Australian Credit Law Bulletin - Vol 3, No 5, July 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:

Whose goods did the sheriff seize?
Ex-director claims didn't know company existed!
Are you keen for a seminar on the NZ Personal Property Securities Act?
Travellers cheques - how safe are they?
Could a cashflow statement prove solvency?
Going to arbitration - how late can you leave it ?

1. Whose goods did the sheriff seize?

Lunt v WRS Pacific Pty Ltd [2002] WASC 27 (21 February2002)

Lunt owed WRS Pacific $9,813.88. A writ of fi fa was issued. This causes the sheriff to make demand on the debtor and, if he doesn't pay, to seize and sell any goods he can find belonging to the debtor, to pay the debt. The sheriff seized some of Lunt's assets from his home. These assets included a grandfather clock, a nine-piece lounge suit, a Kelvinator two-door fridge, and a Samsung microwave. Lunt claimed that the goods were not his but were owned by the Lunt Family Trust.

The trustees of the Lunt Family Trust provided evidence supporting Lunt's claim. Although the original 1994 deed could not be found, they provided a signed change of trustee deed from 1996 which proved the trust existed. A chartered accountant, Mr Bond, further stated that he had been an original trustee and had signed the original deed. Bond and Lunt also swore the assets were the property of the trust.

As a result the Sheriff had to release the assets.

WRS could not bring any evidence to show that the goods were not the property of the trust. The judge noted that this was not uncommon in claims of this nature. He seemed to have some sympathy for the creditor.

He said, "I do not blame the defendant for having contested this interpleader summons. How was it to know that the chattels found in Mr Lunt's house were owned by his family trust? Further, there is no particular reason why the defendant should have withdrawn its claim to ownership at an earlier stage when the 1994 trust deed could not be found. In the circumstances, there will be no order as to costs."

2. Ex-director claims didn't know company existed!

Swansson v Pratt [2002] NSWSC 583 (3 July 2002)

Ms Swansson had been married to Mr Highland but they divorced in 1997. Earlier, in 1992, by way of a complicated family arrangement, they had become the only directors of the Swansson family investment company, RAPP. Swansson retained a 25% shareholding and her mother and brother held the remaining 75%.

Swansson was a director and shareholder until 1999, even though she claimed she was unaware of RAPP's existence! She said that during her marriage she signed whatever documents Highland asked her to sign without reading or understanding them.

The core of Swansson's claim was that Highland had secretly retained over $400,000 for his own benefit. Swansson said that in 1994 Highland had caused the company to sell its interest in a property for $800,000. She claimed Highland had transferred more than half of the settlement proceeds into two of his other companies. She said Highland had procured her signature without her ever being aware of what was going on.

Highland was, she claimed, in breach of the statutory duties he owed as a director of RAPP under the Corporations Act and in breach of his fiduciary obligations under the general law. Swansson attempted to bring a derivative action in the name of RAPP against Highland. A shareholder or officer of a company may bring a derivative action in the name of the company which pays the cost of the proceedings.

The Court looked at what was necessary to allow a derivative action in the company name. Swansson had failed to show that she was acting in `good faith'. Two general principles in respect to `good faith' were applicable. Firstly the applicant must honestly believe

there is a cause of action which has a reasonable prospect of success. Secondly, the purpose for bringing the derivative action must be for the benefit of the company. It must not be for a collateral purpose, as this would amount to an abuse of process. Swansson fell well short of these requirements. Her allegations of Highland's secret dealings and the fact she had only discovered her interests in RAPP in 1999 were unconvincing and were not supported by evidence. Evidence also tended to suggest she actually had notice of the sale of RAPP's property. Furthermore, it indicated that she had already received from her former husband a substantial payment which accounted for the money in dispute under a property separation agreement.

The Court also found it was not `in the best interests' of RAPP to grant Swansson the right to bring a derivative action against Highland. She had other, more suitable ways of taking action against him. It would have been much better for Swansson to have applied to the Family Court to set aside the property settlement agreement on the basis of fraud in order to readjust their respective property rights.

3. Are you keen for a seminar on the NZ Personal Property Securities Act?

Many Australian creditors will be aware that New Zealand has new legislation covering, broadly speaking, securities over goods. It's based on the North American approach; it's an important, dramatic change; it's good for trade creditors, but it's far from simple. If you sell into New Zealand on ROT clauses or you lend money into New Zealand, you need to understand what's happening.

< a href =" http://www.hattaways.com/publications/crbook/creditrev.php">

Credit Revolution: A Practical Guide to surviving the Personal Property Securities Act by Alan Liddell and Peter Hattaway is, in our totally unbiased opinion, the leading text on the subject. Alan, who presents Hattaway & Associates' New Zealand law seminars is one of the leading authorities on the PPSA, and the only one we know who can explain it so that non-lawyers can understand it.

We have had requests to present our PPSA seminars in Sydney and we will do so if there seems to be enough demand.

4. Travellers cheques - how safe are they?

Thos Cook v Kumari[2002] NSWCA 141 (21 May 2002)

This was the first time a case concerning a contract for the issue of travellers cheques had reached the Court of Appeal. Mrs Kumari bought travellers cheques with a face value of over US$50,000 from Thomas Cook in Sydney. She planned to go to the Punjab in India to arrange her son's wedding, travelling via Singapore. During the stopover in Singapore Mrs Kumari visited the markets with a friend. When she opened the outer pocket of her handbag to get the cheques they were gone.

Thomas Cook refused to refund the travellers cheques, stating that Mrs Kumari had breached a condition in the contract to safeguard them from loss or theft "as you would a similar amount of cash." Mrs Kumari conceded that she would not normally carry that amount of cash in such a public place. However the Court said that this alone was not sufficient to establish a breach of the condition. It was well known that people buy negotiable instruments like travellers cheques to get both easily convertible currency and safety. To allow Thomas Cook to refuse to refund the lost travellers cheques would defeat their purpose.

Hypothetically, Mrs Kumari could have been carrying the same amount in cash. The Court could not assume that Mrs Kumari would not do so. There was no evidence she would have carried cash in any other compartment of her handbag. The travellers cheques would not fit in the zipped compartment but neither would cash if Mrs Kumari had been carrying it. The Court decided that carrying US$50,000 in travellers cheques in the outer pocket of a handbag, secured by a press stud, was safeguarding the cheques as you would cash. So Thomas Cook was ordered to refund Mrs Kumari.

5. Could a cashflow statement prove solvency?

Ostgro Australia Pty Ltd v Syarrum Ostriches WAS Pty Ltd [2002] WASC 140 (29 May 2002)

Ostgro Australia Ltd sold 240 wet salted ostrich skins to Syarrum Ostriches WAS Ltd (SAWL) for $36,720. The cheque bounced.

Ostgro issued a statutory demand for payment which was not met nor was it challenged within the required 21-day period. This meant they were presumed to be insolvent. Ostgro then brought a winding-up application against SAWL on the grounds of SAWL's insolvency.

SAWL didn't dispute the debt but opposed the application on the ground that they were in fact, solvent! In order to show this, SAWL wanted to produce statements in Court outlining their cash flow.

Was SAWL entitled to rely on cash flow statements that appeared to be inherently unreliable and which were based on uncertified estimates? No. The Court declined to receive the statements as they were not an accurate financial record in the sense that a financial statement could be prepared from them.

Even if SAWL's cash flow statements had been accepted, the Court found that the circumstances clearly showed SAWL to be insolvent. The debt was uncontested but remained unpaid for six months. The Court considered this to be powerful evidence of insolvency. The debt was one incurred in the ordinary course of business of the company and, given the turnover ($1.15 million in the 2001 financial year), was not a huge debt.

The Court also found that if the cash flow statement was correct as claimed, then the excess income over expenditure should clearly have been sufficient to meet the demands being made on the company. The non-payment of the undisputed debts (the current one plus another of similar size) when they fell due, was powerful evidence of insolvency. This, together with SAWLS's weak evidence as to its solvency, made it easy for the Court to conclude that the company was insolvent. SAWL was ordered to be wound up.

6. Going to arbitration - how late can you leave it ?

CMC Cairns P/L v Isicob P/L [2002] QCA 181 (31 May 2002)

CMC Cairns Pty Ltd were contracted to build a number of home units at Yorkey's Knob. They sub-contracted to Isicob Pty Ltd. The sub-contract was signed by Isicob after they had made some amendments, but CMC never actually signed it. It was agreed final payment would not be due until a final account was received by

CMC, and any disputes would be resolved by arbitration.

In June 1994 the work was completed, 27 days late according to CMC. Isicob never replied to a fax from CMC in July which calculated the overall contract value at around $230,000. The fax also asked the sub-contractors to check the quantities and advise of errors. Final settlement was paid by CMC at the end of July 1994. It was not until June 2000 (that is, six years later!) that Isicob advised CMC of some errors in the calculations, indicating that the value of the work was nearly $268,000.

Unhappy with the final amount, Isicob wrote to CMC requesting extra payment. When CMC did not respond Isicob referred the dispute to arbitration. CMC countered by seeking an order to terminate the arbitration proceedings under s. 46 of the < a href =" http://www.hattaways.com/linkout.php?url=http://www.austlii.edu.au/au/legis/qld/consol_act/caa1990219/s46.html Commercial Arbitration Act 1990 (Qld).The Courts could terminate arbitration where there had been an "undue delay" which was "inordinate and inexcusable". The delay must have also given rise to a substantial risk of an unfair trial or the likelihood of serious prejudice to CMC.

A director of Isicob said they had been held up by their quantity surveyor in the preparation of the bill of quantities which they then had to check over. The Court decided that it was not necessary for Isicob to tell CMC of the problem for a dispute to arise. However, the fact that the delay occurred before arbitration was requested was a relevant consideration. Here, it would not have been difficult for Isicob to inform CMC of the calculation discrepancies in 1994, so the delay was inordinate and inexcusable.

It should be noted that an action based on a contract has to be brought within six years of the dispute (s.10, < a href =" http://www.hattaways.com/linkout.php?url=http://www.austlii.edu.au/au/legis/qld/consol_act/loaa1974226/s10.html Limitation of Actions Act 1974 (Qld)) . However, in arbitration applications, the limitation period is only one factor to be considered along with the relationship of the parties and the circumstances of the case.

The Court held that the lapse of time between the work being completed in June 1994 and the referral to arbitration in July 2001 meant it would be difficult to bring evidence regarding the dispute. The delay also meant that there would be a substantial risk of an unfair trial. So the dispute was not allowed to go to arbitration and Isicob could not recover the extra money they claimed.

David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
David Francis

Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.

Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
Alan Liddell

There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.