Australian Credit Law Bulletin - Vol 11, No 1, January 2010
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:
- The value of insisting on payment arrangements in writing, and ideally by deed
Bookmakers’ debt collection processes prove effective - The distinction between debt collection and extortion
The former may not always work, but the latter leads to 3 years prison - How do you know when a company is insolvent and a director personally liable for insolvent trading?
A recent case with a checklist of the relevant factors
1. The value of insisting on payment arrangements in writing, and ideally by deed
Mirzikinian v Tom & Bill Waterhouse Pty Ltd [2009] NSWCA 296 (8 October 2009)
In September and October 2006, Warwick Mirzikinian placed a number of bets with William (Bill) Waterhouse, a licensed bookmaker, on credit, and ran up a debt of $250,000. Bill Waterhouse was a director of Tom & Bill Waterhouse Pty Ltd. Mirzikinian couldn’t pay, and negotiations followed.
Louise Waterhouse was reported by Mirzikinian as saying, “Bill is the boss and he said he would not consider any proposal for payment unless it is signed and in writing from you.”
At a subsequent meeting she apparently said, “As you know I have discussed your situation with Bill and he said he wouldn’t consider any proposal for repayment until he has something in writing, so we have prepared a document for you to sign so we can show him.”
Mirzikinian said: “Ok that sounds fair enough.”
Robert Waterhouse said: “He likes doing things the proper way.”
Louise handed Mirzikinian an unsigned deed (“Deed of Acknowledgment of Debt”). It acknowledged that Merzikinian owed Tom & Bill Waterhouse Pty Ltd $250,000, plus interest, agreed to charge all his property in favour of Tom & Bill Waterhouse Pty Ltd, and specified when repayment should be made.
A deed is a legal instrument used to grant a right. It must be witnessed. A deed avoids some of the problems which can prevent a contract from being enforceable.
Mirzikinian subsequently tried to back out of the arrangement. His lawyers claimed that because Louise supposedly said, “we will show this to Bill and let you know if it is acceptable to him and we will get back to you”, the Deed was not to be legally effective until Mirzikinian had been informed that Bill Waterhouse had signed it. Until then, they claimed, the Deed was merely a contractual offer that Mirzikinian was entitled to withdraw and had withdrawn.
The judges of the New South Wales Court of Appeal disagreed. The deed was immediately to be binding on Mirzikinian as soon as he signed. Mirzikinian had paid $250,000 into court as security for the judgment debt. The court ordered the money to be paid to Tom & Bill Waterhouse Pty Ltd.
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2. The distinction between debt collection and extortion
HAN, Zhi Qiang v R [2009] NSWCCA 300 (18 December 2009)
Mr Han owned a restaurant at Campsie. Mr Lo was an employee. In 2006, Han became concerned that he was losing money in the restaurant and considered that someone was pilfering goods from him. He installed a CCTV camera and related security equipment.
On 13 August 2006, Lo asked Mr Chen, the manager of the restaurant, for his wages, as he had not been paid for the previous two weeks. Chen asked him to go upstairs with him, where he showed him a video of Lo leaving the rear of the restaurant with a box. Chen accused Lo of stealing from the restaurant. The victim denied it and explained that the box was empty and that he had intended using it to store things. During the course of this conversation, Han and two other persons entered the room.
Chen demanded compensation from Lo, who asked how much Chen was prepared to accept. Lo later claimed he had asked that question because he believed that these men had a criminal background, he was scared for his safety, and he was prepared to pay an amount. He was told that he needed to pay $15,000 and forego the $2700 wages that he was owed. No attempt was made to explain how it was said the figure of $17,700 was calculated. Lo made it clear that he did not have that amount of money.
Lo was then told that his girlfriend, who owned another restaurant, should guarantee the payment. He was told that if the girlfriend did not come and/or the guarantee was not arranged, someone would be sent to burn down her restaurant and also hurt the Lo’s family. Chen made Lo copy, in his own handwriting, a document which acknowledged a debt of $17,700, less the salary, to be paid by 15 August.
Lo rang his girlfriend, who arrived soon after. When the girlfriend asked what would happen if that amount could not be provided, Mr Chen said: “you know who I am, and you also know that I have a lot of brothers around.” She signed the document as guarantor and they were allowed to leave.
Lo was unable to borrow the finance the $15,000. On 15 August 2006, he reported the matter to police. The police contacted Chen, who told them that Lo had been stealing stock and had agreed to pay back $15,000. The police were provided with the CCTV tape and the loan document.
Lo got another job. On 29 April 2007, his new employer told him that two men (Messrs Hu and Huang) were waiting to see him. The victim did not know, at this stage, either of these men. Mr Hu (who called himself, and is referred to as, “Fat Tom”) told the victim that he owed $10,000 to Han and that he had come to collect it. He made it clear that if he didn’t pay off the debt there may be trouble, and that he would return the next night.
Lo contacted the police and when Hu and Huang arrived at the restaurant on the next evening, the conversation was recorded. Hu referred to himself as “Big Circle Fat Tom”. “Big Circle” referred to an alleged gang. The victim told them that he could pay them $1,000 immediately, but wanted a receipt. He handed over $1,000, in marked notes, that had been provided to him by the police.
The next day, Lo rang Hu and told him that, as a result of a windfall at the casino, he was able to pay off the remaining $9,000.
Lo also spoke to Han by phone and asked whether he had sent “Tom” to collect the debt and whether Han had received the $1,000. Han confirmed that he had. Han made it clear that Lo needed to pay the balance and “if you are looking for trouble, I can surely give you a lot of trouble through my boys.”
On 3 May 2007, Lo, once more fitted with a listening device, paid over $9,000, provided by the police, to Messrs Hu and Huang. Shortly afterwards, they and Han were arrested.
Han claimed that he had a genuine belief that the victim owed him money as a result of his pilfering or embezzlement of food and other stock, and that his threats were part of a legitimate commercial debt recovery process. He admitted sending Hu and Huang to see Lo but denied that he asked them to threaten Lo.
Han was convicted by a jury and sentenced to imprisonment for 3 years, with a non-parole period of 2 years. The claim that there was a legitimate debt was rejected. The money claimed was money to which Han was not entitled.
Han appealed the length of the sentence to the New South Wales Court of Appeal. The appeal was dismissed.
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3. How do you know when a company is insolvent and a director personally liable for insolvent trading?
Playspace Playground Pty Ltd v Osborn [2009] FCA 1486 (11 December 2009)
The Toy Shed Pty Ltd sold and installed playgrounds. Ms Christine May Osborn was the sole director of Toy Shed. During June 2004, Toy Shed placed an order with Playspace Playground Pty Ltd for the supply of the component parts necessary to assemble and install playground equipment in 15 City Council parks in Darwin.
Toy Shed didn’t pay Playspace. Playspace obtained a default judgment against Toy Shed in the County Court of Victoria for $116,525.81. On 19 October 2005, Toy Shed was placed in voluntary administration. Soon afterwards, the company wound up and Mr Trevor Angus was appointed liquidator.
With the consent of the liquidator, Playspace brought proceedings against Osborn claiming that there were reasonable grounds for suspecting that Toy Shed was insolvent, or would become so as a consequence of incurring the debt to Playspace (subsections 588G(2) and (3) of the Corporations Act 2001 (Cth)). If it could prove this, Osborn would potentially be liable to pay the debt.
The federal court judge concluded that Toy Shed incurred the debt not when the order was made but when the nominated dispatch date for the playground equipment passed without the order being cancelled.
The onus of proving that Toy Shed was insolvent at this point was on Playspace. Playspace relied on the expert evidence of Angus, the liquidator who based his views largely on an analysis of assets or available funds, compared to liabilities, at the end of each month. On this basis, Toy Shed was insolvent from April 2004.
However, the judge pointed out that this is not the relevant test. Instead, what is required is an assessment of Toy Shed’s financial position as a whole, taking into account the commercial realities of the situation.
In Australian Securities and Investments Commission v Plymin [2003] VSC 123; (2003) 175 FLR 124 Mandie J adopted a checklist of indicators of insolvency and this checklist shows the matters to consider. They are:
- Continuing losses.
- Liquidity ratios below 1. [i.e. Not enough cash or cash equivalents to cover current liabilities]
- Overdue Commonwealth and State taxes.
- Poor relationship with present bank, including inability to borrow further funds.
- No access to alternative finance.
- Inability to raise further equity capital.
- Suppliers placing [company] on COD, or otherwise demanding special payments before resuming supply.
- Creditors unpaid outside trading terms.
- Issuing of post-dated cheques.
- Dishonoured cheques.
- Special arrangements with selected creditors.
- Solicitors’ letters, summons[es], judgments or warrants issued against the company.
- Payments to creditors of rounded sums which are not reconcilable to specific invoices.
- Inability to produce timely and accurate financial information to display the company’s trading performance and financial position, and make reliable forecasts.
With the possible exception of Toy Shed’s liquidity ratio, Mr Angus did not turn his mind to any of the 14 matters set out on the Plymin checklist of insolvency indicators. If he had, the only indicator that suggested Toy Shed may have been insolvent was that it had an outstanding taxation liability to the Australian Taxation Office of $23,611 as at 26 February 2004.
The other indicators which Osbourn’s expert witness was able to locate allowed her to express the opinion Toy Shed was solvent, at least until early 2005. The company made a modest profit of $13,280 in the financial year 2004/2005. It had an overdraft facility with the Australia & New Zealand Banking Group Limited with a limit of $10,000 and, on the whole, remained within that limit. There were only two dishonoured cheques, the first in July 2004. The only legal action taken against Toy Shed was that by Playspace. The company’s accounting records were apparently up-to-date.
The judge concluded that Playspace had failed to establish that Toy Shed was insolvent when it incurred the debt.
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