income and makes no attempt to get one. He is also very resentful towards his mother.
At a hearing in 2007, the Queensland Guardianship and Administration Tribunal found that SAG was prepared to sacrifice all aspects of his life for what he saw as the pursuit of justice. SAG could not account for where his funds from his personal injury settlement or the sale of his share of properties had gone. In fact he denied that he had received any payout. He was unwilling to engage with any government authority or with the health care system generally.
The Tribunal appointed the Adult Guardian as guardian for SAG and The Public Trustee of Queensland as the administrator for SAG for the next 12 months.
In October 2008, the Tribunal reviewed its decision and concluded that there had been no change to SAG’s capacity for decision-making for financial matters.
As a result the Tribunal continued the appointment of The Public Trustee of Queensland as SAG’s administrator. SAG’s mother is no longer able to contribute towards his expenses and the rental property may have to be sold. The Tribunal encouraged The Public Trustee to pursue any possible means to secure income support for him as he was incapable of doing this himself.
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4. Does the law protect those who got poor financial advice and lent to a risky finance company?
In December 2004 a financial planner employed by Wealthcare Financial Planning Pty Ltd (“Wealthcare”) advised Eric Norris, a 77-year-old retired farmer and his wife, Christine Norris, to lend approximately $65,000 to a mezzanine finance company (a company providing risky top-up finance for business and property development) which was part of the Westpoint property development group. The mezzanine finance company went into liquidation in January 2006. The Westpoint group as a whole collapsed at about the same time. The Norrises’ investment was substantially lost.
Section 912A of the Corporations Act 2001 (Cth) requires a financial planner, as a condition of the obtaining of a financial services licence, to be a member of an external dispute resolution scheme that is approved by ASIC. Wealthcare was a member of a dispute resolution service called the Financial Industry Complaints Service Ltd (“FICS”). The Norrises complained to FICS.
Under s 945A of the Corporations Act 2001 it is an offence for a licensed financial adviser to provide advice to a retail client unless the adviser makes “reasonable inquiries” in relation to the client’s personal circumstances. He must also make investigations and make sure that the advice is “appropriate” to the client.
A panel appointed by FICS found fault on the part of Wealthcare and upheld the Norrises’ complaint. The panel concluded that Wealthcare should pay to the Norrises the sum of $65,545 plus interest, on certain conditions.
Wealthcare went to court seeking a declaration that the FICS panel’s decision was wrong. Wealthcare’s key argument was that there were other persons or entities – the mezzanine finance company itself, its directors, the Westpoint group generally, its auditors, and an investment research firm on whose reports Wealthcare had allegedly relied – which, if sued by the Norrises would have been found liable to the Norrises for the same loss. In law, this is called proportionate liability. The proportionate liability regime means that, where it applies, any given defendant is at risk of liability and judgment for an amount limited to its proper share of the loss or damage the subject of the claim. In other words, it wasn’t fair that Wealthcare should repay the whole of the Norrises’ loss.
FICS rules required FICS to “have regard” to “any applicable legal rule”. However, the role of a FICS panel is not equivalent to that of a court. It is not established to hear and determine legal proceedings. Its authority was based on the contract between FICS and Wealthcare. Schemes such as FICS “are less concerned with the articulation and determination of legal rights than with the simple resolution of disputes.”
The judge concluded that the panel was not bound to follow the principles of proportionate liability. In any case, the concept, although important where it applies, is “by no means of universal application”. In the judges view, as the concept is defined in the Wrongs Act 1958 (Vic), it is confined to proceedings in courts and tribunals, and as such “is inapplicable to a matter before a FICS panel.” Wealthcare’s appeal was dismissed.
