Australian Credit Law Bulletin - Vol 3, No 7, September 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:
- The wrong time to buy tech stocks!
Why HIH shouldn't have bought Adler's money-losing shares and why Adler and others were banned from - Exclusion clause saves the bank
And the wife misses out. - Unhappy bankrupts try to remove their trustee in bankruptcy
And fail. - Was one guarantor off the hook when the co-guarantor went bankrupt?
What did the magistrate mean by "abandoned"?
1. The wrong time to buy tech stocks!
ASIC v Adler & 4 Ors [2002] NSWSC 171 (14 March 2002)
Messrs Adler, Williams and Fodera were all directors of HIH Insurance Ltd. They were alleged to have been involved in or caused a payment $10 million by HIH to Pacific Eagle Equity Ltd which was controlled by Adler. The payment was made without disclosure to or with the permission of HIH's investment committee. Pacific Eagle invested the $10 million with Australian Equities Unit Trust (AEUT). AEUT then purchased struggling technology, internet, and media companies owned by Adler and his company, Adler Corporation.
The judge said "there was by end March 2000... a considered view formed by those charged by the HIH Group structure with responsibility for investment decisions...to reduce HIH Group's exposure to technology stocks. The April 2000 fall in technology... stocks would have reinforced that view. It continued unabated thereafter during (and beyond) August and
September 2000. Yet Adler Corporation sold at cost to AEUT its technology stocks in dstore, Planet Soccer and
Nomad notwithstanding."
The transactions involved a personal benefit to a director which was not properly disclosed and authorised. The Court found all three directors had breached the duty owed to HIH and HIH Casualty to exercise care and diligence
(s.180) . Adler and Williams were also found to have breached the duty to not improperly use the position of director (s.182) . The Court also found Adler to have beached the duty to exercise good faith (s.181) and not to improperly use information s.260A of the Corporations Act, although no proceedings were brought for this offence. Section 260A prohibits a company giving financial assistance for the purchase of its own shares which is materially prejudicial to the company, its shareholders or its creditors.
The court imposed penalties and banning orders against all three directors. They were also ordered to pay compensation to HIH.
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2. Exclusion clause saves the bank
White & Anor v State Bank of New South Wales [2002] NSWCA 241 (29 July 2002)
Mr and Mrs White were the sole directors and shareholders of a company. It borrowed from the State Bank to buy a newsagency business. The bank required various securities, including mortgages over their house and the leasehold of the business. Mr and Mrs White were both mortgagors and guarantors of the company's debt. When the company sold the newsagency business, $356,000 was deposited with the State Bank as a fixed term deposit. The amount in the fixed term deposit covered and secured the company's debt to the bank.
In 1990, without his wife's knowledge or consent, Mr White authorised the bank to transfer $200,000 from the fixed term deposit into his brother's account. Mr White's brother was to pay the company's interest on the loan plus pay a 10% premium to the company. Mrs White later became aware of this but did not protest. The brother defaulted on the loan, and was eventually declared bankrupt.
In 1996 the bank began proceedings to recover the outstanding monies or take possession of the Whites' house. Mrs White lodged a cross-claim, arguing that under the
Contracts Review Act (NSW) 1980 the mortgage was unenforceable. She said that the bank was in breach of contract for transferring the money without her consent.
In 2000 Mrs White and the company began proceedings against Mr White and the bank. The company said that in causing the company to transfer $200,000 to his brother, Mr White breached his duties as a director. It argued that the bank had knowingly participated in a dishonest and fraudulent scheme and should be liable to compensate the company.
However, the court found that Mr White had acted honestly and in the best interests of the company. His brother at the time was a successful businessman and the company stood to benefit from the 10% premium to be paid to it.
The court also found the bank had not acted improperly in allowing the fixed deposit to be reduced. The house mortgage contained an exclusion clause that meant that the mortgagors could not be released from liability by any act or omission. The effect of the exclusion clause was that the bank could transfer funds from the fixed deposit without Mrs White's consent. The clause also meant that she could not be released from her liability, at least to the extent of $200,000, under the mortgage. Mrs White's claim under the Contracts Review Act failed as she had known of the exclusion clause. Without the clause there may have been circumstances in which one or both of the mortgagors could have been released.
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3. Unhappy bankrupts try to remove their trustee in bankruptcy
Hughes v Holbrook [2002] FCA 920 (26 July 2002)
Mr Holbrook was both the trustee and, as a result of his costs, the major creditor of the bankrupt estate of Mr and Mrs Hughes. The bankrupts became very unhappy with him. On 23 November 2000 they filed an application under s.179(1) of the Bankruptcy Act 1966 to remove him as trustee. Under S.179 the Court can inquire into the conduct of a trustee in bankruptcy and remove him or her. The Court must be satisfied there is a proper case for an inquiry, and substantial grounds that the trustee erred in his or her administration.
The applicants claimed Holbrook was unable to discharge his duties with impartiality and neutrality, and that he had failed to act in the best interests of the real creditors or the applicants. They raised a number of specific complaints against him. We've listed some of them.
In September 1998, at the first meeting of creditors, Holbrook failed to advise the applicants that they could draw down on their superannuation fund to almost fully satisfy the creditors' claims. However, the Court was not satisfied that the superannuation entitlement could be drawn down at that time. In any case, this occurred before the Hughes went bankrupt so it couldn't be "conduct of the trustee in relation to the bankruptcy".
In December 1999 Holbrook allegedly faced a conflict of interest. Because of his fees, he was the largest creditor and cast the deciding vote not to accept the Hughes's proposed composition. However, even if he had abstained, the necessary special majority (75% by value) did not support the composition. In any case, there is no general statutory provision stopping a trustee from voting on such a composition.
The applicants said Holbrook had not administered the estate efficiently, had not avoided unnecessary expense, and had not exercised his functions in a commercially sound way. They started off owing $24,819.12. Now, they claimed, Holbrook alone was owed over $57,000. However, the Court accepted that his fees had been approved at meetings of creditors and through a costs order by the Federal Court.
A further ground concerned a complaint by Holbrook to the police that Mrs Hughes had threatened him. The presiding magistrate in this matter found that the allegation was unsupported by evidence and found there was no case to answer. The Court held that this did not mean making the complaint was improper conduct.
The bottom line was that the Judge was not satisfied that the applicants had established substantial grounds for a proper inquiry and removal under s179. Holbrook could remain as trustee of the bankrupt estate
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4. Was one guarantor off the hook when the co-guarantor went bankrupt?
Jones v Khera [2002] NSWSC 69 (20 February 2002)
In December 1992 Gita Khera advanced $15,000 to Jones and Jaswant Khera, solicitors in partnership. It's not clear what relation the Kheras were to each other, but in the interests of clarity we'll refer to Gita Khera as Mrs Khera and Jaswant Khera as Mr Khera. The loan was secured by a mortgage deed and personal guarantees. As guarantors Jones and Mr Khera were jointly and severally liable for the debt. The loan was to be repaid by June 1993 at an interest rate of 12%. No money was repaid.
In June 1996 Mr Khera was declared bankrupt. Mrs Khera wrote to the trustee in bankruptcy of Mr Khera providing proof of her interest as a creditor.
She brought an action in the Local Court against Jones claiming payment for the principle and interest on the mortgage. Jones defended the case on the basis of clause 6 of the guarantee document. This clause provided that if the borrowers were released from liability under the mortgage they would be released from that liability under the guarantee. Jones argued that as Mrs Khera had proved her debt in the bankruptcy of Mr Khera and not enforced the mortgage, she had abandoned the debt. Jones said that this abandonment released him from liability.
The Magistrate said that there had been abandonment of the security but that this did not amount to a release. Judgement was entered for GK for $15,868.05. Jones appealed. He argued that as the Magistrate had found that Mrs Khera had abandoned the mortgage he should have concluded, under clause 6, that Jones was released from any liability under the mortgage.
On appeal the court decided that the Magistrate had not used the term 'abandonment' in the technical sense, which is 'waiver of right'. Mrs Khera was seeking to prove her debt on the bankruptcy proceedings without releasing Jones and Mr Khera from their obligations.
On these facts there was no basis for abandonment in the technical sense and there was insufficient evidence to invoke the release clause. Jones remained liable for the debt due under the mortgage.
