Australian Credit Law Bulletin - Vol 1, No 2, August 2000

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:

Undue harassment of debtors - first ACCC case
When internet companies fail
Can trustees take bankrupt's demutualisation shares?
Don't forget the option of charging shares
This is not the way to take a guarantee
Credit Demand Index
Think carefully about settlement offers
Take care with statutory demands
A rare win for the creditors
Vexatious litigation - A$ survives latest attack

1. Undue harassment of debtors - first ACCC case

Australian Competition & Consumer Commission v McCaskey [2000] FCA 1037. (1 August 2000)

"I will make an example of you. You can just ask around town because I am well known as a person who makes examples of low-lives like you. I'm going to get the police to come around..." This seems to be fairly typical of Perth debt collector Sharyn McCaskey's style of collection. Her threats amounted to misleading and deceptive conduct. Her aggressive, abusive and overbearing manner, and frequency of calls amounted to undue harassment and coercion.

The Judge referred to Shylock in the Merchant of Venice, but also, refreshingly, to the "legitimate and socially valuable function" of the debt collector. He said: "The recovery of unpaid debts can be pursued with firmness, determination and civility... without resorting to bullying, bluff, misrepresentation or stand-over tactics. "

The surprising thing is that the penalties awarded seem very mild. Declarations were made by consent that breaches of sections 52 and 60 of the Trade Practices Act had occurred, and injunctions were issued restraining such behaviour in the future. Ms McCaskey has to attend a Trade Practices compliance programme seminar, and pay $2000 towards ACCC's costs. Apparently she intends to continue to work in debt collection.

Her employer, Cash Return Mercantile Pty Ltd also has to publish an apology in the newspaper and pay $6000 costs.

Mild penalties perhaps, but even so, you don't want your staff or your debt collectors breaching the TPA and getting your business into the media. Trade creditors who may have thought that this applies only to consumer debts should take note that two of the debtor "victims" were clearly trade debtors.

We'll let Ms McCaskey have the last word: "You stupid little f***ing idiot, what's your name? Do you know who you're messing with?"

2. When internet companies fail

The thrust of Insolvency: Dot-com disaster area, an article in Business Review Weekly Vol. 22 No. 25, is that the dot-coms tend to bleed money and have no assets (which we all knew but it's useful to have it spelt out) . In fact, insolvency practitioners are unlikely to be keen to touch them for fear of missing out on even their own fees. There's also a useful example of Boo.com, a spectacular European failure where the recovery for creditors was nil. Who is likely to be owed money by the dot-coms when they collapse? According to Max Prentice of national insolvency firm, Prentice Parbery Barilla, it is advertising agencies, media companies such as newspaper and magazine publishers and television stations, the ATO for unpaid goods and services tax and group tax, employees for unfunded superannuation contributions; and banks, for unpaid merchant card fees and overdrafts. If you're one of these types of creditors beware.

3. Can trustees take bankrupt's demutualisation shares?

Unicomb v Official Trustee in Bankruptcy [2000] FCA 457 (11 April 2000)

Yes, but not in this case. When AMP demutualised, shares were given to policy holders in exchange for their membership rights in the Society. Mr Unicomb was declared bankrupt on 2 November 1994, and discharged from bankruptcy on 3 December 1997.

His AMP policies were exempt property under the Bankruptcy Act, but the Official Trustee argued that the right to receive shares was not. He said that when the members of the AMP Society passed the conversion resolution on 20 November 1997, the bankrupt had the right to receive shares, which would vest in the Official Trustee.

The Judge examined the laws relating to the demutualisation and disagreed. He considered that there was no enforceable right for the allotment of shares prior to the conversion date, just an expectation that it would happen. Unicomb didn't get any property until then 1 January 1998. If he'd been bankrupt for another month, his creditors would have got the benefit of the shares.

4. Don't forget the option of charging shares

Judgment creditors who know that their debtor has shares may get a charging order on those shares. We note that all States have some provision for charging the shares of judgment debtors - eg s27 Judgment Creditors' Remedies Act 1901 (NSW).

We have interviewed court staff across Australia, many of them with decades of experience, but we have yet to meet anyone who has ever seen this process used on shares. But that doesn't mean it can't be done. (If you have seen it done, please drop us an email). A charging order operates as a stop order preventing disposal until the creditor can make his judgment effectual by seizure and sale.

5. This is not the way to take a guarantee

Dimitrakipoulos and Anor v Farm Pride Foods Ltd [2000] QCA 80 (24 March 2000)

Mr Dimitrakipoulos and his wife owned a company which owed over $300,000 to Farm Pride Foods. A payment arrangement was agreed, but Farm Pride also wanted Mr and Mrs Dimitrakipoulos to give personal guarantees. Mr Dimitrakipoulos was reluctant to sign until his lawyer reviewed the guarantee. He only signed after being told that it was of no effect until his wife also signed it, that he should consider it as being only a draft until his solicitors approved it, but that he should sign it as a sign of good faith. His wife never signed.

Farm Pride lodged caveats over land owned by Mr and Mrs Dimitrakipoulos, under a charging clause in the guarantee, and took legal action to enforce the guarantee against him. Dimitrakipoulos applied for a declaration that the guarantee was void and unenforceable, and for removal of the caveats.

Not surprisingly, Dimitrakipoulos was successful. The case underlines the need to have guarantees signed before making supplies, and of making sure that guarantors understand what they are signing.

6. Credit Demand Index

If almost all of the consumer credit reporting in the country came through you, you'd be in a very good position to quickly assess - from the volumes of reports - the buoyancy of the economy. This is the theory behind the new Credit Demand Index which is put out by Credit Advantage (formerly CRAA).

It compares recent levels of credit reports with the average for the 1998 financial year. The Index shows that July consumer credit applications were up 10.2% against the national index. Every section of the consumer credit market grew, except personal loans, but mortgage applications were up a massive 55.3% above the 1998 average. And the category of Australians increasing their use of credit the most is that which Credit Advantage calls "Urban Development" - mainly families with dependant children, living on the outskirts of cities.

7. Think carefully about settlement offers

Cinema Center Services Pty Limited v Eastaway Air Conditioning Pty Limited [2000] ACTSC 17 (15 February 2000)

If you lose a court case you will be hoping to pay costs on a "party-and-party" basis. This means you won't have to pay the winner's full legal costs, but only a reasonable share of them.

But if you reject or ignore a reasonable settlement offer, or make an unrealistic counter offer, you may find that you have to pay their full ("indemnity") costs. If the winner gets judgment for more than the settlement offer, that is a strong indication that the offer was reasonable. The logic is: if you had accepted it, the litigation costs would've been significantly reduced, so you should have to pay.

In this case the plaintiff made an early settlement offer by which it would accept $280,000 plus costs, and advised that if this wasn't accepted, it would seek costs on an indemnity basis (a "Calderbank letter"). The plaintiff made another offer halfway through the trial, to settle for $220,000 plus costs. Again there was a warning that full costs would be sought if the offer wasn't accepted and the judgment turned out to be more than the settlement offer. Ultimately the plaintiff got judgment for over $285,000.

The Court said that both offers were reasonable but that it was not unreasonable to reject the first offer as the parties had not yet swapped expert's reports. But at the time of the second offer, the parties knew the strengths and weaknesses of the case, and the defendant should have accepted it. Party and party costs were awarded up until the time of the second settlement offer, and indemnity costs from then on.

8. Take care with statutory demands

Indaba Pty Ltd v Home Building Society Ltd [2000] WASC 38 (23 February 2000)

A statutory demand is the simple and cheap way to start winding up action against a company. In this case an unsigned statutory demand was set aside by consent and costs were awarded against the creditor. As more and more creditors take to issuing their own statutory demands, this case serves as a warning to ensure that the demand is absolutely right _ unnecessary delays and costs may otherwise result.

In this case, the creditor had acted to remedy the problem. The Court declined to set aside a second statutory demand, properly signed and issued 2 days after the first.

9. A rare win for the creditors

McBain v Parsons [2000] FCA 935 (11 July 2000)

The Parsons brothers bought residential properties before they married. Their wives made significant financial contributions to the properties but were not registered as joint owners on the titles. On 28 May 1993, the brothers transferred their properties to their wives.

Both brothers were made bankrupt on 21 October 1997, following the failure of the family transport contracting business. The Trustee of the estate (McBain) applied to the Court for orders that the transfers were void under sections 120 and 121 of the Bankruptcy Act.

A transfer of property for less than market value will be voidable if it was less than 2 years before bankruptcy. If the transfer was more than 2 but less than 5 years before bankruptcy it will also be void, unless the bankrupt was solvent at the time of the transfer.

A transfer at less than market value will also be void where the main purpose is to protect the property from the transferor's creditors. That main purpose will generally be inferred if the transferor was insolvent at the time of the transfer.

It's rare that transactions four years before bankruptcy are found to be void, but that's what happened here. The brothers conceded they were insolvent at the time of the transfers. The transfers were said to be for the earlier contributions of the wives and were not at market value.

Sometimes creditors feel that the bankruptcy laws are ineffectual and not policed vigorously enough. This case should offer some encouragement.

10. Vexatious litigation - A$ survives latest attack

Skyring v Ramsey [2000] FCA 774 (9 June 2000)

Difficult customers or debtors are bad enough, but those that graduate to being vexatious litigants are in another league. Skyring's crusade dates back to at least 1984. He has staunchly refused to accept that Australian paper currency or coins are valid and argues that the legislation authorising its issue is invalid.

The Full Federal Court endorsed the earlier rejection of his arguments, and confirmed the finding that he is a vexatious litigant. This means he will have to get the Federal Court's approval before he can take any action in that Court. Skyring's argument, rather optimistically based on the 13th century Magna Carta, against previous costs orders against him also received short shrift.

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.