Australian Credit Law Bulletin - Vol 3, No 4, June 2002
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe send a blank email to: aus-bulletin-join@mailman.hattaways.com
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:
- Statutory demand - what is a genuine dispute?
- Company loan for consumer purposes?
- Executive's liability for unpaid company shares
- Hiding assets from the liquidator
- Joint and several liability for a debt
1. Statutory demand - what is a genuine dispute?
Solarite v York [2002] NSWSC 411 (14 May 2002)
York International Australia Pty Ltd had contracted to supply airconditioning units to Solarite Air Conditioning Pty Ltd for a project at the Penrith RSL Club for $229,858.92. There were problems. On 2 July 2001, Solarite wrote to York:
"We are extremely concerned at the level of damage to the units that arrived on site at the Penrith RSL project on Friday 29/6/01. Our main concern is that no matter what level of repairs are carried out the consultant may still not accept the units. Some damage is beyond repair and the units will not be brought back into it's original level. It is our intention to withhold part of your payment until all rectification works are carried out to a level that is acceptable to Solarite and the consultant."
Solarite paid $110,000 in July 2001 and York agreed to fix the problems. By about November 2001, York believed ithad done all that was required, but, Solarite was still unhappy and wouldn't pay.
In January 2002, York served a statutory demand on Solarite. If Solarite didn't pay $119,858.92, it would be presumed to be insolvent and York could commence winding up proceedings. So Solarite applied for an order that the statutory demand be set aside. Solarite claimed there was, in terms of section 459H(1)(a) of the Corporations Act 2001, "a genuine dispute between the company and the respondent about the existence or amount of a debt to which the demand relates".
So was this a genuine dispute? This is an important issue for creditors to understand. The tests for this were summarised as:
i. There must be "a plausible contention requiring investigation".
ii. The dispute must be "real and not spurious, hypothetical, illusory or misconceived".
iii. The court will look to see whether there is "a perception of genuineness (or lack of it)" but "it is not expected that the court will embark on any extended inquiry".
Here, Solarite would only fail if its arguments were "so devoid of substance that no further investigation is warranted. Once the company shows that even one issue has a sufficient degree of cogency to be arguable, a finding of genuine dispute must follow ... even where any case apparently available to be advanced against the company seems stronger."
In this case, there clearly was a genuine dispute. "The evidence shows that there are matters which need to be resolved in properly constituted proceedings ... Only a debt established by that process can be, in this case, a safe foundation for any presumption of insolvency." The demand was set aside and York had to pay Solarite's costs.
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2. Company loan for consumer purposes?
Pauline Taylor signed a contract of sale of an $850,000 Toorak property in August 1999. The buyer was "Pauline Taylor and/or Nominee". A mortgage application was requested in in the name of Pauline Taylor "for the time being".
Jim Sukroo, a "loan introducer" sent her to National Mortgage Services, a mortgage broker. Sukroo was informed, it was claimed,
that the Taylors were going to live there when they were in Melbourne. The mortgage broker, however, alloegedly told a finance company, Third Szable, that the loan introducer had told him that it was an investment property. At the time Third Szable had a policy, known to the mortgage broker, not to provide loans to which the Consumer Credit Code would apply ie. loans for for "personal, domestic or household purposes". Barry Taylor, Pauline's husband, signed a declaration for Third Szable that the loan was "wholly or predominantly for business or investment purposes".
Various documentation was then prepared by Third Szable in the name of Pauline Taylor. However, in October, Third Szable were told that the loan was not to proceed.
The purchase was ultimately completed by Wannon Court Pty Ltd, the trustee of a family trust under which Barry and Pauline Taylor were the major beneficiaries. In the mortgage valuation certificate relating to the new loan, signed by one of the directors of Wannon Court Pty Ltd, Anthony Peterson, there was a declaration that the property was an investment property occupied by tenants.
When the Taylors didn't pay legal costs and other fees which Third Szable were entitled to under their contract, Third Szable sued in the Victorian Magistrates Court. Barry and Pauline Taylor then applied to the Victorian Civil and Administrative Tribunal for declarations under s.102 of the Consumer Credit (Victoria) Code.
They alleged that Third Szable had breached key requirements of the code in connection with their credit contract. They also claimed establishment and procuration fees and legal costs in respect of a loan transaction were prohibited by the code, or were unconscionable.
Third Szable applied to have the case struck out or dismissed on the grounds that code was inapplicable because this was an investment loan. In such an application, the court does not decide whose evidence is correct, but merely looks at whether or not the case is "manifestly hopeless or untenable."
The deputy president of VCAT did not accept the submission of Third Szable that, because a company purchases a property, that property must necessarily be purchased for investment purposes.
However, she accepted that as far as Third Szable knew or ought to have known, the loan was to be provided for investment purposes, and that the presumption that the code applies was therefore displaced. Neither the finance broker nor the loan introducer were Third Szable's agent. The fact that they, arguably, may have knownsome other purpose of the loan didn't mean Third Szable did. Nothing was said to put Third Szable on notice of any other purpose.
The deputy president said, "I do not consider that the code intended to apply where a credit provider, at the time of an offer to consider a loan application, did not know and had no reason to suspect that the loan was not to be provided for investment purposes. On this basis, I consider that Third Szable has clearly established that the code does not apply, so clearly, that the Taylors' case is manifestly hopeless."
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3. Executive's liability for unpaid company shares
Wright v Mansell [2001] FCA 1519 (29 October 2001)
Wright became a director of J Wright & Sons Pty Ltd in 1959. In 1989 a special class of executive preference shares (par value, $2) was created. Wright had been allotted 750,000 executive preference shares which were partly paid to one cent. A later dividend went towards paying off the unpaid portion and took the paid-up amount to 16 cents. Wright retired from the company in 1994 but he did not elect to convert his shares to ordinary shares.
The company got into serious financial difficulties in late 1998. By April 1999 J Wright & Sons was effectively insolvent, and Mansell was appointed liquidator of the company.
Mansell claimed that there was $1.84 uncalled capital outstanding on Wright's executive preference shares, which Wright ought to pay. Wright appealed to the Court against Mansell's finding. He argued that the liquidator had no power to make a call on uncalled capital. The Court determined however, that the power of the liquidator to make a call was unlimited as it had been established by statute.
Wright also said that the obligations which attached to the executive preference shares had never included the obligation to pay a call. The court disagreed. Reducing the liability of a shareholder in respect of
uncalled or unpaid capital is a reduction of capital. For example, when shares are $2.00 each but only have 16 cents paid up, to reduce them to fully paid up shares would relieve the shareholder from liability for the uncalled amount. This reduces the capital of the company. Although this is allowable in certain circumstances, the conditions for a reduction cannot be satisfied in the case of an insolvent company. So Wright could not be relieved of his liability to pay calls. He also had to pay costs.
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4. Hiding assets from the liquidator
Total Management (Melbourne) Pty Ltd had only one asset, a waste water treatment plant. It had been leased to Patrick Autocare for a term of five years at a monthly rental of $5,100. Cole was appointed liquidator of Total Management when it was wound up in June 2001.
He found that under an agreement dated 27 April 2001, Total Management had apparently sold the treatment plant and assigned the lease to Golden Arch Waste Systems Pty Ltd and Tareran Pty Ltd for $61,200. These two transactions, if valid, meant that Total Management had disposed of its only asset for substantially less than the value of the remaining lease payments.
Cole applied to the Court to have the transactions declared void. He suspected that the agreements had been made after the liquidation of Total Management. Cole obtained documents from Total Management's solicitors, Kelly & Chapman, which showed that the contract of sale had been prepared after the date of liquidation. It had then been signed by the company and the purchasers and backdated to make it appear that it had been executed before the liquidation. The letter sent to Patrick Autocare advising it of the assignment of the lease also had a false date.
The Court concluded that at the date of its liquidation, Total Management still owned the treatment plant, and the interest under the lease. The documents were a fraudulent attempt to keep the
company's assets out of the hands of its liquidator. Cole was able to recover the treatment plant. The evidence also showed that Patrick Autocare had made some rental payments to Golden Arch and Tareran. They had to pay over the amounts they had collected.
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5. Joint and several liability for a debt
Pollak v National Australia Bank Limited [2002] FCA 237 (14 March 2002)
In 1986 National Australia Bank (NAB) lent money in the USA to Mrs Pollak. When Mrs Pollak died, Dr Pollak and his sister, Mrs Stern agreed to assume liability for their mother's debt. Ten years later, NAB obtained a court judgment in California for $US3.8 million plus interest and costs against Dr Pollak and Mrs Stern.
NAB applied to the Australian Court late in 1996 to enforce the Californian judgment. In December 1998, NAB gained a temporary Mareva injunction preventing Pollak and Stern from disposing of any property or assets without giving NAB prior notice. In November 1999, the Court ordered that judgment be entered in favour of NAB against Pollak and Stern jointly and severally. This meant that either of them could be called on to pay the full amount or that both could be called on to pay their own portion of the debt.
A year later Pollak was served with a bankruptcy notice and made bankrupt. About this time, NAB and Stern entered into an agreement. Certain properties were sold and the proceeds, together with other funds, were paid to NAB in satisfaction of Stern's share of the judgment debt. Pollack then applied to have the sequestration order against his estate lifted. He claimed that the agreement made by Stern operated as a release of the entire judgment debt for all the joint and several debtors and not just for an amount equal to Mrs Stern's share.
The Court's decision swung on the wording of the agreement. NAB had expressly reserved all of its rights against Pollak. It was plain that neither Stern nor NAB intended that the release should operate to the benefit of Pollak. So the Court rejected Pollak's argument that he had also been released from the judgment debt. Pollak stayed bankrupt and his bankruptcy estate also had to pay NAB's costs.
