New Zealand Credit Law Bulletin - Vol 1, No 1, October 2001
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: nz-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:
- My company owes the money, not me!
- Tracing a debtor's assets under the PPSA
- Clawback by liquidator fails
- New Court and Disputes Tribunal fees
1. My company owes the money, not me!
Ede v J A Russell Ltd (2001) 9 NZCLC 262,539
Ede was director of Steven Ede Ltd, t/a Electro Sheetmetals. He signed a credit application form for Russells, but did not disclose his company. He gave the branch manager a business card, which made no mention of the company name. The credit application form required Ede to indicate whether the applicant was a sole trader, partnership or company. He ticked the box marked "company".
Diane Berry, Russells' credit controller diligently undertook a company search under Electro Sheetmetals and, finding no such company, assumed Mr Ede to be a sole trader who had made the common mistake of ticking the wrong box. Electro paid with cheques in the name of Steven Ede Ltd t/a Electro Sheetmetals. It defaulted on payments of over $35,000 and Russells started proceedings to be met with the stock defence - my company owes the money, not me!
The High Court upheld the decision that Mr Ede was personally liable for the debt. The onus of demonstrating to the seller that the buyer is a company is definitely on those who represent the buyer. The court very clearly spelt out that a director of any company, however small or unsophisticated, faces considerable obligations and liabilities when dealing with legal matters, such as the terms on which they trade with other companies. Ede knew of the existence of his company, Russells did not. It was up to Ede to disclose it.
It is a question of fact, to be determined on each case, whether or not the cheques were sufficient notice to Russells of the existence of the company. Electro sent only two cheques. The first was dishonoured and the second arrived after credit was stopped. Ede failed here, as there was no sufficient course of dealings to indicate any pattern. However the Court stated "rather more enquiry should be made by sellers when payments… are apparently made by unrelated third parties". A history of company cheques may be enough to cancel personal liability.
To avoid missing out on payment or, at best, expensive and time-consuming litigation, creditors should closely scrutinise the details on credit application forms. If there is any doubt at all, direct questions should be asked.
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2. Tracing a debtor's assets under the PPSA
Toronto-Dominion Bank v Co-Pac Ltd (1999) Ontario Court of Appeal
This is a Canadian case which gives an indication of the way the courts are likely to apply New Zealand's new Personal Property Securities Act from 1 May 2002. In June 1995 Co-Pac obtained a small business loan from the bank. In return, the company signed a security agreement which included a general assignment of book debts. The agreement provided that any monies received by Co-Pac would be held in trust for the bank.
The Bank's security interest was perfected by registration under the Ontario PPSA. Co-Pac defaulted on its loan and from November 1996 the bank took and sold what it believed to be all of the assets of the company. However, in October 1997, without the knowledge of the Bank, Co-Pac successfully settled a lawsuit, obtaining $33,460. Starkman, the vice-president of Co-Pac, put the money first into his own personal account, then, two days later, into an account in his daughter's name at the Bank of Montreal, apparently in repayment of a loan she had made to him.
One of the principals at Co-Pac who was personally liable under a guarantee, tipped off the Toronto-Dominion Bank. The bank got the Bank of Montreal to freeze the funds, then went to court to get their money. The issue in this case was whether the tracing provisions of the PPSA entitled the Bank to these funds.
The Ontario PPSA defines “proceeds” as “identifiable or traceable personal property in any form derived directly or indirectly from any dealing with collateral or the proceeds therefrom.” The definition in the New Zealand Act is essentially the same. Proceeds are traceable if they are converted into a substituted form which can be located and determined to be the substitution for the original proceeds. Here, the proceeds were clearly traceably.
Another attempted defence was that the daughter should be considered a bona fide purchaser for value without notice of the Bank's interest. The judgment says, “Assuming this can be a defence to the tracing rights provided by the PPSA, the appellants cannot successfully raise it in the circumstances of this case. While the Bank of Montreal account is in the name of [the daughter], Mr. Starkman exercised effective control over it for more than two years through the power of attorney held by his wife.” In effect, the judge did not believe the daughter was “a bona fide purchaser for value without notice.” The bank succeeded in obtaining the money.
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3. Clawback by liquidator fails
Meltzer v Axiom International Ltd CA 246/00 - 26 June 2001
In the six months before going into liquidation, Number One Men Ltd made payments of $69,000 to Axiom. Meltzer, the liquidator, attempted to claw them back. Axiom claimed that the payments were not voidable, having been made in the ordinary course of business, and that Axiom had received them in good faith and changed its position in the belief that the payments were valid.
Number One Men was owned by Mr Woods. He was unskilled in money management and an unreliable payer. Axiom gave credit, payable on the 20th of the following month. Woods never kept to these terms. He engaged a firm of accountants who, from time to time, forwarded to Axiom post-dated cheques in round figure sums, unrelated to specific invoices. Many of the cheques were dishonoured and had to be re-presented.
This somewhat extraordinary situation continued for a year before Woods died suddenly. Orders ceased temporarily, but cheques from the company continued to be sent. Some months later a new order was received, shortly before the company entered voluntary liquidation.
The determination of what constitutes the ordinary course of business is made objectively. The focus is on the ordinary, operational activities of a business as a going concern in its factual setting - whether the payments in question were ordinary or out of the ordinary transactions for those parties. The court held that the payments made before Woods' death were in the ordinary course of business. An established trading arrangement, however idiosyncratic, would seem to effectively counter an attempted claw back.
The High Court came to a different view about the payments made after Woods' death. These fell outside the ordinary course of business test but were considered to have been received in good faith. Axiom had changed its position in reliance. It had not pursued a personal guarantee against Woods' estate. It was thus inequitable for the Court to order recovery of those payments. The Court of Appeal agreed.
Creditors should not simply hand over the money when a liquidator demands it. Take some legal advice.
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4. New Court and Disputes Tribunal fees
A number of changes to court fees took effect on 15 October. Those most noteworthy for credit staff are District Court fee for filing initial documents, which rise from $50 to $120, and the Disputes Tribunal fees for larger claims which are reduced and simplified.
A Disputes Tribunal claim of $1,000-$5,000 which might previously have cost up to $120 to commence, will now cost $50. A claim of $5,000-$12,000 which might previously have cost up to $200 to commence, will now cost $100. The cost of lodging a claim of less than $1,000 is unchanged at $30.
