Australian Credit Law Bulletin - Vol 3, No 6, August 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:

Section 14(1) of the Contractors Debts Act (NSW) considered for the first time!
Not as easy as contractors might have hoped.
Solicitors' lien or Centrelink garnishee - who had a right to the money?
The special right of the solicitors' lien versus Centrelink's statutory power under the Social Security Act.
Directors of failed company try to avoid examination
And fail.
Speed versus money - the court's approach to delaying a 2nd meeting of creditors
A lot of 2nd meetings are delayed - here's how the judges approach these matters.
Ex-employee tries to wind up company for unpaid wages
Never let your HR matters reach this point!
Liquidator used the directors' lawyer - was this a conflict that justified his removal?
Not so easy to get a court to replace a liquidator.
Judge - "The law harsh? It certainly seems it to me"
Bad luck for the agent owed $1.3 million.

1. Section 14(1) of the Contractors Debts Act (NSW) considered for the first time!

De Martin & Gasparini v Ex Parte - Energy Australia [2002] NSWSC 55 (15 February 2002)

Austin Australia Pty Ltd contracted to construct an electricity sub-station for Energy Australia. Austin sub-contracted De Martin & Gasparini (DMG) to carry out concreting work on the project. Austin was to make payments after assessing DMG's claims for work completed. There were delays in assessing DMG's claims for payment and in both July and November 2001 DMG served notices of dispute. About $1 million was at stake. DMG claimed under s14(1) Contractors Debts Act, 1997 (NSW) for an attachment order. This Act allows the Court to make an order in favour of an unpaid party against any other party from whom they might be able to recover the debt (in this case, Energy Australia). On 30 November 2001, the court ordered Energy Australia to retain $960,000 that it would otherwise have paid to Austin, until DMG was able to get judgment.

Austin knew nothing about the attachment order at that point. As soon as they found out they hurried to seek a discharge of the attachment order.

DMG had to have already begun proceedings to recover the money from the main contractor, Austin. Here the notices of dispute, including the notice in November which referred the dispute to arbitration, indicated that DMG had commenced proceedings.

However, DMG had to show that Austin owed them money for work carried out under the sub-contract. The money owed must be the basis of the application for the attachment order. However, Austin claimed that DMG's delays meant a substantial amount of work has not been completed by the due date. Consequently Austin may have been able to 'set off' the amount owed against the incomplete work. The Judge did not agree that DMG were definitely owed money, but only that there was a genuine dispute about it. Accordingly the attachment order could not stand.

2. Solicitors' lien or Centrelink garnishee - who had a right to the money?

Firth v Centrelink & Anor [2002] NSWSC 564 (10 July 2002)

Mr Firth was a solicitor. In November 1995 he represented Mr Koushkarian, the victim of a motor vehicle accident. The case was settled in May 1997 for $20,000 and Firth was to be paid $6,385. Unbeknownst to Firth, Koushkarian owed money to the Department of Social Security. Before the defendant's insurance company, GIO General, could send the $20,000 to Firth, they received a garnishee notice from Centrelink under

s1233 of the Social Security Act 1991 for $23,188.68. GIO therefore paid the money to Centrelink, so nothing remained to pay Firth.

A garnishee notice orders "the debtor's debtor" (here, GIO General) to pay the money they owe to the debtor (here, Koushkarian) directly to the creditor (here, Centrelink). Firth asked the Court to declare that the garnishee notice was invalid. However the Judge said the State Court had no jurisdiction to review the validity of Centrelink's Garnishee order.

Firth also asked the Court to examine the effect of the notice, as opposed to its validity. The issue was whether he had an "equitable lien" over the money, and if he did, whether that had priority over the Centrelink debt. An equitable lien is where the law recognises that a person has a right to be paid from property of another. A solicitors' lien (sometimes called a "fruits of the action" lien) is the right of a solicitor whose efforts result in the recovery of money for his client to have his costs paid from that money. A solicitors' lien is generally at the top of the list to be paid in this situation. For example, if the solicitor's client has gone bankrupt, the solicitor takes his money out of the proceeds ahead of any other creditor of the bankrupt.

Here, it was Firth's efforts in acting for Koushkarian that resulted in the settlement proceeds, so an equitable lien arose. Centrelink argued that no lien existed because Firth had not given GIO notice of the interest. The Court decided that the giving of notice is not a requirement for a "fruits of action" lien to exist. The lien arose when settlement was reached in May 1997 despite not giving GIO notice of it.

Centrelink argued that even if a lien existed, they were still entitled to receive the whole proceeds. The Court however disagreed. If this were the case, "the Commonwealth [would be] confiscating Mr Firth's proprietary interest in the settlement proceeds... without any compensation to Mr Firth." The judge concluded that Parliament did not intend this result when it passed the Social Security Act. Centrelink therefore had to pay Firth. (Note that there was no suggestion that they had to pay Koushkarian the rest of the money.)

3. Directors of failed company try to avoid examination

Ferrinda & Anor v Bendigo Bank Ltd WASC 169 (26 June 2002)

Lincoln Construction (WA) Pty Ltd (Lincoln) went into in liquidation. Bendigo Bank Ltd was the largest creditor. The Australian Securities and Investment Commission (ASIC) granted Bendigo examination summonses against two of Lincoln's former directors, Ferrinda and Lapedota. Examination summonses can be issued under s596A of the Corporations Act 2001. Either ASIC, or a liquidator, or an administrator, or a person authorised by the ASIC can summon a person for examination about a corporation's affairs.

Bendigo was involved in bringing separate Court proceedings against Lapedota which included serious allegations of premeditated fraud. The proceedings related to allegations that Lapedota, Ferrinda, and two employees of Bendigo had fraudulently transferred funds from four Bendigo accounts into two bank accounts operated by Lincoln. They then purportedly used the money for their personal benefit.

Ferrinda and Lapedota applied to set aside the examination summonses ASIC had authorised. They argued that Bendigo's application for the examination amounted to an "abuse of the court process". They said Bendigo's main purpose in applying for the examination summons was to obtain information about them in order to help prove the fraud in the case against Lapedota. They argued that the proper purpose of an examination summons was to aid the company (Lincoln), and that as Bendigo was seeking a personal advantage from the examination this amounted to an 'abuse of process'.

Bendigo said that although information that might assist them in their action against Lapedota might come out of the examination, that wasn't its main purpose. Its main purpose was to understand the affairs of Lincoln.

The Court dismissed the application to set aside the examination summonses. It considered Bendigo had an entirely legitimate and permissable interest in the affairs of Lincoln. This justified ASIC's granting of the examination summonses. The possibility that Bendigo might gain an advantage which might assist in the other case did not automatically make the examination an abuse of process. There was a serious allegation of fraud against Lapedota. In the circumstances the proper administration of the corporations regime required that an eligible applicant such as Bendigo be able to examine directors' actions.

4. Speed versus money - the court's approach to delaying a 2nd meeting of creditors

Diamond Press Australia Pty Limited [2001] NSWSC 313 (23 April 2001)

Silvia and Walker were appointed administrators of Diamond Press Australia Pty Ltd and associated companies. Under the Corporations Law they had to hold a second meeting of creditors by the 25th April 2001. They had decided that to give the best return to creditors, they should sell the companies as a going concern. They applied to the court under section 439A of the Corporations Law for a three-month extension in order to oversee the sale of the company.

The court saw its function as striking a balance between the expectation that administration would be a relatively speedy matter and the requirement that undue speed should not prejudice sensible and constructive actions maximising the return for creditors and shareholders.

Here, the court was satisfied that the administrators were on the right track to get the best price for the company. The strategy adopted was realistic, reasonable and commercially sensible. It included a detailed timetable for the closure of expressions of interest and the date for which firm offers would close. 58 expressions of interest for the possible purchase of the companies' assets in whole or in part had already been received.

The court accepted that where an informal tender or competitive selling process is undertaken and where due diligence procedures by short-listed candidates were required, some time would be necessary. An order for the extension of time was granted as it was appropriate to allow the administrators to present a clear picture to creditors at the second meeting.

5. Ex-employee tries to wind up company for unpaid wages

Kwik & Swift Co Pty Ltd v Shawyer [2002] WASC 156 (21 June 2002)

Kwik & Swift employed Shawyer as its operations manager. When Shawyer resigned he gave Kwik & Swift a mere three days notice. The company replied in writing stating that it accepted Shawyer's resignation but insufficient notice had been given. Shawyer made a statutory demand on his former employer for 18 days of unpaid annual leave and one week's gross pay totalling $3,380.70. A statutory demand is the step before applying to wind up a company.

Kwik & Swift applied to set aside the statutory demand on the basis that there were four offsetting claims. Two of the offsetting claims were found not to be genuine. One related to the argument that three days' notice by Shawyer was inadequate. The Court found that although Shawyer's resignation had caused inconvenience and the period of notice was insufficient, no monetary loss had been suffered by Kwik & Swift.

The other was an allegation of missing cash. The judge described this as "so devoid of supporting detail and documentation that I do not regard it as a genuine offsetting claim."

Kwik & Swift did establish two genuine offsetting claims. The first related to Shawyer's negligence in the workplace. An employee owes a contractual duty to his employer to carry out his duties with reasonable care and skill. Kwik & Swift alleged Shawyer had negligently caused the company to misplace 2000 pellets belonging to Hi Trans, worth a total of $53,000. Kwik & Swift settled the dispute for $26,000 but subsequently lost the valuable contract it had with Hi Trans, worth between $40,000-$50,000 gross per month.

Shawyer denied any responsibility for the lost pellets but the Court said that it was arguable that Shawyer was at least partly responsible and that his conduct resulted in a loss to Kwik & Swift of several thousand dollars.

Kwik & Swift also established another offsetting claim involving the payment of two company mobile phone contracts following his resignation. Shawyer's statutory demand was set aside.

6. Liquidator used the directors' lawyer - was this a conflict that justified his removal?

National Australia Bank Ltd v Wily [2002] NSWSC 573 (27 June 2002)

In June 2000, National Bank Australia Ltd (NAB) appointed receivers in respect of three companies associated with Mr Jack Roberts and Miss Karan Roberts. In February 2001 the bank commenced proceedings for some millions of dollars against the Roberts under loan guarantees. In these proceedings various claims were made against them and others alleging fraud. Mr Fordyce, a solicitor, acted for the Roberts.

Five Roberts' companies in all, ended up in voluntary liquidation in March 2001. The liquidator, Mr Holzman, couldn't get funding for investigations, so at a meeting of creditors in January 2002, he resigned. Mr Wily replaced him.

According to the minutes of the creditors' meeting, Holzman resigned because, "the director of the company [presumably either Jack or Karan Roberts] had procured litigation funding, and had advised that a condition of the provision of litigation funding was that Mr Holzman resign as liquidator and that Mr Andrew Wily be appointed in his place." The meeting supported the new liquidator in undertaking examinations of officers of the bank and the receivers to see if they could be sued. Naturally, the bank was not happy with this.

Wily retained Fordyce's firm as the solicitors for the liquidation, knowing that Fordyce also acted for the Roberts (but not that those proceedings included serious fraud allegations against them). The bank was not happy with this either. As the judge subsequently put it, "the engagement of Fordyce is claimed to have tainted the liquidator and compromised his independence irremediably".

NAB applied under section 503 of the Corporations Act 2001 for an order to remove Wily as liquidator. Section 503 allows the Courts to remove a liquidator for "lack of independence (actual and perceived), misconduct (actual and perceived), partiality in performance of duties and failure to act in the best interests of all creditors." The day after NAB brought this action Fordyce withdrew from his role as solicitor for the liquidator.

There is no general objection to a liquidator hiring a lawyer who is also acting for one of the parties in the proceedings, particularly where that lawyer has special knowledge that is of benefit in the proceedings. It only creates a problem in extraordinary circumstances.

The courts have previously said that they should not agree to replace liquidators too readily, otherwise such applications might be used to stop liquidators doing their duty. A consideration was whether it was to the "general advantage of persons interested in the winding up" to remove the liquidator. Here, only the creditor whose actions were to be examined sought his removal.

The judge said that "a lack of independence would be shown if there were 'a serious possibility of conflict in [the liquidator] continuing to act.'" Here, he concluded that removal was not required.

7. Judge - "The law harsh? It certainly seems it to me"

Investmentsource v Knox [2002] NSWSC 710 (15 August 2002)

Investmentsource performed marketing and sales services to Knox. Knox was the owner of a home unit building in Chippendale. Under a rather complex agreement, Investmentsource was to receive a commission from Knox for selling each home unit based on a formula in the agreement.

Investmentsource was owed $1,330,589 in unpaid commissions from Knox. Knox refused to pay, saying that Investmentsource had breached Sections 42AA and 42A of the Property, Stock and Business Agents Act(NSW) 1941. This act stops an agent from having any right to recover or commence a court action to recover commissions where they have failed to meet the statutory requirements.

Section 42AA sets out the various requirements that an agreement between an agent and a vendor must contain before an agent may recover a commission. As Investmentsource was marketing and selling residential properties, it was required to include the following term: 'This fee has been negotiated between the parties to the agreement'. This term had not been included. The court also found Investmentsource had failed to serve a copy of the agreement on Knox within 48 hours of the agreement being signed. This was required even though Knox had signed the agreement. Because the term required under Section 42AA was not included, and the copy had not been served, the Court held that Investmentsource had no right to recover the commissions.

The process by which Investmentsource sought to enforce payment by issuing a statutory demand was also defective. Section 42A requires that an agent must serve a statement of claim within 28 days. As the first defendant had not been properly served, proceedings against it could not continue.

Sections 42AA and 42A clearly removed any right to recover the commissions. The judge noted that this might seem harsh in a case "not involving any apparent need for consumer protection in the generally accepted sense. It certainly seems to me to be harsh. The result is nevertheless one dictated by statutory provisions of long standing and must be accepted by both the court and the parties."

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.