Australian Credit Law Bulletin - Vol 10, No 6, June 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:
- Did “letters of support” mean parent company liable for debts owed by subsidiary?
Holding company pulled plug when subsidiary lost multi-million dollar court case - Bankrupt fights 5-year battle to prevent property being sold
Trustee’s legal bill of around $1 million won’t be paid until he gets cash from sale - $80,000 of administrators’ fees; what for?
The judge isn’t sure
1. Did “letters of support” mean parent company liable for debts owed by subsidiary?
Atco Controls Pty Ltd was the parent
company of Newtronics Pty Ltd. Atco
funded Newtronics. Atco’s debt was
secured by mortgage debenture.
In the mid-1990s, this debt was in the hundreds of thousands of dollars. By 2001, however, the amount owing to Atco had risen to $18,017,827.00. Newtronics could not have continued to trade without Atco lending more and more money to Newtronics.
Between 1994 and 2001, there was a series of “letters of support” written by Atco to Newtronics’ auditors. These allowed Newtronics’ directors to maintain that if there were reasonable grounds to believe that the company would be able to pay its debts as and when they became due and payable. It also meant that Newtronics’ financial statements for the 2001 financial year could be prepared on a “going concern” basis. This is a basic accounting concept which assumes that a firm will continue to operate in the foreseeable future. When a business ceases to be a going concern, its assets can be valued at only what they can be sold for in a liquidation sale, and “intangible” assets (such as goodwill) become worthless.
The letter of support dated 20 July 2001 read:
Atco Controls Pty. Ltd., being the holding company of Newtronics Pty. Ltd., hereby confirms the following:
1. That the amount owing by Newtronics Pty. Ltd. to Atco Controls Pty. Ltd. of $14,622,183 as at 30th April 2001 shall not be called upon within the current period to the detriment of all other unsecured creditors.
2. That if necessary, funds or additional bank security will be provided to Newtronics Pty. Ltd. or its debit financier to ensure that it can meet its current trading obligations that have, or will be incurred.
In 1998 Seeley International Pty Ltd brought an action against Newtronics for breach of contract, negligence and misleading and deceptive conduct. The case related to the design and manufacture of electronic controllers by Newtronics for Seeley’s roof-mounted air conditioners. On 21 December 2001 Seeley won a judgment against Newtronics for $8,901,708.02 (to which interest of $5 million, and costs, were later added).
On the day of the judgment, Atco demanded the immediate repayment by Newtronics of all money – now $18 million - owing to Atco.
Newtronics was unable to pay Atco, so Atco appointed receivers to recover its secured debt. Soon after, a liquidator was also appointed to Newtronics.
Newtronics was, of course, unable to pay its debt to Seeley.
The receivers sold the business and assets of Newtronics to Atco Electronic Controls Pty Ltd for around $13 million. The purchase price was satisfied by reduction of the debt due from Newtronics to Atco.
Newtronics, in liquidation, sued Atco, claiming that Atco had a contractual obligation to provide financial support and not to call upon secured debts to the detriment of unsecured creditors.
The critical issue was whether there was a legally enforceable contract between Atco and Newtronics obliging Atco not to make demand upon the mortgage debenture when it did and to continue to provide funds to meet Newtronics’ obligations including, in effect, the debt which became the Seeley judgment debt.
The judge in the Supreme Court of Victoria concluded that there was such a contract. Once the Seeley debt crystallised, “Atco was obliged … to honour its previous contract with Newtronics not to call upon its entitlements under the mortgage to the detriment of other unsecured creditors and, further, if necessary to put Newtronics in funds or to secure additional bank security for Newtronics or its debt financier to ensure that it could meet the current trading obligations which had been incurred and by then had been quantified.”
He awarded judgment for Newtronics against Atco for $17,361,031.69 plus interest.
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2. Bankrupt fights 5-year battle to prevent property being sold
Marchesi v Vasiliou [2009] VSC 213 (5 June 2009)
On 14 September 2004 Andrew Vasiliou became bankrupt on the petition of a creditor. Brendan Marchesi was appointed trustee of the bankrupt estate.
Marchesi put caveats on three properties which were registered in Vasiliou’s name. A caveat is a warning to anyone dealing with the property that the “caveator” has some interest in the property which must be addressed. A property cannot generally be transferred without the removal of the caveat. However, caveats can only be lodged by someone with an appropriate interest – a proprietary or security interest – in the land. For example, a creditor who has a right to put a mortgage over land but who, for some reason has not done so, might lodge a caveat to protect his position.
A trustee in bankruptcy would appear to have a valid interest in the property of the bankrupt. However, Vasiliou maintained that he was not the beneficial owner of the properties, and that he held them on trust for the Vasiliou Family Trust. He began a series of applications for review. After each loss, he appealed. Among other things, he sought an order that the plaintiff remove caveats lodged by him on the titles to the three properties. This application was dismissed. Vasiliou took the matter all the way to the High Court, which refused leave to appeal.
This process took several years. Eventually Vasiliou was discharged from bankruptcy. Marchesi remained the trustee of the bankrupt estate.
On Christmas Eve 2008, Marchesi was finally registered as the proprietor of one of the properties, Claremont. As at 31 October 2008, the trustee’s expenses were approximately $1.5 million, including around $1 million in legal fees. The trustee’s solicitors were owed over $700,000 for work since 2004 and had not yet presented a bill, because the trustee himself had received almost no money from the estate, and was unable to pay.
It was Marchesi’s opinion that the sale of this property would meet all the expenses of the bankruptcy, and pay the creditors of the bankrupt.
A company associated with the Vasiliou family, Optquest Pty Ltd, (at times a trustee of the Vasiliou Family Trust) then placed a caveat on the Claremont property. Marchesi applied to have the caveat removed.
The judge said, “It is plain beyond argument that there is no serious question to be tried... That is because the question … was squarely raised and litigated before, and decided...”
Marchesi also sought a number of orders from the court. One was that Vasiliou, his family, and Optquest be prevented from lodging further caveats on the titles of the properties concerned. Another was that the Registrar of Titles reject any caveat lodged for registration on the above titles unless it was lodged by leave of the Court, or by Marchesi.
The judge said that, “[w]ithout such orders the probability, which I found reinforced by the first defendant’s address before me, is that on the removal of the present caveat the first defendant or someone at his behest … will lodge another caveat...” He therefore made the orders.
He also awarded indemnity costs – the payment of Marchesi’s actual costs of taking the case, rather than the standard costs which the court would usually award. He said, “[t]he circumstances of this case overwhelmingly warrant such an order. There are two aspects. First, there is the improper use of the caveat procedure, which is becoming all too common and which more and more is being met with special orders for costs. Secondly, the present case has aggravating features in its misuse of the caveat procedure. Here we have a caveat lodged in defiance of a judicial finding upheld on appeal, and preceded by the history of caveat removals and orders for indemnity costs. To put it mildly, the conduct in lodging the caveat was ‘a high-handed presumption’…”.
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3. $80,000 of administrators’ fees; what for?
Pleash & Anor v Gold Coast Property Investments & Management Pty Ltd [2009] QSC 17 (4 February 2009)
After some days of discussions with the sole director of Gold Coast Property Investments & Management Pty Limited, Blair Pleash and Brent Kijurina of insolvency practitioners, Hall Chadwick, were appointed as administrators. National Australia Bank held a charge over the assets of the company. Two days later the bank appointed receivers and took possession of all of the assets of the company. On the face of it, it would appear that from then on, the administrators were largely powerless and the administration largely pointless.
However, the administrators proceeded to carry out the tasks which were required to be carried out by the Corporations Act. The major meeting of creditors was convened and adjourned to a date two months later to allow “further investigations”. When it was reconvened, the creditors resolved that the company be placed into liquidation and one of the administrators was appointed as liquidator. But the creditors rejected the administrators claim for remuneration under section 449E(1)(a) of the Corporations Act.
National Australia Bank objected on four main grounds, claiming:
1. That the hourly rates charged by the administrators were excessive;
2. That the administration was not complex, and that was particularly so having regard to the shortness of the period during which the administrators had control of the company;
3. That the administrators could not have carried out any meaningful investigation of the company's business affairs, property and financial circumstances because they did not have a copy of the company's books and records; and
4. That the professional fees incurred by the administrator's staff for travel expenses were unnecessary because of the employment of staff from the Melbourne office and the Sydney office of the administrator's firm.
The administrators applied to the court for approval of fees of a “total of $80,000”.
The judge said that “the state of the evidence does not satisfy me that fees as high as those charged by Hall Chadwick in the present case are justified… I do find it surprising that once control of the assets was lost such a considerable amount of work remained to be done… I am not satisfied that the level of complexity of the administration subsequent to the appointment of the receivers was such as to warrant the incurring of fees to such an extent as $50,000-odd… In summary, then, I am not able to determine on the evidence before me what is an appropriate amount of remuneration to allow for the administrators in this case.”
He said that “there would appear to be no reason why a further application could not be made… [but that for now] it seems to me that the best course to take is simply to dismiss the application.”
