Australian Credit Law Bulletin - Vol 4, No 2, February 2003
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the Australian bulletin index and enter your details on the right
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:
- What do you do when a wealthy company fails to pay?
Ignoring a statutory demand almost led this company down an absurd path. - Was $142,252 fair remuneration for the liquidator?
Outline of procedures to be followed by a court when a creditor objects to a liquidator's remunerati - Small mistakes by finance company lead to $30,000 penalty
This finance company used the wrong formula for the cost of finance leaving 400 customers $40 short. - Whoops! How not to treat sensitive information
Here's an example of a situation where privacy laws became important in debt collection. - Extending stays of proceedings, and the further borrowing of money...
A stay wasn't registered on the insolvency register, meaning the debtor could not borrow to pay the - The Consumer Credit Code and default notices
Did the Code apply when part of the loan was used for business purposes? And if so, was the default - The Hattaways Reminder Limerick Competition
The limerick competition is well underway, and we have had some excellent entries.
1. What do you do when a wealthy company fails to pay?
El-Fahkri, in the matter of Elfah Pty Ltd (in liq) [2002] FCA 1469 (19 November 2002
Mr Akram El-Fahkri and his two brothers, Daniel and Moses, set up a company called Elfah Pty Ltd in 1990 as a trading company. The three brothers held all of the issued shares. They used the company to hold their investments. The assets of the company included interests in real estate, shares and taxi licences. The assets were valued at several million dollars.
Sky Channel Pty Ltd sued Elfah in the New South Wales Local Court. Judgment was entered for $7,733. Sky Channel then served a statutory demand, the first step in putting a debtor company into liquidation. Elfah failed to pay so Sky Channel obtained a winding up order.
The brothers issued an application to the court hoping to terminate the winding up. They also promised to account for the liquidator’s costs and expenses. The court is given the discretion to make such an order following s 482(1) of the Corporations Act 2001 (Cth). The court had to consider the position of the creditors, the members of the company, the interests of the liquidator and the public interest. The judge said that should the liquidation run its course there would have been enough money to pay both of their secured creditors, discharge the expenses of the liquidation and leave a substantial surplus for the shareholders. It was suggested that the surplus to the brothers could have been as much as $6 million.
The judge decided that this was a situation where the winding up should be terminated. He stated that there would be no prejudice to any creditor if the winding up was terminated and all parties actually seek that result. The judge also said that if the order was not made then the members of the company would be adversely affected because the liquidator would need to sell company assets to pay the debts and recover his costs.
The judge finally asked the question as to how a company with assets well out-valuing its liabilities came to be in this position over a $7,000 debt. The judge recognised Mr Fahkri as “an experienced businessman who, on behalf of his brothers and himself, has invested wisely and accumulated a good deal of wealth. This rather suggests that Mr Fahkri would have a better understanding than he is prepared to concede of the consequence of failing to comply with a statutory demand. That said, I do not think that this is a sufficient reason to refuse the order.”
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2. Was $142,252 fair remuneration for the liquidator?
Anderson Group [2002] NSWSC 764 (29 August 2002)
The Anderson Group had been wound up as it was insolvent. Mrs Anderson, a creditor and the sole shareholder of the company, sought the removal of their liquidator, Mr Mann. The court made an order for his replacement, that included a direction for the new liquidator to pay Mann his “proper fees, costs and expenses” for the work he had done.
Mann applied to the court for an order that his remuneration be fixed at $142,252 (under s473 (3)(b)(ii) of the Corporations Act 2001). Anderson objected. She argued that Mann had acted improperly and therefore his remuneration should be denied or reduced. Her complaints were that Mann had threatened to sell one of the company's major assets below its real value; had failed to conduct a proper investigation into the affairs of the company and take control over its property; and had failed to act impartially and with adequate speed. With that in mind, how could $142,252 be fair?
In reply, Mann argued that as Anderson had accepted the consent order to provide for his “proper” remuneration, she could not later object to his application for the court to fix his remuneration. Mann further argued that Anderson could not allege misconduct under s473(3)(b)(ii), as s536(1) of the Act was the appropriate avenue (that related to the court inquiring into a liquidators conduct).
The Court disagreed. It found that allegations of misconduct are relevant when fixing a liquidator’s remuneration. It set out a two stage test. The first stage involves the Registrar deciding what remuneration is reasonable for the work completed. This requires a liquidator to submit details of the work done and time spent, similar to a solicitor's bill of costs. The Registrar is to ignore any allegations of misconduct except that the work associated with the misconduct allegations should be clearly identified and costed. Secondly, the Court must then consider whether the full amount decided in the first stage should be reduced due to the alleged misconduct. The one alleging misconduct would have to prove their allegations by providing evidence.
Thus, although no order for Mann’s remuneration was set, the court directed that the parties agree on the procedural matters necessary so that the test above could be applied at a later date.
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3. Small mistakes by finance company lead to $30,000 penalty
NRMA Finance Ltd v Various Debtors [2002] NSWCTTT 53 (19 April 2002)
NRMA Finance Ltd, as a credit provider, lent money to a number of borrowers between 1985 and 1988. During that period, 4655 loan contracts were issued in which it was estimated that around 400 of those were refinanced in breach of s 36(2)(c) of the Credit Act 1984.
That breach occurred because NRMA used the “Rule of 78” system instead of the Schedule 1 formula (found in the Credit Act 1984) to calculate the amount of finance. That meant effectively, a lower rebate for borrowers than Schedule 1 would have provided. The average loss for borrowers on each contract was estimated to be around $40.
NRMA argued that this breach should not affect their ability to claim from the borrowers affected by their breach especially since NRMA made substantial repayments (though made 14 years later) to cushion their borrowers’ losses. NRMA sought an order for their borrowers to remain liable to pay the whole of their debts under their contracts.
The Consumer, Trading and Tenancy Tribunal (“the Tribunal”) partly agreed with NRMA’s argument. Whilst the Tribunal was in favour of letting NRMA claim the full debt from the borrowers affected by their breach, the Tribunal also liked the idea of imposing a penalty. NRMA had to make a payment to the Financial Counselling Trust Fund (under s 86B of the Credit Act 1984). That was despite the Tribunal noting that the role of penalties to encourage future compliance is somewhat diminished because of the recent introduction of the Consumer Commercial Code regulating the loans agreements used by NRMA.
A penalty was imposed mainly because of the delay of over 10 years in NRMA bringing an application. The Tribunal pointed out that no steps were taken to arrange for refunds on a systematic basis for some 14 years after their breach was realised. Also, in a similar case, Custom Credit Corporation Limited v Various Debtors (1997) ASC 55-006, the Commercial Tribunal imposed a penalty.
Thus, the Tribunal made an order that NRMA pay $30,000 into the Financial Counselling Trust Fund within 60 days. Once that penalty was paid, then the borrowers were liable for the full extent of their debts.
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4. Whoops! How not to treat sensitive information
B v Private Health Insurer [2002] PrivCmrA 2
nformation in the form of a “Membership Arrears Payment Notice” had been collected from a member of a health insurance fund (named, “B”). Such information was sensitive because it related to B’s medical status. The insurer included the information on a form that was sent to a large number of employers as an example of the form an employee would receive if they fell into arrears with their contributions. It replaced the usual sample notice which contained only dummy information. Whoops!
An investigation was made under s 40 of the Privacy Act 1988 as to the health insurer's actions in the disclosure of such sensitive information.
Under National Privacy Principle (“NPP”) 2.1, the personal information collected from B, could only be used for another purpose (the attachment in this case) if it fell within the exceptions stated in NPP 2.1.
Under the exception in NPP 2.1(a), the health insurer could only disclose B’s information for a secondary purpose if it directly related to the primary purpose of collection, and that B would reasonably expect his health insurer to disclose the information for the secondary purpose. Whilst it could be argued that the disclosure in the notice was directly related to the examination of B’s quality assurance, the Office of the Federal Privacy Commissioner found that an individual would not reasonably expect their information to be disclosed in the way B’s was.
Also, under exception 2.1(b) of the NPP, the health insurer could only disclose B’s information for a secondary purpose if B had consented to the disclosure. However, B had not consented to any such disclosure. In light of this, it was accepted that the health insurer had probably breached NPP 2.1.
However, in this case the insurer was able to redeem itself after the mistaken disclosure. In this situation, the health insurer: revised and strengthened its checking procedures to reduce the risk of recurrence; provided further training to its staff; advised all the companies that had received the information to destroy it and; took disciplinary action against the staff member who had disclosed the information.
B was satisfied that these measures addressed his concerns. The investigation was closed under s.41(2)(a) of the Privacy Act, on the grounds that the health insurer had adequately dealt with the matter.
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5. Extending stays of proceedings, and the further borrowing of money...
Teese v Clinch & Ord [2002] FMCA 205 (10 September 2002)
Ms Teese was a debtor who could not pay the money she owed to her creditors. One creditor issued bankruptcy proceedings against her. That resulted in a sequestration order being granted by the court with a stay of 21 days after 20 August 2002.
Unfortunately for Teese, the insolvency register only included reference to the sequestration order without any reference to the stay. Teese contended that because of this, she could not obtain finance in respect of the debt she owed to her creditor.
Teese sought amongst other claims, an extension for the stay of proceedings that was put in place on 20 August 2002.
In relation to Teese’s position, the court commented that in light of Gould v Day, a stay should not be executed to allow a debtor to borrow money. In this case, the stay was ordered so that Teese could consider her position and put her affairs in order.
In relation to the error that meant that the stay was not recorded on the insolvency register, the court said that any complaint should be directed to the Insolvency and Trustee Service, not the petitioning creditor.
Further, the court said that it had no power to grant a stay of longer than 21 days unless there was an appeal or a review appeal regarding the bankruptcy proceedings itself. Unfortunately for Teese, no such question arose here. What's more, under s 37(2) of the Bankruptcy Act, there is a clear prohibition for a court to suspend the operation of a sequestration order.
Thus, Ms Teese failed in her application to extend the stay of 21 days. Adding to her woes, the court made an order that the creditor's costs were to be paid out of her estate.
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6. The Consumer Credit Code and default notices
New Capital Finance P/L v Miller [2002] QDC 291 (25 September 2002)
Miller entered into a loan agreement with his lender, New Capital Finance. The loan was not paid off and New Capital Finance obtained judgment for $84,840. If a defendant doesn't tell the court he intends to defend legal proceedings, the creditor can generally enter judgment by default. This is what happened in this case.
Miller brought an application to set aside the judgment. To do that, he had to establish a defence and explain the delay in not filing a defence within the prescribed time (under rule 290 of the Queensland Uniform Civil Procedure Rules).
In the opinion of the court, the delay in providing a defence was explained by the correspondence between the parties over three months. During that time, the parties were attempting to negotiate and Miller was to auction his house. In order to succeed in setting aside the judgment, Miller therefore had to establish that his defence had merit.
Central to that defence was the applicability of the Consumer Credit Code to the loan agreement. Miller used $20,000 of the loan for business purposes. The court found that the code still applied as the credit given by New Capital Finance was entered into, “for predominantly personal, domestic or household purposes,” under s 6 of the Credit Code.
Since the Credit Code did apply, New Capital Finance had to adhere to s 80 of the Credit Code. That meant that New Capital Finance had to provide Miller with a default notice allowing Miller a period of at least 30 days to remedy the default. However, the court found that the letter given by New Capital Finance to Miller was not a default notice as it did not meet the requirements of s 80 (3) of the Credit Code.
Because a default notice was not provided, Miller had a defence under rule 290 of the Uniform Civil Procedure Rules. The judgment was therefore set aside.
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7. The Hattaways Reminder Limerick Competition
Our limerick competition ends on 21 February. Some of the entries are very good, some...not so good. Have a look at the limerick page. (Warning: one or two of them are not for the easily offended!)
Here's one that Lisette, our resident accounts poet, came up with:
There once was a bill overdue
Our clients knew not what to do
Pete charged in on his horse
Gave the best advice, of course!
And in the end there was no need to sue!
If you can make your customers smile and charm the money out of them you'll always be better off than if you had to bully or frighten them into paying. Our Psychology of Credit Management courses help you to understand your debtors, improve your relationship with them and persuade them to pay...you!
