Australian Credit Law Bulletin - Vol 10, No 8, Christmas 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:
- Small business post-mortem #1
Bad debts lead to aggressive quoting and a downward spiral - Small business post-mortem #2
You have to pay attention to the bookkeeping! - Breakfast radio host "Spanky" of RDU98.5FM interviews Peter Hattaway
Required listening for anyone who's thinking of moving their collection call centre to India
1. Small business post-mortem #1
Hyndman v QBSA [2009] QCCTB 240 (20 October 2009)
David Hyndman has been a plumber and drainer for 15 years. In 2000 he became the sole director, secretary and shareholder of Pipe Dream Plumbing and Hydraulic Services Pty Ltd (now known as Chester Grey Pty Ltd).
In 2001 the company won subcontracting work on a number of projects which had some risk of non-payment. According to Hyndman (eight years later), the company analysed the effect non-payment would have on operations, set credit limits, and decided to take the commercial risk. He believed the company could continue even if it wasn't paid.
Unfortunately, two head contractors went into liquidation and Pipe Dream wasn't paid. It was left with bad debts of $220,000 and was unable to pay its tax bill. It made an arrangement with the Australian Taxation Office to pay off the tax over time.
The company tried to expand its activities to pay the tax debt, quoting aggressively. Hyndman said that Pipe Dream did some jobs “with very small margins for risk and error. This [was] necessary … to continue to cover existing debts and to keep the company running. If [jobs are] quoted at the lesser margin but finish on time and on budget they are still very beneficial to financial stability of the company.” (Of course, businesses which win projects by quoting low cause problems for other businesses in the same industry which either lose business or lower their own prices to compete.)
The increase in revenue, however, was eaten up by wages and bad debts. Hyndman conceded that Pipe Dream had taken on jobs which were too big for the available staff. Foremen had to oversee three or four jobs each; there was little supervision and employees were not working effectively.
In 2006 the company had major difficulties with projects. Again, this led to a significant increase in the company’s bad debts (from $39,438.00 (2005/2006) to $133,072.00 (2006/2007) in its liability for unpaid tax. Hyndman said, “We had implemented a spreadsheet to track all costs and appointed foremen on most jobs. We also analysed the actual cost on jobs against projections. Despite these precautions we found the Buddhist Temple at Springwood to be unprofitable due to factors not readily apparent on the plans. For example all other trades except us and one other failed to continue on site and the cost of waiting for new contractors impacted on our profitability. As a result we decided to downsize the company.”
Unfortunately, the company was now in an insolvent trading situation and Hyndman was advised to put the company into administration to avoid personal liability for debts. “As a result of downsizing we were unable to continue the monthly payments to the ATO [tax debt increased from $87,179.00 on 21 August 2006 to $194,672.00 on 29 January 2008]. ... We took the decision to place the company in Administration. [M]y family was the biggest creditor [$521,000 was owing to Hyndman’s wife]. [A]ll the staff entitlement and super were paid in full, all trade creditors were paid in full and the Deed of Company arrangement gave me an opportunity to formalise an arrangement with the ATO. … The Deed has been accepted by the creditors.”
The Queensland Building Services Authority Act 1991 requires the Queensland Building Services Authority to cancel licences issued under the Act to a tradesman whose business fails. Hyndman asked the Queensland Commercial and Consumer Tribunal to review the Authority’s decision.
The Act is designed to stop contractors from going bust, then starting up again (often characterised as a “phoenix company” rising from the ashes of the old one… but without the old company’s debts). Their only excuse is if they can demonstrate that all reasonable steps were taken to avoid the insolvency (for example, if they were the innocent victim of fraud). Hyndman had no such excuse and his review application was dismissed.
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2. Small business post-mortem #2
Ricketts v QBSA [2009] QCCTB 238 (15 October 2009)
Paul Ricketts has known Craig Slater for about 20 years. He worked for the Slater brothers’ company, Maxi Group, first as a sole trader, and then through a company that he formed called Boutique Renovations Pty Ltd. Ricketts was a shareholder, director and secretary of Boutique. All his work came from Maxi.
Ricketts was told that Maxi would inject money into Boutique if it needed it. He had no training in accounting and his only bookkeeping knowledge came from when he did his builder’s course 20 years ago. Craig Slater and his brother Greg Slater did the paperwork for Boutique. Maxi’s bookkeeper did Boutique’s bookkeeping on an apparently haphazard basis.
Around October 2007, on the authority of Greg Slater, Maxi’s bookkeeper negotiated on behalf of Boutique a repayment arrangement of $2,500.00 per week with the ATO, the minimum amount it would accept from the company. The payments were missed. Ricketts was apparently ignorant of the financial position of Boutique until December 2007 when he was contacted by the Australian Tax Office and informed that the company was in arrears of $329,752.54. A second repayment arrangement was set up, and again broken.
Ricketts later said that he did ask Greg Slater “about the tax when it got to $70,000.00” and he said that it would be paid when Maxi got some money. Ricketts did not chase the money owed to Boutique by Maxi because it was all “in house”. Maxi ended up owing Boutique about $80,000. Greg Slater glossed over the tax liability and told Ricketts it was all organised. He did not tell him anything that “would stop him doing our work”.
In 2007 and 2008, Maxi had its own financial difficulties. In May 2008 it had to refinance, couldn’t do so and its bank foreclosed.
In mid-2008, Ricketts was served with the director’s penalty notice by the ATO. There was a downturn in the industry and the world was going into a global financial crisis, so he put Boutique into liquidation on 3 July 2008.
In August 2008, he applied to the Queensland Building Services Authority to be categorised as a permitted individual under section 56AD of the Queensland Building Services Authority Act 1991, so that he could trade as a builder again. The Authority refused his application on the grounds that his previous business had gone into liquidation. Ricketts appealed to the Queensland Commercial and Consumer Tribunal.
In such an appeal, the Tribunal must decide whether or not the applicant took all reasonable steps to avoid the circumstances that resulted in the liquidation. In this case, it was clear that he hadn’t. The company didn’t keep proper books of account and financial records. Putting all his trust in Maxi, without any proper check or inquiry of his own, was not taking all reasonable steps.
He took no advice from solicitors or accountants as to his duties as a director, even when he knew the tax debt had reached $70,000.00. He took no steps to recover any debts owed to Boutique and did not consult solicitors about recovery of debts owed to him or the possibility of a sub-contractors’ charge. And he made no provision for payment of Boutiques’ tax debts.
The Tribunal therefore found that the Authority was right to refuse to categorise Ricketts as a permitted individual.
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3. Breakfast radio host "Spanky" of RDU98.5FM interviews Peter Hattaway
