Australian Credit Law Bulletin - Vol 10, No 4, April 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:
- $2 million in legal and liquidators’ fees but next to nothing for unsecured creditors
Judge sets cat among pigeons by ordering inquiry into liquidators’ conduct - A debtor argues that creditor accepted that he might not be able to pay
Judge says, that’s not what’s in the contract - The downside of insolvency for a lawyer
Part X arrangements not all beer and skittles no matter what creditors might think - Help! I need a good credit manager!
But what exactly does a good credit manager look like?
1. $2 million in legal and liquidators’ fees but next to nothing for unsecured creditors
Hall v Poolman [2009] NSWCA 64 (31 March 2009)
The collapse of the Reynolds Group (Reynolds Wines Limited and Reynolds Vineyards Pty Limited) resulted in a shortfall of over $30 million to secured creditors. There were no assets available for unsecured creditors, who were owed just under $99 million, and not even enough to pay the costs of the voluntary administration and winding up. However, there was the possibility of recovering approximately $9.6 million from voidable preference payments made to the ATO and by suing the directors for insolvent trading.
The liquidators had no funds to pursue those claims and so they entered into a funding agreement with a litigation funder, Insolvency Litigation Fund Pty Ltd, a subsidiary of IMF (Australia) Ltd. The Committees of Inspection for the failed companies approved the litigation funding agreement even though the returns to creditors were likely to be very low.
Even if the liquidators were to recover the full amount of their claims, including costs and interest, after payment of the litigation funder's costs and "success fee" and the costs of the liquidators and their solicitors, unsecured creditors would receive no more than a fraction of a cent in the dollar of their claims;
The case was heard in the New South Wales Supreme Court and the judge was concerned. In the main judgment Palmer J said that pursuant to section 536 of the Corporations Act, "I will enquire into the conduct of the Liquidators in entering into a funding agreement and commencing these proceedings when they were aware that there was a substantial risk that the creditors would receive no, or very little, dividend; permitting costs to amount to approximately $2 million; failing to obtain the directions of the Court before proceeding.
He warned that if he came to the conclusion that the liquidators' expenditure on costs was unjustified and improper, he would give consideration to whether a costs limiting order should be made under the Civil Procedure Act s 98(4)
Section 536 says that either the Court or ASIC may inquire into the actions of liquidators, and take such action as it thinks fit where:
(a) it appears to the Court or to ASIC that a liquidator has not faithfully performed or is not faithfully performing his or her duties or has not observed or is not observing: (i) a requirement of the Court; or
(ii) a requirement of this Act, or the regulations or of the rules; or
(b) a complaint is made to the Court or to ASIC by any person with respect to the conduct of a liquidator in connection with the performance of his or her duties…
The liquidators then argued that there was no foundation for this enquiry. Palmer J, in a supplementary judgment said, "As I have noted in the judgment, it seems to me that the Court should know more about how the Liquidators could have let costs of the proceedings run up to some $2 million, although feeling some disquiet about it and not seeking directions. In my view, a sufficient basis is made out for an enquiry under CA s 536(1)(a)… I have made it clear to the parties that I do not propose myself to conduct the inquiry under s 536. In view of the comments which I have made in the judgment, I think it is wiser that the enquiry proceed before another Judge, and that I consider that Judge's report when making final costs orders in these proceedings."
He said the facts of the case were extreme "in showing how a mammoth piece of litigation can be instigated, perhaps to the ruin of a defendant, with negligible 'access to justice' for those who have suffered a wrong but with lucrative reward for those who make a business of investing in law suits".
The liquidators appealed this order to the NSW Court of Appeal who concluded that, "[t]he matters relied upon by Palmer J as justifying an order for an inquiry were, on the whole, concerns that should support an order for further investigation… Our findings on appeal have not undermined the major part of his Honour's reasoning."
However, "the proceedings that were before Palmer J were settled after he made an order under s 536 and before the hearing of the appeal against that order… [U]nder the terms of settlement, payments have been made in settlement of the costs of proceedings and the liquidators' own fees… [so] there were no longer any outstanding costs orders to be made by the Court and therefore no prospect of the Court making a costs limiting order under the Civil Procedure Act. [This] has the consequence that the purpose of the inquiry envisaged by Palmer J has gone.
"In these circumstances there does not appear to be any utility in ordering an inquiry."
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2. A debtor argues that creditor accepted that he might not be able to pay
HARDEL PTY LTD v BURRELL & FAMILY PTY LTD [2009] SASC 77 (25 March 2009)
In 2005, Hardel Pty Ltd borrowed substantial sums from Burrell & Family Pty Ltd, apparently in relation to property development. On 30 November 2006 the parties entered into an agreement set out the terms on which the combined loans - $1,464,511.28 - would be continued. The loan was to be for two months. A handwritten addendum to the contract said, among other things:
(2) The borrower does not remain fully confident that this date will be achieved due to the timing of the financial restructure required for the property group....
(4) The borrower undertakes to represent the true nature of the lenders intentions that this was not an investment loan, rather a loan of grace intended to assist the borrower from a Christian perspective.
The sole director, Mr Harris, guaranteed payment. He said later, when the matter reached the courts, that when the agreement and addendum were signed, he told Mr Burrell, the chief executive officer of Burrell & Family, that he was concerned that Mr Burrell intended to take enforcement action on the debt. Burrell replied that he fundamentally misunderstood their relationship if that is what he thought.
The money was not repaid. A new agreement covering the remaining debt, $1,440,786.87, was signed on 1 April 2008. Among other things, it said that, "The Borrower must repay and fully discharge the loan on or before the Repayment Date of 1 June 2008." Mr Harris said that on signing the April 2008 agreement he told Mr Burrell that no more than $1 million could currently be repaid, and that any repayment was subject to refinancing arrangement. He said that Mr Burrell "accepted these matters".
The money was not paid. Burrell served a statutory demand on Hardel. This is the first step in the process of a creditor winding up a debtor company. Hardel applied to the Supreme Court of South Australia to set aside the statutory demand on the grounds that it was only liable to repay the loan if and when it refinanced the property development, and that if it were never able to obtain other finance the respondent would be bound to take an interest in a property development in Queensland. Alternatively, Hardel claimed that Burrell & Family should be "estopped" (stopped) from relying on the repayment date in the contract because of Mr Burrell's comments.
Hardel's application to set aside the statutory demand was rejected. On appeal, the Full Court of the Supreme Court of South Australia said that "The question is… what a reasonable person would understand from both the written terms of the April 2008 agreement and the contemporaneous conduct of the parties. The strength of the representation conveyed by subscribing to a perfectly legible and easily comprehended document is so great that it is generally regarded as conclusive.
"It is simply unarguable that a discussion as vague as that deposed to by Mr Harris could in any way vary [the clause regarding repayment date in the contract]. Objectively considered, the conversation was, like the addendum, no more than a disclosure by Mr Harris of the practical difficulty he would have in meeting the unambiguous legal liability imposed by that clause. Any 'acceptance' by Mr Burrell of that fact could not possibly be regarded as any more than an acknowledgement that it may be difficult to get 'blood out of a stone', notwithstanding the legal relations between the appellant and respondent recorded in the April 2008 loan agreement.
"For similar reasons I would find that the conversation between Mr Harris and Mr Burrell deposed to by Mr Harris could not possibly give rise to an estoppel. The conduct relied on to support an estoppel must be clear and unambiguous… It is not arguable that the conversation which Mr Harris claims accompanied the execution of the April 2008 agreement could have led any person to reasonably believe that the obligation to repay in [the agreement] expressed no more than a forlorn hope which would not be legally enforced." The appeal was dismissed.
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3. The downside of insolvency for a lawyer
THE LEGAL PRACTITIONERS ACT 1981 (SA) RE RODERIC JASON LINDQUIST [2009] SASC 93 (6 April 2009)
Mr Lindquist is a partner in the law firm Lindquist Partners. His marriage broke up and he reached a property settlement with his estranged wife. They sold the matrimonial home. He used the approximately $500,000 he received from the sale to pay the National Australia Bank and liabilities of Lindquist Partners.
The settlement required that his family trust sell its interest in Kemps Mercantile Agency. He expected this to sell for $300,000; it fetched only $30,000 and this was shared with his wife.
His remaining liabilities to creditors were about $420,000. He owed around $258,000.00 on credit cards -he had relied on unsecured credit card advances in order to meet his day-to-day expenses, apparently over a period of four years! He owed $120,000.00 advanced to him by friends and associates, and a tax liability of approximately $40,000.00.
He estimated his interest in the firm Lindquist Partners at approximately $150,000.00, (although this valuation has been disputed by his partner in the firm, Marko Runjajic). He has no other property or assets as defined in the Bankruptcy Act.
Lindquist intended to ask his creditors to accept a Personal Insolvency Arrangement under Part X of the Bankruptcy Act 1966 (Cth). He proposed that creditors would receive the proceeds from the sale of his interest in Lindquist Partners. However, he wanted to continue to practice law and applied to the Supreme Court for approval. Section 49 of the Legal Practitioners Act (SA) says that a legal practitioner who has become bankrupt or subject to a composition or deed of arrangement or assignment with or for the benefit of creditors must not practise law except with the authority of the Supreme Court.
The firm's trust account had been audited by the Law Society and by the firm's auditor, and was all in order. The Law Society of South Australia had no objection to the proposal. The reasons for financial difficulties were, it seems, matrimonial and commercial, and were unrelated to the conduct of his legal practice. There were no issues with respect to dishonesty which might cause concerns about his ability to practise the law.
The court gave Lindquist authority to practise as an employed solicitor under the supervision of another lawyer. He will not be allowed to deal with trust moneys or operate a trust account.
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4. Help! I need a good credit manager!
This article appeared in the NBR
When I was 26, I met the owner of a debt collection agency socially. He offered me a job running a collection business he was buying. As I had suspected, I enjoyed managing staff, improving systems, and dealing with debtors a lot more than I enjoyed being a lawyer. A couple of years later, still young and foolish, but full of confidence, I went to Telecom as a credit manager. Luckily, Telecom was a monopoly at that point, so I couldn't do the business too much harm while I learned that debt collection and credit management are only loosely related. (Ultimately it turned out OK.)
Credit management isn't sexy; it hasn't, to date, been a recognised stepping stone to the top in business (though we live in changing times). In many credit seminars, over many years, in both Australia and New Zealand, I've asked the attendees how many of them left school dreaming of working in the field of credit management. No-one has ever raised their hand. There is no university degree in credit management. Most fall into credit by mistake, when someone else leaves and they're asked to fill in, or when a job includes a bit of collecting overdues. If they're good, they rise through the ranks.
This can be a problem for a business which wants a star credit manager for a bigger credit role. You may find plenty who have learned at the school of life, but if your industry or the role you offer is outside of that life experience, they will have some more on-the-job learning to do.
Here are my three key attributes the ideal candidate should have. The first is a good understanding of law, because credit management generally involves lots of law. Your ideal person needs enough to be able to negotiate confidently with business owners, insolvency practitioners, and fast-talking lawyers.
The second is people skills, which of course cover a great many things. Good credit managers are regularly telling customers (and often colleagues) things they don't want to hear and asking questions they don't want to answer. And even though they're saying hard things, they still want their business. The easy option is not to ask that hard question, and many credit managers don't. Your ideal candidate must be tough enough, brave enough, and also charming enough to say these difficult things.
They need to be able to earn and wield influence in their own business, building bridges with and giving feedback to senior managers. They need to be able to persuade people to do the credit-related things that they should be doing but don't enjoy.
Also under the heading of "people skills" comes "managing staff" (assuming there are some). Skills for managing debtors don't necessarily transfer to running a team.
The third attribute (and there is some overlap between the three) is "business nouse". They have to understand where the best interests of the business lie - the profit margins which apply, and the appetite for risk which is appropriate - in order to be able to train their colleagues and staff in what is required for business success, as opposed to good-figures-this-month. And of course, they have to make good decisions about who will pay their debts.
In general, broad experience seems to help, both general life experience, and things like time spent working in sales, or owning a business, but practical credit experience is also crucial.
Of course, this paragon has to have built up those skills over a period when bad debt was generally very low, and credit management roles generally underpaid, undervalued, and small in scope. They now have to apply them in a time of economic crisis. I anticipate head-hunters hammering on the doors of a very small number of possible candidates.
Peter Hattaway is a director of Hattaway & Associates Ltd, Credit Consultants, www.hattawaysconsulting.com.
