Australian Credit Law Bulletin - Vol 11, No 2, February 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:
- How directors ripped off their creditors, and how ASIC pursued the lawyer who advised them
A case to strike fear into the hearts of dastardly business advisors. Go ASIC! - Company closes down and new one takes over the business – creditor not told
Director ends up personally liable for misleading and deceptive conduct - A reminder that owning a struggling business is very stressful
Another potted history of small business failure in the Queensland building industry
1. How directors ripped off their creditors, and how ASIC pursued the lawyer who advised them
ASIC v Somerville & Ors [2009] NSWSC 934 (8 September 2009)
Timothy Somerville is a solicitor. He was a partner with the firm of Somerville & Co, Solicitors, up to the end of 2005 when the firm became Somerville & Co Pty Limited, an incorporated legal practice, and he became a director of this company.
Nick Jones was the sole director of a small removal business called Piditty Liditty Pty Limited. The ATO served a statutory demand on Piditty on 13 March 2002 in respect of a tax debt of $56,362. This is the first step for a creditor in the process of winding up a debtor company for an unpaid debt. Jones consulted with Somerville who sent him a letter advising him how to proceed. Somerville arranged the incorporation of a new company, Jones’ Removals & Storage Pty Limited. The new company created a “V” class shares. The assets of Piditty were sold to Jones’ Removals & Storage in return for 100 “V” class shares in Jones’ Removals. The “V” class shares had the right to receive all dividends declared by the company until a total of $150,000 was paid. No dividend was ever paid so while Piddity was paid in shares, it received no money for its assets.
While this was being organised, another creditor, QBE, was also pursuing Piditty for unpaid superannuation. The settlement date was brought forward, and took place in August 2002, two days before QBE wound up Piditty.
In July 2006, QBE sent the new company, Jones’ Removals & Storage, a statutory demand for a claimed debt of $11,705 for unpaid workers compensation premiums. Jones again consulted Somerville. According to Jones, Somerville said, ‘Do it again’. Jones said, ‘It sounds a bit rich’. Somerville said, ‘No, it’s alright’.
Again, just before its liquidation the indebted company sold its assets to a new company (this time called Jones’ Removals Pty Limited) which Somerville helped organise, again in return for “V” class shares. The indebted company was then put into liquidation by its creditors. No dividend was ever paid.
A number of other small business directors sought legal advice from Somerville in respect of their failing businesses. He gave similar advice, their companies sold their assets to new companies in return for “V” class shares, and the creditors concerned received little or nothing. In each case where it was necessary to have a winding up by way of a creditor’s voluntary winding up, Somerville made arrangements for a particular person to consent to appointment as liquidator and agreed on the fees.
The Australian Securities and Investments Commission (“ASIC”) subsequently sought declarations against eight of these directors that they had acted in breach of their duties as directors under the Corporations Act 2001, sections 181, 182, and 183, and should be disqualified as directors.
The judge in the NSW Supreme Court agreed. He found that there never was any genuine intention on the part of the directors to pay for the assets by way of the “V” class dividend. “The declaration of dividend out of profits in small companies such as these was, judging by past trading history, unlikely and was properly, I think, described as optional or discretionary… What has really happened here is that a scheme has been devised to bring about asset stripping but to attempt to make this seem legitimate by providing for “V” class shares.” In a later judgment which considered penalties (http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2009/998.html) he concluded that they should all be disqualified as directors for two years.
ASIC claimed that Somerville was personally involved in these breaches alleged against the other defendants within section 79 of the Corporations Act 2001 (Cth) which deals with persons who “aided, abetted, counselled or procured” the breaches by the directors. The judge concluding that it was clear that Somerville “aided, abetted, counselled and by carrying out the necessary work procured the carrying out of the transaction… [T]he transactions would not have taken place but for his involvement.”
In the subsequent judgment to consider the penalties which should be imposed (http://www.austlii.edu.au/cgi-bin/sinodisp/au/cases/nsw/NSWSC/2009/998.html), Somerville claimed, “I honestly believed that the creditors would be better off if the company could continue to trade and pay off its creditors over time.”
The judge said, “I regret to have to come to the conclusion that I do not accept that statement… [It was] perfectly clear that the view of Mr Somerville was that the creditors were unlikely to be paid and that it was really in the hands of the same director of the new company whether any payment was received or not, and by whom.”
Somerville also said, “Had I realised that my conduct was such as to be involved in breaches of the Corporations Act by those to whom I was providing advice as has been found by this Honourable Court, I would not have given that advice.” He said that he had given similar advice to that complained of on dozens of occasions, commencing about 10 years ago and that no one had challenged the transactions. He was quoted as saying, “until the Court proves otherwise I will continue to promote them.” A court has now said that what he was doing was wrong.
The judge said, “Mr Somerville gave no evidence that he considered that the creation of the “V” class shares was anything other than a subterfuge… I have the greatest difficulty in accepting that Mr Somerville considered that his actions in these cases [were] proper and in accordance with the law. This is because he must have known the consideration for the sale of assets … was really a fiction and he must have [known] the transactions were uncommercial. If, however, he did consider that to be the position… it shows, I consider, that he ought not be a director… he should be prohibited from taking part in the management of a company for a considerable time… [I]t is important to send a message to the public and those closely engaged in corporate activity that conduct resulting in obvious breaches of the law which is likely to cause disadvantage to creditors of insolvent companies and which deprives them of their statutory rights will not be countenanced and this conduct is in general made worse by dressing it in misleading garments.”
Back to top
Information on our current seminars
2. Company closes down and new one takes over the business – creditor not told
Dwyer v Craft Printing Pty Ltd [2009] NSWCA 405 (15 December 2009)
Paul Andrew Dwyer was a director of Comsta Pty Ltd which traded as “Paul’s Warehouse”. In July 2003, Comsta applied to open a credit account with a printing company, Craft Printing Pty Ltd. A signed guarantee form was returned with the credit application, dated 30 July 2003. Dwyer guaranteed the account of Comsta for any amount that was due and payable to Craft. The application was approved.
In May 2005, Dwyer decided to reorganise his various businesses. He instructed his staff to send a circular letter to creditors, dated 30 May 2005, which said that all orders would, from 1 June 2005, be made in the name of Paul’s Retail Pty Ltd as trustee for Paul’s Warehouse Discretionary Trust. In other words, Paul’s Retail Pty Ltd would be the debtor company for any orders from then on.
Dwyer believed that an employee named Tania put each letter into a window-faced envelope and that they were all despatched. He assumed that all debts from this point would be charged to the Discretionary Trust. However, Craft apparently never got a letter and continued to deal, it believed, with Comsta.
Comsta was wound up in a creditors’ voluntary winding up effective from 7 March 2007.
Craft claimed that, at that date, Comsta owed it $204,930.01. After 7 March 2007, there was continued trading between the Dwyer’s enterprise and Craft (who still thought they were trading with Comsta and obviously didn’t know Comsta was in liquidation) and a further debt of $135,521.01 was incurred.
Paul’s Retail Pty Ltd went into administration in January 2008. On 21 April 2008 a deed of company arrangement (DOCA) was delivered under which creditors were to have their debts extinguished. They were to be given a dividend out of monies contributed by Dwyer and others.
Initially, Craft claimed under the DOCA. However, it later changed tack and claimed against Dwyer personally in the District Court under the guarantee in respect of the pre-liquidation debt. It also claimed against him for misleading and deceptive conduct under the Trade Practices Act 1974 (Cth) or the Fair Trading Act 1987 (NSW) in respect of the post liquidation debt.
Craft claimed that it had never received the relevant letter. This was reinforced by evidence from Craft executives that they would have insisted on a new guarantee before allowing future credit if they had received the letter. The judge concluded that they had never received it. This meant that Comsta was the debtor for all debts up to the point where it went into liquidation. Dwyer was personally liable for this pre-liquidation debt under his guarantee.
Craft continued to deal with what it assumed was Comsta, thinking that its account was secured by Dwyer’s guarantee. The judge said, “There was a clear rational expectation of disclosure by [Dwyer] of the true facts, and his failure to do so resulted in [Craft] being misled and deceived.” Dwyer was therefore also liable for the post-liquidation debt because of this misleading and deceptive conduct. Judgment, including interest, was entered against Dwyer for $416,592.39.
Dwyer appealed in respect of the post-liquidation debt. He argued that he made no misrepresentation. He believed that he had informed Craft of the change of operation of his group’s accounts, so the fact that Comsta had gone into liquidation was of no importance. He had inadvertently failed to inform Craft of the true situation, but he could only be liable if his misleading and deceptive conduct was intentional, he claimed. The Court of Appeal disagreed.
The arguments of Dwyer’s lawyers focused on what Dwyer could reasonably expect, however, the question was not what he could reasonably expect, but what Craft could reasonably expect. The Court of Appeal held that the judge was entitled to draw the conclusion he did.
Dwyer’s appeal was dismissed. He was personally liable for the $416,592.39.
Back to top
Information on our current seminars
3. A reminder that owning a struggling business is very stressful
Dyson v QBSA [2009] QCCTB 87 (30 April 2009)
Robert John Dyson started bricklaying in 1970. He got a licence in that trade in the mid-1970’s. In early 1990 he took a six month part-time course in building construction and obtained his licence as a “builder – low rise”. He completed about a dozen projects as the nominated builder, but most of his work has been as a bricklayer, employing up to 40 men on projects up to $400,000. In 1991 he set up a company, Bob Dyson Bricklaying Pty Ltd (BDB). Dyson and his wife were the shareholders and Dyson was the director. The business operated on an overdraft secured by a mortgage over the family home.
In the 2003 financial year, BDB was hit by three large bad debts totalling approximately $201,000.00. The companies concerned either ceased trading or went into liquidation and there was, Dyson later claimed, no chance of recovering any money. As a result of the stress, Dyson suffered a major depressive illness. He was hospitalised in late 2004 for five weeks and didn’t return to work for another 10 months.
In 2005, BDB contracted with McNab Constructions, at a contract value of $400,000.00. A dispute arose over an amount of $210,000. Although Dyson later claimed to have a strong case, he said he had no funds to litigate and was forced to settle for a payment by McNab of $11,000.
Two other companies went into liquidation owing BDB a total of $48,000. In addition, a worker employed by the company contracted pneumonia while working. Due to “a bookkeeping error”, insurance premiums had not been paid for that worker, so BDB was liable for that worker’s $60,000 loss of income.
The Dyson’s divorced in 2005. Under all this pressure, Mr Dyson’s depression recurred. He spent another seven weeks in hospital from January 2006. Dyson, who apparently “always treated paper work as only marginally relevant”, admitted that on his return to work, he did not read any correspondence received by the company in his absence.
BDB was wound up by the Queensland Supreme Court on 4 September 2006, leaving several hundred thousand dollars unpaid to unsecured trade creditors, $125,000 in unpaid tax, and various other debts. Dyson’s family home was sold to pay debts to two of BDB’s creditors which held personal guarantees from Dyson. The rest went to pay the bank’s mortgage.
As a result of this business failure, Dyson’s subsequent application to again run a business in the building industry was rejected by the Queensland Building Services Authority. Dyson hoped to conduct business as a bricklaying/block-laying contractor employing three or four workers and at some point to build a house for himself and his children.
The Authority said that Dyson failed to take all reasonable steps to avoid the failure of the business. It said, among other things, that he was not aware of the financial position of the company at any time from 2003. (Dyson’s wife did the bookkeeping until their marriage broke up. After that, he employed a bookkeeper.) It said that it was extraordinary for Dyson to settle a $210,000.00 claim, with (apparently) good prospects of success for $11,000.00. The Authority was also critical of Dyson’s approach to credit management – a few telephone calls with rarely any resort to legal action.
In addition, the Authority was concerned that there was no evidence offered that Dyson was over his depression. Dyson had shown that he was unable to deal with the stress of “everyday business occurrences”, which might be expected to be worse in “the current economic climate.”
In all of the circumstances, the Tribunal was not satisfied that Dyson took all reasonable steps to ensure that BDB could pay its debts. The Authority’s decision was confirmed.
Back to top
Information on our current seminars
