Australian Credit Law Bulletin - Vol 12, No 1, May 2011
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 stress of collecting debts when English is your second language
Hard when you have to repeat yourself because debtors can’t understand your accent - What does a credit controller have to prove to a judge in a simple guarantee case?
A simple example of the elements necessary to prove an undefended claim for $300,000 - A case study of one of the ways consumers build big debts
Failure to meet child support liabilities leads to substantial penalties - More NZ examples of companies losing money by not registering on the PPSR
Surely no-one would be so foolish? Yes they would!
1. The stress of collecting debts when English is your second language
Macedo v Comcare [2010] AATA 1037 (21 December 2010)
My estimate is that in one of our typical collection seminars a quarter of the attendees will have an accent that is not from New Zealand or Australia. Many very skilled and effective collectors have an accent of some sort. The problem is that when people can’t understand the collector, or the collector can’t understand them, it’s common for the debtor to get angry, which makes the collector’s job stressful. This is a matter which reached the courts and which touches on this issue.
Mr Macedo was a native of Peru. He came to Australia, attended an English course, and obtained work.
It is unnecessary to go into all the details of this review of Mr Macedo’s claim for compensation for stress-related psychiatric problems, but the problems first arose when he was working in the Targeted Enforcement Debt Collection Team of the Child Support Agency. One of Macedo’s particular complaints was that he was unable to attend training. He said it was very stressful because he was required to deal with aggressive people on the phone. He said the effect of this stress was that he could not sleep and kept thinking about clients and their problems. He said that people became angry when they heard his accent. He thought he needed to do courses to improve his skills, including his pronunciation of English.
One of Macedo’s colleagues “described the work as very stressful, requiring officers to call people to pursue collection of arrears of payment of child support by means including garnisheeing of wages. She said many people on the phone become very angry and described the work as emotionally and psychologically draining.” She said no one in the team had received any training on communication or telephone skills or on conflict resolution or dealing with difficult people. However, she said the whole team received training on technical matters including the relevant legislation. She said there was a backlog that the team had been set up to deal with and it was the primary focus of the team to deal with that backlog. She said that focus was the reason that other training was not offered to team members. She said there was no particular discrimination against Mr Macedo.
The Administrative Appeals Tribunal acknowledged that he had a genuine illness but found that he was not entitled to compensation.
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2. What does a credit controller have to prove to a judge in a simple guarantee case?
AUSTWIDE WHOLESALERS PTY LTD -v- IBRAHIM [2011] WADC 21 (18 February 2011)
Austwide Wholesalers Pty Ltd, (Austwide) is a supplier of various goods on a wholesale basis to retailers. In 2001, Austwide’s NSW manager, Mr Williams, met Sam Ibrahim, the sole director of Discount Zone Pty Ltd. Williams gave Ibrahim a credit application to complete and received it back, duly completed on behalf of Discount Zone, on a subsequent occasion. It included a personal guarantee by Ibrahim. Austwide then supplied goods to Discount Zone.
Eventually, Discount Zone fell into arrears and was placed into administration in February 2008. Austwide filed a statement of claim against Ibrahim for $181,266.51, plus interest in the WA District Court on 11 February 2010. Ibrahim filed a defence dated 19 March 2010. In that defence, he denied the execution of the contract, denied the debt and, in the alternative, pleaded that the purported guarantee of 5 September 2001 was 'otherwise expressly withdrawn by the defendant' in 2005.
The matter was listed for trial in December 2010. However, at that point Ibrahim’s solicitors were given leave to withdraw, and the matter was relisted for trial on an undefended basis. From this point all that remained was for Austwide to complete the formalities of proving the basic elements of the claim, given that Ibrahim had disputed some of these. If a credit manager has to appear in court on a matter, these are the sort of “nuts and bolts” details that you may have to prove.
- There was a contract between Austwide and Discount Zone. There was, as evidenced by a copy of the credit application and Austwide’s acceptance of that contract by supplying goods.
- Ibrahim guaranteed Discount Zone’s debts. He had signed a deed (a type of formal legal document which avoids some of the problems of a contractual guarantee) of guarantee in the credit application and the signature was witnessed.
- Austwide delivered and invoiced goods and Discount Zone didn’t pay for these goods. Ms Robbins, account controller (her role was mainly collections) for Austwide from 2006, produced a statement of account for Discount Zone for the relevant period. She had gone through the files and retrieved hard copies of credit notes and cheques signed by Ibrahim. She explained the system whereby payments received were credited against particular invoices when supplied with a remittance advice, and that process was shown in the statement of account.
- The amount outstanding is $181,266.51. This was shown by Robbins’ amended statement of account.
- The cost of debt recovery as permitted under the contract. The conditions of trading in the credit application said that: “The applicant will be liable to pay any legal costs or debt collection charges incurred by the company, in collecting outstanding accounts whether for collection of monies due or for recovery of goods supplied.” The evidence showed an amount paid by Austwide to Dun & Bradstreet greater than the $9,222 pleaded. The claim was limited to that sum.
- The amount of interest due. The credit application allowed Austwide to charge 17% or “the current bank overdraft rate (whichever is the higher)” on overdue amounts. The judge was satisfied with the calculations provided by Robbins which showed interest at 17% totalled $104,213.
Austwide had therefore made out the claim and judgment was entered for $294,701.74.
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3. A case study of one of the ways consumers build big debts
Welke v Child Support Registrar (SSAT Appeal) [2011] FMCAfam 2 (20 January 2011)
Mr Welke’s child was born in 1992. He did not accept that the child was his, and it was not until 19 July 1994 that a child support assessment registered for collection by the Child Support Agency (CSA) was in force. By this time he had an outstanding child support debt with respect to other children (and penalties) of over $10,000. There was a payment of $2500 in 1995, but little more.
In February 2008 orders were obtained in the Federal Magistrates Court declaring the child support debt as consisting of $59,639.98 in child support arrears and $64,305.65 in late payment penalty fees. Various orders were made by the magistrate for the lodgement of tax returns and to grant the appellant time to make any application to vary child support assessments, together with orders restraining him from dealing with a property that he owned near Melbourne. An intercepted tax refund reduced the debt by $26,000, and further adjustments were made to the child support assessments, and corresponding penalties.
At 28 July 2009, Welke still owed in excess of $41,000 in child support and penalties. He appealed to the Federal Magistrates Court against the Social Security Appeals Tribunal’s decision to refuse to remit penalties.
The Court said that “in some cases the CSA will agree with a child support debtor that if the debt is fully paid by a particular date the Agency will remit all or part of the penalties. It remains open to the Registrar to negotiate with debtors on that basis, relying upon the powers in s.68(1)(c) of the Act, when the Registrar is confronted with circumstances where the Registrar concludes, on a practical or commercial basis, that such an arrangement is the most effective method to affect a timely recovery of the debt. This flexibility is an important tool in a debt collection process. However, it could not be concluded that simply paying the child support debt would, of itself, amount to a special circumstance leading to a conclusion that it would be fair and reasonable to remit the late payment penalties.”
Welke argued that the SSAT failed to consider his capacity to pay the penalties that had been imposed. If a special circumstance is raised, then the capacity to meet the debt would, no doubt, be a relevant consideration in many cases. However, failure to pay child support for a lengthy period, coupled with limited financial resources, is unlikely, in all but the rarest of cases, to be sufficient on its own to amount to a special circumstance for the remission of late payment penalties.
The judge said that “this case is a poignant reminder that failure to meet child support liabilities, in the expectation that if one avoids long enough they will never be enforced ... is not only a futile endeavour, but likely to result in liability for substantial penalties.” The application was dismissed.
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4. More NZ examples of companies losing money by not registering on the PPSR
SEGARD MASUREL (NZ) LTD V NICOL & ORS HC AK CIV 2007-404-003603 [2008] NZHC 109 (12 February 2008)
New Zealand trade creditors can take back product they have supplied and for which they have not been paid, if they have a security agreement (such as a retention of title clause) and have registered the consequent security interest on the Personal Property Securities Register.
Even creditors supplying on “cash only” terms might include a term in their documents that gives them a security interest and register it “just in case.”
Remember, registration costs only $3 (it will cost $7.80 in Australia) and takes only a few minutes. Why wouldn’t you protect yourself? To save $3? Surely no-one would be so foolish?
There are two recent New Zealand cases where the management will be kicking themselves for not spending the $3. Feltex Carpets Ltd was put into receivership in 2006 by ANZ Bank, the holder of a registered general security over Feltex’s assets. In the lead-up to this, it was common knowledge that Feltex was in deep trouble. One of its suppliers was Segard Masurel (NZ) Ltd, a wool wholesaler which was selling on “cash on delivery” terms. Segard had no registered security agreement. Alert readers can probably guess what happened.
Segard delivered wool on 5 September 2006 which was not paid for at the time of delivery. In fact, for most of their transactions under this arrangement (65 out of 86), payment was not made at the time of delivery but was a day or so later.
After this particular delivery, Feltex's financial controller advised Segard that payment had been temporarily delayed and would be made as soon as possible. Another assurance was given a few days later. Segard knew from stories in the news media that ANZ had given Feltex until the end of October to sort out its finances. It therefore decided against immediately repossessing its wool. On 22 September, Feltex was put into receivership and the receivers refused to give the wool back. Segard was left with a debt of $180,983.31.
Segard took the matter to the District Court. The judge held that under the terms of the contract, title had passed, but if it hadn’t there was a conditional sale which would have created a security interest under the PPSA. The PPSA looks at the substance of an arrangement and in almost any situation where non-land property owned by one party is put into someone else’s hands without ownership changing and with an obligation to pay, a security interest is created. However, the security interest (if it was one) was unregistered, therefore it came behind the registered interest of ANZ in the wool. The High Court affirmed this decision. Segard’s contract should have spelled out that if any goods were supplied to Feltex without payment being made, Segard retained a security interest , and Segard should have registered this on the PPSR.
Another Feltex supplier was JS Brooksbank & Co (Australasia) Ltd, a wool broker. Brooksbank sold to Feltex using credit insurance to protect itself, but in June 2006, its credit insurer told Brooksbank that it would no longer insure supplies to Feltex. Brooksbank continued to supply Feltex under a new contract which required that it be paid in advance. The woolstores which held the wool would only release it to Feltex if they had a “buyer delivery order” from Brooksbank, and Brooksbank would only supply the order if it was paid.
In early September 2006, Feltex employee Ms Angela Gust went back to work after maternity leave. She had a quick “catch up” with the person who had been filling in for her, then faxed requests to woolstores holding Brooksbank’s wool, which she assumed had been paid for. It hadn’t been. Even though there was no buyer delivery order from Brooksbank, some of the woolstores released wool with a total value of $132,839.11. Feltex realised the mistake and put that wool to one side, but never paid for it. A few weeks later, Feltex was put into receivership and the receivers refused to give the wool back, claiming that ANZ now had a security over it.
Brooksbank took the matter to the High Court and lost. The Court said that Brooksbank’s contract gave it a security interest over any wool it supplied which wasn’t paid for, but of course it hadn’t registered that security. ANZ’s registered security therefore had precedence.
Brooksbank then went to the Court of Appeal, which concluded that because of the element of mistake, the facts were slightly different to Segard, where the creditor was clearly prepared to agree to delivery before payment. Here there was a clear mistake. Feltex had no right of possession under the contract, therefore ANZ’s security didn’t attach to the wrongly supplied wool. The receivers had to pay Brooksbank for the wool.
In order to get to that point, Brooksbank would have spent tens of thousands of dollars on unrecoverable legal fees, and with a slightly different set of facts, would still have lost. They wouldn’t have had this problem if their contract had included a security agreement and they had registered it.
Peter Hattaway is a director of Hattaway & Associates Ltd, credit consultants. This article is not legal advice. This article first appeared in MG Business in January 2011.
