Australian Credit Law Bulletin - Vol 1, No 4, October 2000

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:

Lending to those who don't speak English
Lodging defaults
Bugger me! Just what can you say?
How does this Bulletin come into being?
What happens if a third party fails to pay?
How can an unsecured creditor appoint a receiver?
Stay of bankruptcy - process not to be abused
Asset couldn't simply disappear
Beware post-Olympic closing ceremonies

1. Lending to those who don't speak English

Ribchenkov v Suncorp-Metway Limited [2000] FCA 835 (21 June 2000)

The danger of consumer borrowers avoiding their debts by claiming, "I didn't understand what I was signing", is very real. The debtor may claim to be under a "special disability" and say that the lender made unfair and unreasonable - "unconscionable" - use of its superior position. Here is a case where the lender did things right and won.

Mrs Ribchenkov's daughter and son-in-law applied for a loan of $355,000 for house refinancing and renovation. Because the valuation of the house was too low, the loan was declined. So the son-in-law arranged for 74-year-old Mrs Ribchenkov to be a co-borrower. The bank required, and received a statutory declaration from her solicitor that she had had independent legal advice.

However, when the bank came to enforce the mortgage she protested. She thought her exposure was just the $20,000 her son-in-law had talked about. She said she had no idea what the documents were about or that it was a mortgage. Because of her relationship with her son-in-law she trusted him implicitly and signed the documents.

The Court was faced with conflicting stories. Both Mrs Ribchenkov's memory and her English were poor. The lawyer said the translator was at the meeting where the documents were signed; the translator said he wasn't.

The Court found that Mrs Ribchenkov was under a special disability vis-à-vis the Bank because of her age, her lack of English and her general ignorance of legal matters. This disability was known to the Bank. But the Court also found that the Bank reasonably believed that independent advice had been given to the applicant. As a result, the bank did not behave unconscionably.

The lawyer was not so lucky. His explanation of the documents to her was deficient _ the extent of the risk was not spelled out to her - and so her claim against him succeeded. (Readers concerned about these issues should also see Professor Collier's article in the Journal of the Australian Institute of Banking and Finance.)

2. Lodging defaults

An article by Steve Brown in the AICM magazine, Credit Management in Australia, Vol 8, No 1 (July 2000) has some useful, practical tips on lodging defaults on the Credit Advantage (previously CRAA) database. One was the suggestion that a standard letter notifying a debtor of pending legal action might include the paragraph:

"As a subscriber to the credit reporting agency, Credit Advantage, we also have an obligation to report your overdue account unless it is paid by [date]. Once a default is logged on your credit record, it may well affect your ability to obtain credit in the future. You will be able to clear your credit record at any time by settling your account."

The power of a default lodgement comes first from the fact that many financiers will refuse credit because of the default, and second from the fact that the creditor can update the database to tell the world that the default has been remedied (ie. paid).

Another tip was that directors who are providing personal guarantees should be told at the outset that non-payment may lead to the default being listed with Credit Advantage. The full text can be found under "News" on the Credit Advantage website.

3. Bugger me! Just what can you say?

Anissa Pty Ltd v Parsons (on application of the Prothonotary of the Supreme Court of Victoria) [1999] VSC 430 (8 November 1999)

ACCC v McCaskey, a case reported in our August Bulletin, has attracted considerable comment. In this case, a debt collector harassed debtors. Among her debt collection techniques was some fairly colourful language. While we don't advise the use of such language, it is worth pointing out that society is becoming more accepting of such language, as shown by Anissa Pty Ltd v Parsons (on application of the Prothonotary of the Supreme Court of Victoria) [1999] VSC 430 (8 November 1999).

Parsons was a solicitor who had had disputes over the boundary with his neighbour, Anissa. It escalated to the point where Parsons got a bulldozer to drive down the boundary, wreaking destruction. Anissa's solicitor (who was there) got an urgent injunction to stop the bulldozer.

It was read to Parsons and he was told he would be faxed a copy when Justice Beach signed it. Parsons said: "And Justice Beach has got his hand on his dick" and "Tell him, because if you don't, I will."

Justice Beach got the Prothonotory to file contempt proceedings. Parsons argued that he said to Anissa's solicitor: "Justice Beach? You've got your hand on your dick". Justice Cummins did not believe him (there were many witnesses) but found that it wasn't contempt when judged by contemporary Australian standards. It may be offensive, but it is not contempt of court for a person to describe a judge as a wanker. The words might undermine confidence in Parsons but not in the administration of justice. We imagine the result would have been different if he'd said it to the Judge in Court or in person.

4. How does this Bulletin come into being?

Malcolm Hattaway researches the cases with assistance from Godfrey Livingstone. They pick useful, "interesting" cases (off the internet so we can link to them). Our theory - if it's not fun, people won't read it.

Peter Hattaway does most of the editing. Sarah Fifield, almost the only one of the team at Hattaway & Associates without a law degree, checks to make sure a layperson can understand it. (Sarah is about to sit her final oral examination for her Ph.D. in psychology.)

Sarah and Peter present The Psychology of Credit Management seminar and Malcolm and Godfrey present The Law of Credit Management. (These seminars and others - Financial Analysis, Negotiation for Credit - are coming to a city near you in November.)

5. What happens if a third party fails to pay?

Baker Johnson Lawyers v Suncorp General Insurance Ltd [1999] QDC 297 (23 December 1999)

Ms Smith was in a car accident. Baker Johnson acted for Smith. Suncorp insured the driver who caused the crash, and agreed to pay $10,000 plus legal costs at $5819. Smith agreed that Baker Johnson could take their fees ($9481) from the $15,819, and pay her the balance.

The agreement gave the lawyers an equitable charge over the funds, once they had given notice to Suncorp. The money then had to be paid to the lawyers. However, Suncorp paid the $15,819 direct to Smith, and Smith didn't pay Baker Johnson. Did that mean that Baker Johnson could recover the money off Suncorp?

The short answer is "yes". On appeal the Judge said Baker Johnson were entitled to full payment of their costs from Suncorp.

6. How can an unsecured creditor appoint a receiver?

The lawyers in the previous case had an equitable claim that wouldn't generally apply to other creditors. What could a normal creditor do in a situation where they know their debtor has an insurance payout coming to them? How do you get your hands on that money?

If it was a normal debt, rather than an insurance claim, there's a relatively easy solution. You'd get a judgment against the debtor, then a garnishee order against the "debtor's debtor". The debtor's debtor would pay the money direct to you, the creditor.

According to Mercantile Systems (whose collection software, among other things, produces legal documents for civil litigation) this option is mainly used against employers to make them pay some or all of the wages of a debtor direct to the creditor. In WA and SA it is not generally possible to garnishee wages, and in Victoria the process is called attachment of earnings rather than a garnishee order.

Garnishee can also be used to take money other than wages; for example, if your debtor is a sub-contractor and is due for a payment from the main contractor. If you have a judgment, a garnishee order will require the main contractor to pay the money direct to you. Many creditors don't know this option exists.

You can only use a garnishee when your debtor is owed a debt. Money which will be paid on an insurance claim is, in law, not a debt but a claim, so garnishee isn't an option here. But some states have another option (though it is very rarely used); judgment creditors have a right to appoint a receiver. It's not the same process as for a bank-appointed receiver but the result is much the same. The receiver receives money the insurer would otherwise pay to the debtor.

Aside from situations where there is an insurance payout coming, a receiver might be used when there is money to be paid by a trustee. For example, in WA a creditor recently had an order served on the Public Trustee, ordering him to pay the Perth Bailiff any money he was going to pay the debtor.

7. Stay of bankruptcy - process not to be abused

Bowin Designs Pty Ltd v Leslie [2000] FCA 530 (7 March 2000)

Leslie (who, as it happens, was a debt collector) was made bankrupt. Refusing to accept the inevitable, he applied for a stay of proceedings. The law here is clear. The judge, quoted an earlier case, saying:

"The approach ... has been to grant the stay where there is any reason to doubt that the sequestration order was correctly made or, in other terms, a stay will be granted where the appellant can demonstrate that there is a point that is arguable on appeal."

In this case, the judge struggled to follow the debtor's submissions. Leslie's previous lawyer had told him he had no case and so Leslie was now representing himself. Leslie said the court process had been abused. The Judge, however, considered that it was Leslie's arguments that verged on abuse of process. His motion was refused.

8. Asset couldn't simply disappear

Lewis v Cook [2000] NSWSC 191 (21 March 2000)

Creditors often suspect that the assets of liquidated companies have disappeared just before the company folds. This was certainly what happened here. Doran Construction Pty Ltd (DC) owned Doran Construction Australia Pty Ltd (DC Australia) which owed it $2.5m. In November 1997, the directors of DC, for reasons which are not entirely clear, resolved to forgive the debt. They then declared DC Australia solvent, and appointed Cook to wind the company up.

The subsidiary - now without its $2.5m debt - was able to be wound up as a (barely) solvent company, while the parent company - now without its $2.5m asset was wound up as an insolvent company. Lewis was appointed liquidator of the parent less than a month later. He argued that the forgiveness of the $2.5m was ineffective.

There were two situations where the forgiveness could have been valid. One was if there had been "valuable consideration" - if it was in return for something. In other words if DC Australia had provided DC with, say some goods or services, that would have been consideration for the forgiveness. They could then justifiably have said that the debt was cleared. On the other hand, if it was just a gift, it had to have been done by executing a deed. There was no consideration and there was no deed so the forgiveness was void.

The Judge also found that it would have been void because the forgiveness was done at a time when DC was insolvent, and it was uncommercial. DC had some chance of getting some money out of DC Australia. By forgiving the debt it gave up that chance.

9. Beware post-Olympic closing ceremonies

The Olympics were absolutely fantastic, but now that they're are over we'll start to see what effect they've really had on the economy. The predictions in terms of insolvency have not been all positive.

An article called Insolvency: 'Undertakers' await a post-Olympics revival, in Business Review Weekly Vol 22 No 7, looked, in part, at the Atlanta experience. It quoted "The Rings of Risk", a report by Prentice Parbery Barella which was based largely on the rates of bankruptcies in Atlanta following the 1996 Olympics.

The metropolitan Atlanta area had 21,013 business and personal bankruptcy petitions in 1996, the second-highest number in the United States that year. In 1997 the numbers were worse, with 23,383 bankruptcy petitions. At least six Atlanta hotels went bankrupt in 1997. The hospitality, restaurant, and entertainment industries were particularly badly hit. PPB partner Max Prentice expects the same in Sydney along with, perhaps, a downturn in the construction industry. Be warned.

David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
David Francis

Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.

Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
Alan Liddell

There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.