New Zealand Credit Law Bulletin - Vol 3, No 4, April 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:
- The difficulties of imposing periodic detention for debt
Was a debtor’s sentence of three months periodic detention correct? - The messy problem of legal advice for small finance deals
Should you insist on independent legal advice for the guarantor of the finance for a $7,000 Bongo? - The downfall of Tasman Pacific Airlines
Incomplete financial statements were the CEO’s responsibility. Time to face the music. - Director forced to sign guarantee - was it duress?
The perils of buying your son a milk round. - "Come hell or high water I'll pay the debt" - guarantee even though not in writing?
The creditor tried to rely on statements made by the debtor, arguing that it was a personal guarantee.
1. The difficulties of imposing periodic detention for debt
Edmonds v Baycorp Ltd [2003] NZAR 111
On 11 May 2001, Baycorp got judgment from the District Court against Edmonds for the sum of $2,169.29. Edmonds was employed at this time but by June or July 2001 he was unemployed.
On 29 August 2001, Edmonds was back in court for an order of examination to assess whether he could pay the debt. Edmonds said that he had no money available and could not pay. The Court ordered Edmonds to pay $10 per week, despite his objections.
Edmonds made no payments. He was back in court on 10 April 2002. This time it was for an application that Edmonds be ordered to perform periodic detention for his failure to pay. Section 84O of the District Courts Act 1947 covers the situation where a judgment debtor has been the subject of an examination order and the court is satisfied beyond reasonable doubt that the debtor has sufficient means to pay the debt but refuses to do so. The court, on the application of the judgment creditor, may order the debtor to undergo up to six months periodic detention. All other methods of enforcing the judgment must have been considered or tried and have been inappropriate or unsuccessful. At this hearing Edmonds again explained that he had no income or any other money. He was bailed to reappear later.
On 21 May 2002, the court held that Edmonds’ failure to pay the judgment debt was contempt of court. Edmonds was ordered to undergo three months’ periodic detention.
Edmonds appealed to the High Court. Section 84O turned the case into one similar to a criminal offence, where the judge is given a power resembling the power to sentence on conviction of a criminal offence. Therefore, this brings the Criminal Justice Act 1985 (now replaced by the Sentencing Act 2002) into the decision of periodic detention and it states that Edmonds needs to be advised to and/or receive legal representation.
The High Court found that the judge in the District Court had made several errors of law in imposing periodic detention. The judge commended Baycorp, saying it “had the good sense not to oppose the appeal.”
The High Court in scolding the District Court judge, said that if the judge had followed the above rules, there was no way he could have found beyond reasonable doubt that Edmonds could pay. In fact, the judge had appeared to have accepted in his file note that Edmonds was unable to pay. Furthermore, Edmonds was not advised of his rights to legal representation. Additionally, the judges’ written decision in giving periodic detention was inadequate.
Usually, the High Court could have ordered a new hearing or applied a new order on Edmonds to pay, but said in this instance they couldn’t because the lower court judge had acted outside his authority. This put it outside the High Court’s authority to apply a new hearing or order to pay. Edmonds was let off periodic detention.
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2. The messy problem of legal advice for small finance deals
Vehicle Finance Ltd v Smeath NP 9/00 [2002] DCR 775 (22 April 2002)
Toni Reid purchased a 1986 Mazda Bongo van from the Auckland Motor Vehicle Repossession Centre in June 1999 for $7,000. Reid took out insurance costing $1,000 and paid brokerage and legal fees amounting to $790. The amount due was $8,790. Finance was arranged through Vehicle Finance Ltd. The rate of interest was 24.79% to be repaid over 3 years. This gave a total amount to be repaid of $12,480.
Because this was a 100% finance contract, her partner Steven Smeath offered to be guarantor. He put his 1991 Nissan Bluebird (valued at $9,000) as security and believed that the car would be the full amount he would be liable for.
Within six months, Reid was in default and the Bongo was repossessed. The Bongo was passed to Turners Car Auctions, who stated that it was worth $1,500, but if $800 were spent on repairs it would be worth $4,000. VFL did not proceed with any repairs. The Bongo was sold at auction without reserve as damaged goods for $300. Auction fees were $150. VFL got $150 from the sale.
VFL then took possession of Smeath’s Nissan. Smeath found a purchaser for the Nissan, who offered $4,000. VFL rejected this offer saying they would not sell it for less than $6,000. One month later VFL put the Nissan on a caryard for $5,000. The Nissan was stolen from the caryard. It was recovered six months later at a panel beaters. VFL took possession and sold it through Turners 18 months after originally taking possession from Smeath. The net return from the car was $2,300.
VFL sued Smeath for $12,000, being the outstanding amount owed on the finance contract. VFL said the actual shortfall, after selling both vehicles, was closer to $18,000 through penalties and interest.
"Individuals, however unsophisticated, must of course, have the right to enter into foolish transactions if they wish to," said the judge, "but it is not surprising that Parliament has seen the need to also introduce legislation which attempts to impose some standards and controls on this kind of activity". The standards and controls are found in the
Credit Contracts Act 1981 and the
Credit (Repossession) Act 1997.
First, in the Credit Contracts Act, the lender has to fully inform the borrower and the guarantor of what they are letting themselves in for. The judge said that "[i]n order to allay reasonable suspicion a prudent course for the financier is to insist that the guarantor be given advice by an independent solicitor and to obtain from the solicitor a certificate that the effect and implications of the documents have been explained and the guarantor appeared to have understood the explanation."
He said that "a prudent financier will endeavour to ensure that someone, preferably a solicitor, explains the documents and their consequences. The financier may be able by that means to obtain reasonable satisfaction that the guarantor has understood the transaction." If this is not done, it can be seen as oppressive to the guarantor and fixed by the court as the court thinks fit. The judge said that in this case "the re-opening of the credit contract would have been justified. [This wasn’t suggested in this case.] There was a particular need for independent advice where the whole of the amount of the purchase price was being borrowed, where the purchaser was a beneficiary, and where [Smeath] was in fact a co-borrower rather than a guarantor."
Additionally, s26 of the Credit (Repossession) Act states that the repossessor has to do everything within their means to get the best possible price when selling repossessed vehicles. VFL did not do enough. They should have used the insurance Reid was made to take out, to repair the Bongo and get a better price. The vehicles should have been offered for sale at more than one place and the valuation for the Nissan could not be taken from the sale by Turners, when it had been in possession of VFL for 18 months.
The case was dismissed. Smeath was not required to pay anything more and VFL had to be satisfied with the $2,450 collected from the sale of both vehicles.
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3. The downfall of Tasman Pacific Airlines
Ministry of Economic Development v Doddrell [2003] DCR 170
Ansett New Zealand Ltd was taken over in February 2000 by Zazu Ltd. Zazu was a corporate structure of mainly New Zealand investors. Ansett was renamed Tasman Pacific Airlines Ltd. The company gained the right to trade under the name Qantas New Zealand. Tasman was placed in receivership in April 2001 owing over $100 million to creditors.
Kevin Doddrell was the CEO and a director of Tasman. The Registrar of Companies, under the umbrella of the Ministry of Economic Development, brought a prosecution against Doddrell under the Financial Reporting Act 1993. He pleaded guilty to three charges, for failing to ensure that Zazu and Tasman had their financial statements for the year ended 30 June 2000 completed, dated and signed by two directors of the company or the group by 1 December 2000. Doddrell admitted that he did not take all reasonable and proper steps to ensure that the financial statements were completed.
In sentencing, the judge told Doddrell that he was not judging his character or making him the scapegoat for the failure of Tasman, but for the offending that took place. He said Doddrell’s failures had not caused the collapse of Tasman. However up-to-date accounts could have given unsecured creditors a better picture of the company’s position. The judge thought it incredible that Tasman did not have to register financial reports because they had less than 25% foreign ownership. He believed that either their size or their public responsibility, as a major national airline, should mean they had an obligation to register financial reports and that the government should change the law to reflect this.
In determining Doddrell’s sentence the judge looked at the Sentencing Act 2002. From this Act there are three purposes of sentencing which apply – holding the offender accountable, denunciation of the conduct, and deterrence. The judge determined that under the three purposes, that a fine of $45,000 (from a maximum of $100,000) was adequate for the charges if the party had pleaded not guilty. Courts commonly give discounts of 20%, 25%, sometimes 30% for a plea of guilty. The fine was reduced to $32,000 plus costs of $130.
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4. Director forced to sign guarantee - was it duress?
Mainland Products Ltd v Tovell-Soundy [2003] DCR 188
Peter Tovell-Soundy, director and shareholder of Richmond Milk Ltd entered into a contract with Mainland Products Ltd in July 1998 so that his son Neil could run a milk round. Tovell-Soundy was required, as part of the contract, to sign a personal guarantee, making him liable for all of Richmond’s debt to Mainland. Tovell-Soundy signed the contract in the last week of July 1998, but held off signing the guarantee, saying he wanted to get advice from his accountant.
One month after the contract was signed and 20 days after Mainland had begun supplying milk products, Mainland asked Tovell-Soundy for the signed guarantee. They said if they did not receive it, the supply of products would stop. Tovell-Soundy signed the guarantee.
Three years later Richmond Milk ceased to trade. Mainland tried to enforce the guarantee and get payment of Richmond’s debt from Tovell-Soundy. Tovell-Soundy refused to pay.
He claimed the guarantee was unenforceable because it hadn’t been signed at the time of the contract – in other words that the guarantee was for “past consideration”. In contract law both parties must provide something of value. This value is called consideration. If one side doesn’t provide consideration, it’s a gift not a contract. If one side’s consideration was provided in the past, this is past consideration and the contract is not valid.
In this case, the benefit of receiving the milk products by Richmond had already begun. Mainland had supplied products for 20 days. Signing the guarantee was not part of receiving that benefit. Tovell-Soundy said that the guarantee was an independent document and Mainland had to supply something extra to Tovell-Soundy for the guarantee to be enforceable.
However, the judge said that for the guarantee to be excluded from the contract, the contract needed to have ended before the guarantee was signed. This contract was for an ongoing supply of products, which continued well after the guarantee was signed.
Tovell-Soundy also argued that he was forced to sign the guarantee under duress. That is, if he didn’t sign, the supply of milk would stop and this would mean Richmond couldn’t continue to trade. In essence he had no choice but to sign.
But the judge said that Tovell-Soundy knew from the outset and prior to signing the contract that a guarantee was required as part of the contract. When Mainland insisted Tovell-Soundy made the choice of giving in to what was always inevitable so that the trading relationship would continue. He summed it up as, “[t]his was not a person acting under duress, merely one swallowing the unpalatable”.
Tovell-Soundy was ordered to pay the debt of $73,780.34 plus interest and costs.
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5. "Come hell or high water I'll pay the debt" - guarantee even though not in writing?
NZ Labour Hire Ltd v Holden [2002] DCR 912
Joseph Richard Holden, a builder, traded as Joe Holden Construction. In March 1999, NZ Labour Hire Ltd, entered into an oral agreement that it would provide Holden Construction with labourers. Six months later, Joe Holden, with the view of seeking bigger building contracts, became Joe Holden Construction Ltd.
After the incorporation of his company in September 1999, Holden asked the manager of Labour Hire, Dion Cusack, to start invoicing Joe Holden Construction Ltd, rather than Holden personally. Cusack did. The last invoice issued to Holden in September 1999, was paid 5 November 1999.
Vance Simpson, co-director of Labour Hire, was concerned with this change in entity. He sought assurances from Holden that Labour Hire would be paid. In response to this request and others Holden implied the debt would be paid, coupled with statements like, “Vance my word is good, I’ll make sure this happens” and “come hell or high water [I'll] pay the debt”. Simpson took this as a personal guarantee for the company debt. Holden later said that he meant that the company would pay.
Between October and December 1999, no payments were made to Labour Hire and by January 2000, Holden Ltd owed Labour Hire $22,003.56. When Simpson met with Holden, Holden advised that his house was being auctioned in April 2000 and that Labour Hire would then be paid.
In February 2000, Simpson instructed Guardian Credit Services to begin debt recovery from Holden Ltd, then in late March 2000 from Holden personally. In May 2000, Cusack, while Simpson was overseas and without his knowledge, instructed another debt collection firm Accounts Enforcement Limited to collect the debt.
On 7 July 2000 Cusack instructed Accounts Enforcement to serve a statutory demand under the Companies Act on Holden Ltd. With the company unable to service the debt, Simpson sought to enforce the oral personal guarantee from Holden to recover it.
The court found that Holden’s statements amounted to an oral personal guarantee. This led Simpson to continue to supply services to Holden Ltd. The court said this was unenforceable under the
Contracts Enforcement Act 1956 for part performance but is enforceable as “promissory estoppel”. Briefly, this is where one party has made a clear and unequivocal promise which was intended to affect the legal relations between the parties and to be acted on accordingly. Once the other side has acted on the promise, the promisor is bound by it. Here, Holden promised Simpson he would pay, and Simpson relied on this promise and continued to provide a service. Holden was therefore bound by that promise. When he didn’t keep his promise, Simpson suffered a loss and was therefore able to recover that loss.
The court ordered Holden to pay Simpson the outstanding debt of $22,003.56.
