New Zealand Credit Law Bulletin - Vol 3, No 3, March 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: 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:
- Who got the Harley? Outstanding payments to the finance company or court fines?
The court wanted to sell the Harley and use the money to pay the debtor's court fines, leaving the finance company short. - Was this debenture a voidable charge?
The liquidator wanted the debenture declared invalid as a voidable charge, but the Court of Appeal disagreed. - If the notice gets the year wrong, is it invalid?
The creditor stated the wrong year for the due date, so the guarantor argued the notice was invalid. - What costs should a creditor have to pay when a statutory demand is served and a genuine dispute exists?
The court considered what would be appropriate costs when the creditor accepted that there was a genuine dispute. - Debtors have 14 days, and only 14 days, to challenge a bankruptcy notice.
The debtor applied to have the bankruptcy notice set aside but was late by just one day. - Thoughts on risk...
Here are some interesting quotes on the topic of risk.
1. Who got the Harley? Outstanding payments to the finance company or court fines?
Otago Finance Ltd v District Court CP 1/02 [2003] 1 NZLR 336, (30 October 2002)
On 13 June 2001 Mr Pennington bought a 1995 Harley Davidson from a licensed motor vehicle dealer for $13,000. It was financed by a Hire Purchase Agreement provided by Otago Finance. Pennington agreed to pay 48 monthly payments of $387. He didn’t make any repayments to Otago Finance.
On 19 September 2001 a warrant was issued by the District Court to seize any property of Pennington’s for unpaid fines totaling $2,787.
On 21 September 2001 a bailiff seized the Harley. A search of the register under the Personal Property Securities Act 1999 showed Otago Finance had a financial interest in the Harley. The District Court advised Otago Finance on 25 September 2001 that they had the right to lodge a claim against the Harley if it were to be sold to pay the fines. A judge would then decide who would get first option on the money raised from the sale.
On 27 September 2001 Otago Finance advised the District Court that Pennington owed them $14,239.79 for the Harley. They asked the Court to release the Harley to them as owners by reason of the Hire Purchase Agreement. Otago Finance said they could get a better price than the Court’s decision to sell by auction or tender. Otago Finance said that any money raised from the sale of the bike that exceeded the $14,239.79 owed to them would be deposited to the court to go towards the fines.
On 31 October 2001 the judge determined that the Harley be sold by auction and that the unpaid fines be recovered from the sale (there is no indication of what the Harley sold for at auction). If any money was left over after the fines were paid then they were to be given to Otago Finance. Pennington by now had $7,000.00 worth of fines. The judge reasoned the order of payment was that paying the fines served the public interest better than it did if the private company were paid.
Not happy with this decision, Otago Finance appealed to the High Court. They suggested that the procedure followed by the District Court in its decision was an error of law and a misunderstanding of facts, relevant matters weren’t considered and irrelevant were, and that the decision reached was unreasonable within the law of New Zealand.
The High Court agreed with Otago Finance, they said that Pennington was a conditional owner until he paid off Otago Finance. Thus the true owner of the Harley was Otago Finance and therefore the District Court could not claim the money from the sale ahead of the real owner, Otago Finance. The High Court said this was an error of application of the law by the District Court.
Otago Finance received the proceeds from the sale of the Harley.
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2. Was this debenture a voidable charge?
Parsons v Norris CA 247/00 [2002] 2 NZLR 497, (15 October 2001)
Mr Norris was the sole director and shareholder of a small spray painting company, AMS Auto & Marine Spray Painters Limited. To fund the company Mr Norris borrowed $50,000 from Westpac on the security of his own home, sold certain plant and equipment to AMS, and provided it with further advances. The advances were made from time to time from two bank accounts in Mr Norris’ own name. AMS did not have its own bank account. Instead, Mr Norris' accounts were used for all AMS’ receipts and payments. Mr Norris said that he had advanced $90,000 in total.
AMS’ liability to Mr Norris was recorded in a loan agreement of 10 July 1997. The agreement recorded that the loan was to be secured by a first debenture over the assets of the company. It was signed on behalf of the company by Mr Norris as director. Mr Norris says that a debenture was executed at the same time.
By 1999 AMS was in financial difficulty. When a special financial adviser was consulted he discovered that the debenture had not been registered. A fresh debenture was signed on 21 April 1999 and was registered five days later.
Six weeks later Mr Norris issued a statutory demand for payment by AMS. He ceased to hold office as director on 15 July 1999 and AMS ceased to trade two weeks later. On 8 October 1999 AMS was put into liquidation on Mr Norris' application. On 20 October 1999 he appointed a receiver.
The liquidator, Mr Parsons, argued that the second debenture was a “voidable charge” for the purposes of s293(1) given within the restricted period. The restricted period is the six month period preceding the application to place the company into liquidation. Any charge given within that period is voidable at the application of the liquidator. Mr Norris argued that the debenture should not be set aside.
The Court of Appeal said that for all practical purposes an unregistered charge is void upon liquidation. But if the debenture secured money provided at the time of, or after the giving of the debenture, it would be valid pursuant to s293(1)(a) of the Companies Act.
Mr Norris argued that during the period following the giving of the debenture on 21 April 1999 he made payments to AMS’ creditors from his own bank accounts. He argued that this qualified as valuable consideration at or after the giving of the debenture, and as such, his debenture should be valid. This argument was rejected in the High Court, but the Court of Appeal agreed with Mr Norris. The Court held that it was sufficient if Mr Norris made payments to or for the benefit of the Company following the execution of the debenture.
The advances made by Mr Norris to AMS meant that the debenture of 21 April 1999 was valid against the liquidator, even though the original debenture was not. In other words he had security over the business for the full $90,000.
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3. If the notice gets the year wrong, is it invalid?
Bryers v Harts Contributory Mortgages Nominee Co Ltd CA 5/02 [2002] 3 NZLR 343, (21 May 2002)
Mr Bryers was a director of four companies. In 1998, the companies borrowed $2.536m from Harts Contributory Mortgages Nominee. The loans were secured by Mortgages over six properties. The loans were guaranteed against each company and personally by Mr Bryers.
On 20 December 1999, behind in their loan repayments the four companies were advised by Harts that they had until the 21 January 2000 to catch up with their repayments or Harts would proceed with selling the mortgaged properties. Mr Bryers was advised on 21 December 1999, that if the properties were sold and the money owed to Harts was not reached by the sale, then he personally would have to pay the difference between money owed and money received.
On 28 January 2000, Harts advised Mr Bryers that one of the six loans that he was guarantor of was also in arrears, requiring it to be fixed by 2 March 1999. The letter said "1999" when "2000" was meant. This clerical error was not questioned by Mr Bryers.
With no repayments forthcoming, Harts sold the six properties as a block on 19 July 2000 for $1.2m. It then proceeded to get the difference from Mr Bryers.
It was then that Mr Bryers argued that the notice served on the 28 January 2000 was invalid because it did not meet the New Zealand law. This law states that notices in which borrowers are advised to catch up on their overdue payments, have to state a date to catch up on their payments that is at least four weeks from the date the notice is served. This notice should have read 2000, instead of 1999. This requirement is part of the duty of lenders, to borrowers, if they intend to force a sale of property.
However, Mr Bryers argument failed because the notice was held to be valid. The court decided that a clerical error of the date did not make the notice invalid. The court further said that the duty of the lender is to the borrower and not the guarantor. Therefore Harts duty was to the company and not Mr Bryers.
Mr Bryers was ordered to pay Harts the sum of $1,918,923 together with interest and costs.
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4. What costs should a creditor have to pay when a statutory demand is served and a genuine dispute exists?
Professional Printing Ltd carried out work for Global United Ltd. Some initial dealings had been carried out with Global acting on behalf of a third party. The third party failed to pay the amount of $16,972.43 and so the invoice was passed on to Global. When Global didn’t pay Professional served it with a statutory demand under s289 of the Companies Act 1993. A statutory demand is the first step in the winding up of a company.
Global invited Professional to withdraw the demand, due to the existence of a genuine dispute. Professional refused to do so. In response, Global made an application to have the demand set aside on the grounds that there was a genuine dispute. Professional argued that there was no genuine dispute as to whether the debt existed, and instead they said the only dispute was as to who was liable for the debt. The court suggested that given the nature of Global’s initial involvement in the printing negotiations, there was some room for argument as to whether or not it had become liable in respect of the printing orders which followed.
Professional then accepted in court that there was a dispute and the demand was therefore set aside. Global was adamant that Professional should be made to pay costs.
The issue for the court then became whether Professional should pay Global’s costs in setting aside the demand. The court accepted that creditors should be careful to ensure that demands are not issued where a genuine dispute exists, because of the tight time frame that a debtor is under once a demand is issued.
However, ultimately the court thought that Professional did not have to pay for all of Global’s costs. In the view of the court, the demand was not issued to put unnecessary pressure or leverage on Global. The initial dealings between the parties as to the debt itself illustrated that fact.
Although, Professional did not have to pay full costs, the court felt it was fair that Professional did have to pay disbursements to cover Global’s costs in bringing the application.
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5. Debtors have 14 days, and only 14 days, to challenge a bankruptcy notice.
Edwyn Roberts Contractors Ltd served a bankruptcy notice on their debtor, Bruce Macmillan on 27 June 2002. Macmillan in reply, brought an application to have that notice set aside.
The court had two issues to determine. First, under s19(l)(d) of the Insolvency Act 1967, a debtor issued with a bankruptcy notice commits an act of bankruptcy if he or she fails to satisfy the court within 14 days of the notice served that they had a counterclaim, set-off or cross demand. Unfortunately for Macmillan, he filed his application on 12 July 2002, (one day outside the allotted time) and that application was not served until 26 July 2002, some 15 days after the bankruptcy notice was made. Thus, Macmillan was in breach of s 19(1)(d).
Secondly, Macmillan argued that he had grounds for a counterclaim, set-off or cross demand because of lack of quality of the work carried out by Edwyn. Here, the court said that such arguments should have been raised in the earlier court proceedings where Macmillan had failed to take such an opportunity. Judgment in the earlier proceedings was issued against Macmillan by default before the bankruptcy notice was issued.
Thus, because of the court’s inability to extend the 14 day time period, the application to set aside the bankruptcy notice was deemed a nullity and was struck out. Because it was a nullity then any argument as to a counter claim, set off or demand was irrelevant.
It was not all bad for Macmillan. The court left it up to him to commence his own proceedings in a different court if he genuinely believed he had a claim in respect of the quality of the work carried out by Edwyn.
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6. Thoughts on risk...
"The four most dangerous words in investing are: It's different this time."
- Sir John Templeton
"Risk is good. Not properly managing your risk is a dangerous leap."
- Evel Knievel
"There are risks and costs to action. But they are far less that the long-range risks of comfortable inaction."
- John F. Kennedy
"Why not go out on a limb? Isn't that where the fruit is?"
- Frank Scully
"Educated risks are the key to success."
- William Olsten
