Australian Credit Law Bulletin - Vol 4, No 1, January 2003
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:
- $3m Mareva order, $2 company
If the company was allowed to pay $5m in dividends, any later enforcement action would be impossible - How much money was the funding creditor entitled to?
A creditor provided 10% of the litigation costs and wanted priority in return. - Attempt by bankrupt to defeat the statutory requirement of deregistration
Bankrupt accountant applies for permission to manage a company hoping to defeat deregistration requi - Creditor tries to get company in administration wound up
The retention of title creditor could take their goods back if the company was in liquidation. - Bankrupt fights on...and on...and on
Bankrupt for $8000; trustee's expenses of $50,000. - Creditor wins preference case on "natural justice"
A liquidator was awarded an order to extend the time to claim without hearing arguments from the cre - The Hattaways Reminder Limerick Competition
Yes, you read it right. Come up with a limerick reminder. Make your debtors smile and win a bottle
1. $3m Mareva order, $2 company
Consolidated Constructions Pty Ltd v Bellenville Pty Ltd [2002] FCA 1513 (4 Dec 2002)
Consolidated Constructions Pty Ltd is a commercial construction company. They entered negotiations with Bellenville Pty Ltd regarding a contract concerning the refurbishment of a building which became the site of the David Jones store in Perth. Bellenville was a limited liability company with paid up capital of $2.
The building had been the subject of an asbestos report carried out by an agent of Bellenville. The report indicated "that there was relatively little asbestos" in the project, and that the asbestos that did exist was not in a form which required immediate removal by experts or which restricted access to any portion of the building. There were specific clauses in the contract preventing any increase in the contract sum ($23,198,470) or making any claim against Bellenville because of any inaccuracy as to the quantities, type, or location of asbestos as identified in the tender documents or the asbestos report.
During the refurbishment Consolidated found considerably more asbestos than was expected and allowed for. This created significant delays and considerable costs. Consolidated quantified its losses at $5.15m including $1m directly from the asbestos complications. It claimed misleading or deceptive conduct by the first respondent and its agents contrary to s52 of the Trade Practices Act.
Bellenville was formed as a special purpose vehicle for the refurbishment and on-sale of the building. It was common practice for the shareholders of Bellenville to immediately distribute the profits by way of dividend, leaving the company stripped of all worth. If the company had no assets then a court order against it would effectively be useless. Consolidated obtained an interim Mareva order in October 2002. A Mareva order effectively freezes the assets of the defendant before the actual hearing has taken place. The court may seize the assets or restrain the defendant from selling them.
The current hearing, in December, was to decide whether the interim order should remain in place until the claim under the Trade Practices Act could be decided. Bellenville argued that Consolidated must show in distributing the profits Bellenville was intending to avoid the payment of any order a court made against it. However, the judge said a Mareva order does not necessarily require a positive intention to avoid a payment.
Bellenville also argued that it was within the ordinary course of business for the groups behind Bellenville to set up single purpose companies whose profits are distributed in the form of dividends immediately at the conclusion of each project. This was described as a relevant factor in the exercise of the court's discretion. The judge also considered the extent to which the making of a Mareva order would intrude on the carrying on of their business. He made it clear that such orders are normally tailored to interfere as little as possible with the carrying on of their business.
However, in this case the groups behind Bellenville wanted to bring to an end that company's business and take all of its assets, "at a time before its legal rights and obligations have been finally determined". He allowed Consolidated's application for the Mareva order, but decided that the amount covered by the order should be reduced from $5m to $3m which would be "at least reasonable in all of the circumstances".
Back to top
Information on our current seminars
2. How much money was the funding creditor entitled to?
Re Home Corp Projects [2002] NSWSC 879 (27 September 2002)
Australian Home Mortgage Corporation Pty Ltd (in liquidation) was owed $65,081.00 by Home Corp Projects Pty Ltd.
Under the Companies Act 2001, creditors may appoint a committee of inspection. In this case the creditors' committee of Australian Home Mortgage' had passed a resolution authorising its liquidator to provide $4,850 to the liquidator of a Home Corp to support him in the pursuit of litigation against a related company. The liquidator incurred legal costs of $51,724. The amount provided by the creditor was roughly 10% of this.
The litigation was settled and $90,000 was recovered. Australian Home Mortgage would at least get back the sum it had contributed. But as funding creditor, did it have first call on any more of the money?
According to the Home Corp liquidator's report to creditors there was a cash surplus for distribution of only $23,575.00. Australian Home Mortgage sought an order under s 564(a) of the Corporations Act 2001 that the debt due to it by Home Corp be paid in whole or in part in priority to those of other creditors. The order was opposed by another creditor.
The judge said that "the resolution of the Australian Home Mortgage creditors' committee was not particularly specific. It authorised an offer of 'funding'. No amount was mentioned. Nor was there any reference to indemnity." However he granted the application. Although this was not a case in which priority should be given as to 100% of the creditor's debt, some recognition should be afforded to the creditor by way of priority. It was appropriate to limit the priority to payment of 100 cents in the dollar in respect of 10% of the creditor's debt (that is, about $6508.10) with the remaining 90% ranking equally with the debts of other unsecured creditors.
Back to top
Information on our current seminars
3. Attempt by bankrupt to defeat the statutory requirement of deregistration
Mr Birdseye was an accountant who had invested in property during the 1980s. He fell victim to the property crash in 1990. He was made bankrupt on 9 September 1998. As a result of Mr Birdseye's bankruptcy, he became subject to what was formerly known (under the Corporations Law) as a s 229 prohibition. This prohibited him from managing a corporation without the permission of the Court.
As he was prohibited from managing a corporation, Mr Birdseye's registration as an auditor could be cancelled by the Companies Auditors and Liquidators Disciplinary Board. The Board is required under s 1292 of the Corporations Act 2001 to cancel an auditor's registration where that person is disqualified from managing a corporation.
The Australian Securities and Investments Commission (ASIC) applied to the Board to cancel Mr Birdseye's registration as an auditor. In the meantime, Mr Birdseye had developed a plan to avoid his registration from being cancelled. The day before the Board hearing, Mr Birdseye applied to the Court under s 206G for permission to manage a corporation. He then told the Board of this application and asked if they would hold off making a decision until the Supreme Court had decided his case. He told the Board that if the Court granted him leave to manage a corporation, then ASIC's application for his deregistration, would certainly fail. The Board refused to wait and ordered that Mr Birdseye's registration be cancelled.
Mr Birdseye appealed the Board's decision. The Court found that the Board's decision was correct. As Mr Birdseye was disqualified due to his bankruptcy, the Board was under a statutory duty to cancel his registration.
The Court also considered that even if the Supreme Court granted Mr Birdseye leave under s 206G to manage a corporation, it made no difference to the Board's decision on the registration issue. This was because even where a Court grants leave, the person effectively remains disqualified. Therefore, the Board had no option but to cancel his registration as an auditor.
Back to top
Information on our current seminars
4. Creditor tries to get company in administration wound up
Nortel v Coretel [2002] NSWSC 799 (3 September 2002)
Coretel Pty Ltd is a Western Australian telecommunications company specialising in providing high capacity broadband services. Nortel Networks Australia Pty Ltd was a supplier to Coretel of plant and equipment including the installation and commissioning of Coretel's telecommunications network. Nortel wasn't paid and served a statutory demand on Coretel for slightly more than $400,000. A statutory demand is the first step in winding a company up. Before Nortel could proceed, Coretel went into voluntary administration, on 6 August 2002.
The winding up of Coretel would yield the general body of creditors nothing or next to nothing. At the second meeting of creditors, five out of the six creditors present (representing $2.5 million of debts) voted against a resolution that Coretel be wound up, instead preferring that the meeting be adjourned and the company continue under administration. The one creditor that supported the winding up was Nortel. Nortel had supplied the plant and equipment under an arrangement incorporating a retention of title provision and would be able to recover that if the company went into liquidation.
Nortel therefore proceeded with its winding up application on 3 September.
Under s 440A of the Corporations Act 2001, "the Court is to adjourn the hearing of an application for an order to wind up a company if the company is under administration and the Court is satisfied that it is in the interests of the company's creditors for the company to continue under administration rather than be wound up."
The question was whether the court was satisfied that it was in the interests of the company's creditors for the company to continue under administration rather than being wound up.
The administrators of Coretel stated that they had been approached by some interested parties, aware of the situation, who were considering either an equity investment or an outright purchase of the company. This would have led to a more favourable position for the majority of Coretel's creditors. Allowing Coretel to be wound up, and therefore, allowing Nortel to exercise its rights would have brought about a breakdown of the company's income structure making it very difficult for a liquidator to effect any type of going-concern sale.
The choice was between winding up with a virtually zero gain for the majority of creditors and the continuation of the company under administration. The latter option carried with it the possibility of a buy-out or injection of capital. The court considered that the creditors' opposition to the resolution regarding winding up was evidence as to what the creditors considered to be in their own best interests.
The court therefore decided that the balance was toward the majority of the creditors' view and allowed the company to continue under administration. Nortel's application to wind up Coretel was adjourned for a month.
Back to top
Information on our current seminars
5. Bankrupt fights on...and on...and on
Grundy v Wattyl Australia Limited [2002] FCA 1539 (11 December 2002)
Mr Grundy was in business as a painting contractor. He purchased materials and equipment from Wattyl Australia Ltd, including a spray paint unit.
By the application of Wattyl, Mr Grundy was declared bankrupt based on a debt of $8,495.05 on 13 September 2001. Representing himself, he didn't turn up at the hearing that day. Later, he tried to set aside the order for bankruptcy. When this was rejected by the court, he appealed. He also lost the appeal.
While waiting for that appeal to be heard, he opened what Conti J in the Federal Court described as a "second front". On 29 April 2002 he began proceedings seeking to rely on s 153B of the Bankruptcy Act 1966 (Cth), requesting the annulment of the bankruptcy order. Mr Grundy suggested that the spray paint unit was inherently defective, causing poor workmanship and resulting in damage to his professional reputation. Mr Grundy also suggested that this contributed to the deterioration of his business resulting in him becoming hospitalised with a heart condition and surviving on welfare. No evidence was ever produced of any losses. Stepping even further, Mr Grundy sought compensation for "stress, anxiety, depression, loss of lifestyle, loss of employment, loss of income" all to the amount of $150,000.00.
Mr Grundy suggested that an agreement had been reached between himself and counsel for Wattyl, prior to his bankruptcy, that adjustments would be made to his account regarding the substandard spray unit, and also for discounts that he said were promised but never delivered.
Mr Grundy also argued that this "agreement" was the reason that he did not appear on 13 September 2001 for the bankruptcy hearing.
Mr Grundy believed that these arguments were justified leading to his continued delay and non-compliance with important bankruptcy obligations, such as, completing a statement of affairs.
The court, however, rejected these arguments. The judge found that what Mr Grundy was actually trying to achieve was a return to the status quo prior to his bankruptcy in order for him to discharge such of his debts as he would consider fair and appropriate. This intention is not in line with an annulment under s 153B, where a bankruptcy may be annulled upon the basis of payment by a person of all debts proved in the bankruptcy. Mr Grundy had made no payment.
Unfortunately for Mr Grundy the original debt which gave rise to the bankruptcy order was little more than $8000, but the costs associated with his bankruptcy had risen to over $60,000. The judge said, "I think that it must be concluded that Mr Grundy has at least largely contributed to the trustee's costs and expenses by his own conduct."
Back to top
Information on our current seminars
6. Creditor wins preference case on "natural justice"
On 11 September 1997 Messrs Greig and Duff were appointed as voluntary administrators of Australian Building Industries Pty Ltd ("ABI"). ABI's creditors agreed that the company should be wound up and appointed Greig and Duff liquidators.
The liquidators wrote to Stramit Corporation Ltd on 3 March 1998 suggesting that Stramit had received unfair preferential payments, covered by s 588FA(1) of the Corporations Law amounting to $1,426,655.72. As readers of these bulletins will be aware, all creditors are supposed to suffer equally in a liquidation. The law attempts to prevent a creditor from being paid more than its fair share in the months before the company went into liquidation.
Stramit replied on 6 March 1998 denying the liquidators' allegation and requesting its reasoning. The liquidators never replied.
On 7 September 2000 the liquidators made an application before the court for an order extending the time limit fixed under s 588FF(3), to bring a claim for an unfair preference payment. Stramit was not informed of this application, therefore, they were not heard in the proceedings. This order extended the deadline for the liquidators to bring a claim until 11 September 2001. The claim and statement of claim were served on Stramit on 10 September 2001.
In their argument, Stramit relied heavily on the case of Cameron v Cole (1943-1944) 68 CLR 571 in which it was said that "[i]t is a fundamental principle of natural justice, applicable to all courts that a person against whom a claim or charge is made must be given a reasonable opportunity of appearing and presenting his case. If this principle be not observed, the person affected is entitled ...to have any [decision] which affects him set aside."
Due to the extension order, Stramit had effectively been denied a complete defence as to the expiry of time. The purpose of the time limit is to protect creditors from late claims for preferential payments. Stramit should have at least been allowed the opportunity to resist the extension.
The Court decided that the extension order should be set aside. However, they also said that the liquidators may re-argue the application. This meant that an extension was still possible, but this time Stramit would have their chance to be heard.
Back to top
Information on our current seminars
7. The Hattaways Reminder Limerick Competition
Final reminder my friend,
After this one it's court & the end,
If you don't pay it now,
We'll get it somehow,
Notice to sell we will send!
There was a debt chaser from Spain,
She chased them through hail, shine & rain,
When they told her "we're broke",
On laughter she'd choke,
As she let the pitbull off its chain
You promised to pay back your debt,
We haven't received payment yet,
Don't make us take action,
We want satisfaction,
What we want, we make sure we get!
We're not recommending you use these, but maybe you can do better. If you can make your debtors smile, you're half-way to getting paid. Our resident poet (and co-presenter of Psychology of Credit Management), Elke Meyer has been working on her limericks and these are three of her finest efforts. (You don't want to see her worst efforts.)
The limerick should ideally be in the form of a reminder to a customer (but we'll assess that liberally). Elke and Peter will judge them and the best will be posted on our website (anonymously if you're shy). The very best will receive a bottle of Grange Hermitage. If you like fine wine, get scribbling. This could be an easy competition to win!
