Australian Credit Law Bulletin - Vol 3, No 2, February 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:
- Receivers not guilty of conversion
- Endorsing cheques meant liability in conversion
- Bankrupt not personally liable for loan he arranged
- Leaving Australia was act of bankruptcy
1. Receivers not guilty of conversion
Barrymores Pty Ltd v Harris Scarfe Ltd [2001] WASC 210 (14 August 2001)
Harris Scarfe operated 35 department stores in all states of Australia when it went into voluntary administration in April 2001. Three days later, the ANZ appointed receivers.
Barrymores supplies childrenswear. They had supplied Harris Scarfe with various goods under a retention of title (Romalpa) clause. This meant that ownership of the goods didn't pass to Harris Scarfe until Barrymores were paid in full. Barrymores was owed $350,763.58 at the time the receivers were appointed.
The receivers wanted to sell the business, including its stock, but Barrymores demanded that they immediately return all of their goods still in their possession. The receivers proposed to pay into a special bank account the retail price of all Barrymores goods sold, until the balance reached the amount owed. By July 2001, the receivers had paid $265,575.01 into this account.
Barrymores sued the receivers for conversion, and for payment. In simple terms, conversion is something short of theft which involves depriving the owner of possession (for example, someone taking a car for a joyride). When a receiver refuses to give back goods supplied under a Romalpa clause he can be liable for damages to the owner of the goods in conversion. But the owner must have a legally enforceable right to take immediate possession.
Here the receivers could hold on to the goods until Barrymores got the administrators' written consent or a court order to release them. Until then Barrymores did not have a legally enforceable right to take possession and so the receivers could not be guilty of conversion.
Barrymores also claimed that, by arranging the special bank account, the receivers' had created a trust. The Court decided that this arrangement overrode the retention of title clause, at least in respect of the goods that had been sold. So the receivers were required to account to Barrymores for the proceeds as if they were trustees. The receivers had to pay Barrymores the money in the special account over to and give back any unsold goods.
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2. Endorsing cheques meant liability in conversion
Sanwa Australia Finance Ltd v Finchill Pty Ltd [2001] NSWCA 466 (13 December 2001)
Finchill Pty Ltd was trying to sell refrigeration equipment which would be financed by Sanwa Australia Finance, to Alpha Food Services Pty Ltd. Finchill sent invoices to Sanwa, lease agreements were executed and Sanwa drew cheques in favour of "Finchill or bearer". The cheques were handed to El Haj, a director of Alpha, for delivery to Finchill. By making false representations, El Haj had Finchill endorse the cheques, making them payable to Alpha. They were paid into Alpha's bank account.
However, Alpha never placed a formal order with Finchill and the goods were never delivered. Soon afterwards, Alpha was put into liquidation. Sanwa then tried to recover the loans from Finchill.
The Court decided that Sanwa could recover from Finchill for the conversion of their cheques. Finchill knew, at the time the cheques were endorsed, that it had no order from Alpha. Thus, even though Finchill had never received any of the money it had ostensibly received payments to which it was not entitled. By accepting delivery of the cheques and endorsing them, Finchill had exercised the power of a holder in due course (see ss 28 and 29 of the Cheques Act, 1986 ) and had tried to pass on an invalid title to the cheques. It didn't matter that the director of Finchill had acted in good faith and as a result of the fraud committed by El Haj.
When Finchill accepted and dealt with the cheques, it had done so at its own risk. Finchill had to pay back the amounts outstanding on the loans, less a small allowance for some payments made by Alpha.
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3. Bankrupt not personally liable for loan he arranged
Nilant v Shenton [2001] WASCA 421 (20 December 2001)
On 15 November 1995, Derbyshire Nominees Pty Ltd agreed to loan $200,000 loan, repayable on demand, to Edenbank Nominees Pty Ltd. During the negotiations Shenton represented Edenbank almost exclusively. Demand for repayment in full was made on 30 January 1996 but Edenbank failed to pay. The company went into liquidation.
Edenbank's liquidator, Nilant, applied for an order under the Corporations Law, section 588Z, (now Corporations Act 2001), that Shenton be held personally liable for Edenbank's debts because he had managed Edenbank while a bankrupt.
Shenton had been declared bankrupt on 17 March 1995 and his bankruptcy was not annulled until 27 June 1996. Shenton had taken the leading role in persuading Derbyshire to lend the $200,000 and to commit to other more extensive investments. He was also a co-signatory on Edenbank's bank accounts. The Court said this meant he had been managing Edenbank while an undischarged bankrupt.
The decision is at the discretion of the Court. The Judge said "that the conduct of the person in the management of the company... should disclose some element which makes it appropriate that the person should personally bear a financial responsibility for the consequences of his or her role in the management." The purpose of the law stopping a bankrupt from acting as a director or managing a company is to protect the public from irresponsible actions by the bankrupt.
In his dealings with Derbyshire, Shenton had made no secret of his bankruptcy. Furthermore, Derbyshire took independent legal advice over whether to advance the loan and still chose to do so in the face of
strong opposition. In fact, it was not clear that Shenton's management had even caused Derbyshire, or the public, to suffer financial loss. It was also clear that there was a special arrangement between Derbyshire and the liquidator, to enable one creditor (Derbyshire) to recover its money from Shenton.
All in all, the Court decided that the private interests of Derbyshire, and even the overall the public interest, were not enough to make Shenton personally liable for the loan.
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4. Leaving Australia was act of bankruptcy
Edge Technology Pty Ltd v Wang [2000] FCA 1586 (24 October 2000)
Johnson Wang and his wife were directors and controlling shareholders of a collection of companies known as the Edge Group. Edge was placed in voluntary administration by Wang on 7 June 2000. By that time the Wangs owed Edge in excess of $3 million.
Immediately after calling in the administrators Wang left Australia. On his departure card he wrote that he was an "Australian resident, departing permanently". Three days later Mrs Wang left in similar circumstances. Since then, the administrator had had no contact with the Wangs, despite numerous attempts to contact them. Finally, Edge Technology presented a creditor's petition to the Courts to make the Wangs bankrupt. The company claimed that, in leaving and then remaining outside Australia with the intention of defeating or delaying their creditors, the Wangs had committed an act of bankruptcy, as specified in s 40(1)(c) of the Bankruptcy Act, 1966.
The Judge said the crucial element in determining such an act of bankruptcy was the intent of the debtor. The fact that a debtor had merely left his residence was not greatly significant. In this case however, it was clear that the Wangs had not provided their creditors with any means of contacting them overseas. The Judge decided that their continuing absence, together with the financial collapse of the Edge Group, sufficiently established that their departure from Australia was for reasons that included delaying or defeating their creditors. Therefore, the act of bankruptcy was established.
