Australian Credit Law Bulletin - Vol 4, No 5, May 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:
- The pitfalls of getting personal securities from people whose business is failing
These issues generally don't apply to business borrowers. Here they did. - Could employees receive their bonuses ahead of payment to creditors?
These employees had substantial bonuses built into their contracts. - Permission to travel your honour? Bankrupt might miss son's wedding
The trustee refused permission to travel so this bankrupt wanted the court's help. - Should creditors who didn’t help fund action against directors get paid from the proceeds of the action?
Four large creditors did not contribute towards the cost of a legal action. - UK bankrupt, living in Australia, wouldn’t cooperate with local receiver
Australian courts were called upon to enforce bankruptcy from United Kingdom. - Problems with your phone bill? Who you gonna call? Not Billbusters!
The ACCC tries to make sure a "businessman" won't try the same trick again.
1. The pitfalls of getting personal securities from people whose business is failing
Karam v ANZ Banking Group Limited & 1 Ors [2001] NSWSC 709 (21 August 2001)
Charles and John Karam worked as shoemaker apprentices. In their spare time they made shoes from the family garage. In 1972 they set up their own shoe making business. They manufactured children’s shoes, expanding to adult and youth shoes by 1978.
Between 1979 and 1993 the brothers and their wives, Nada and Diane, signed a series of documents. They included loans, guarantees and other security documents. There was also a solicitors’ certificate and an acknowledgment.
In November 1995 the ANZ bank appointed a receiver over the Karam’s company and it ceased trading in January 1996. ANZ issued demands on the Karams for $4,826,451.67. The sale of company property and assets reduced this debt to $1,700,541.19 plus interest at 1 July 1996.
The Karams counterclaimed, stating that the bank had misled them with an inadequate explanation of an unlimited guarantee; that they were not made aware their personal property would be applied to the company debt; and that the bank acted unconscionably through obtaining the security documents, personal guarantees and the solicitor’s certificate by illegitimate pressure amounting to economic duress.
The judge said the Karams were in a position of special disability. They had limited education and understanding of technical English and an inadequate understanding of financial matters. John and Charles had immigrated from Lebanon in 1961, Nada in 1962 and Diane in 1971. In 1980 they were unable to read, write and speak English and in 1993 it wasn’t much better.
The judge said that ANZ had “exploit[ed] the financial vulnerability” of the Karams’ company and, indeed, the Karams in their desperate financial circumstances. He said they did not sign the solicitor’s certificate “freely and voluntarily” as it suggested. He said that to do this, the person signing must understand the rights they are giving away. The judge then said that the acknowledgment was deceptive and simply “false on it’s face”.
The judge concluded that the Karams’ financial circumstances, though not ANZ’s doing, “provided the opportunity to bring that pressure to bear to sign the acknowledgments, by the threat to cut off funding thereby collapsing the business, forcing a sell-off of [ANZ’s] securities, preferably through the Karams’ selling but otherwise the bank implicitly threatening to do so. That was the illegitimacy of the pressure on the Karams to sign the documentation which amounted to economic duress.”
According to the judge ANZ unfairly took advantage of the Karams “when it gave inadequate or misleading explanations as to the availability of the guarantees and mortgage security to meet the debt” of the Karams’ company and “failed to urge or recommend the seeking of independent legal advice”. The judge said that without independent advice the securities “were so convoluted and unnecessarily complex...as to be quite incomprehensible even to lay-people lacking the disability suffered by the Karams and most certainly for them.”
The judge gave ANZ 21 days to meet with the Karams to reach an equitable resolution regarding the application of the proceeds of sale of the private homes consistent with his decision.
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2. Could employees receive their bonuses ahead of payment to creditors?
Walker & Sherman & Anor v Andrew & Ors [2002] NSWCA 214 (19 July 2002)
Employees of Galaxy Media Pty Ltd had employment contracts which provided for the payment to the employee of a salary and a “bonus”. Galaxy Media Pty Ltd went into receivership where the various employees wanted to enforce their right to be paid the bonuses ahead of other creditors.
Under s556(1)(e) of the Corporations Act 2001, wages are paid out in a receivership ahead of certain other debts. So, did the “bonus” fall within the definition of “wages”? In other words, could the court say that the bonuses were “wages” and so should be paid before creditors received any money.
Wages were defined in s9 of the Corporations Act as “amounts payable to or in respect of an employee of the company…under an industrial instrument, including amounts payable by way of allowance or reimbursement but excluding amounts payable in respect of leave of absence.” The meaning of “industrial instrument” was also found in s9 and was: “a contract of employment or a law, award, determination, or agreement relating to terms or conditions of employment.”
Each of the employees involved in this action had slightly different bonus schemes in their contract. Mr Maguire, was to receive a performance-based bonus of 50% of his base salary with a guaranteed 25% in his first year. His bonus was to be based on performance criteria such as number of subscribers achieved and in future years, profitability criteria.
Mr Waldo was to receive a 50% bonus based on goals set within two months after he had started work. He was guaranteed a 25% bonus in his first year. Most of the other employees in this action had similar bonus provisions in their contracts.
Finally Ms Heywood’s bonus was slightly different in that she received a fixed sum every year subject to performance. The liquidator accepted that her performance would have earned her bonus that year.
It was decided that the employees had no contractual right to the bonuses but had been employed on the understanding that there would be some kind of bonus scheme in place. This meant that the bonuses were considered “wages”. The employees received their bonuses before other creditors of Galaxy were paid what they were owed.
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3. Permission to travel your honour? Bankrupt might miss son's wedding
Ha v White [2003] FMCA 64 (16 January 2003)
Ba Thi Ha was bankrupt and Warren White, a chartered accountant, was the trustee of her estate.
Ha wished to travel from Australia to Vietnam in late January 2003 to attend her son's wedding and also wanted to stay until June 2003 to care for her aged mother. Failing that, she sought to remain in Vietnam for a period of three weeks. Ha filed an application on 15 January 2003 for “permission to travel overseas”.
White refused Ha permission to travel overseas. Ha appealed on the basis of s178 of the Bankruptcy Act 1966, which states that “[i]f the bankrupt, a creditor or any other person is affected by an act, omission or decision of the trustee, he or she may apply to the Court and the Court may make such order in the matter as it thinks just and equitable.”
White filed an affidavit in court stating his reasons for the refusal. He stated that Ha had not paid the statutory minimum remuneration entitlement that he should have received under s161B of the Bankruptcy Act. This amounted to $1,269.
In court Ha’s son indicated that he would pay the $1,269, however, the judge noted that at the time of his decision the amount had not yet been paid.
White also argued that Ha had failed to provide documents as requested by him, including information concerning her superannuation and life policies, bank accounts and chequebooks. He said that Ha also failed to provide him with information regarding the sale of a property in which she was a joint registered proprietor. The sale of the property returned a net sum of approximately $147,000. There was evidence that Ha’s son had stated that some of those proceeds had been used to finance trips to and from Vietnam. The rest had been gambled away at the Crown Casino. Perhaps most significantly White was concerned that Ha would not return to Australia if she was given permission to leave.
The judge said that Ha’s evidence was “vague and unsatisfactory”. He dismissed Ha’s application stating that White need not reconsider his decision.
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4. Should creditors who didn’t help fund action against directors get paid from the proceeds of the action?
Peake, in the matter of Australian Housewares Pty Ltd (in liq) [2003] FCA 170 (7 March 2003)
Australian Housewares Pty Ltd was wound up by its creditors after a short period of administration. An investigation was carried out into the company’s affairs and the liquidators, Russell Peake and Philip McGibbon, were informed that they had a strong claim for insolvent trading against Housewares’ former directors.
Peake and McGibbon wrote to all creditors asking for contributions to meet the cost of a public examination of the directors. It was suggested that each creditor should contribute an amount equal to 5.47% of its debt. Seven creditors did so. Four large creditors, including the Commissioner of Taxation, did not contribute.
With the consent of the contributing creditors, an action was commenced immediately to stop the directors disposing of their assets in order to defeat any judgment. Within a short period of time the action was settled and the directors paid $123,000 to the liquidators. Peake and McGibbon were left with approximately $30,000 after deducting costs and expenses. This surplus was to be divided between creditors.
Peake and McGibbon then filed an application to the court under Corporations Act 2001 asking for an order that the contributing creditors should be given an advantage over the other creditors. Peake and McGibbon wanted to pay to contributing creditors the whole of the surplus assets, which would have seen them with a dividend of approximately 22.42 cents in the dollar. Under this proposal the non-contributing creditors would receive nothing.
The judge was initially hesitant in making an order depriving the non-contributing creditors of any share in the surplus proceeds. However, he said that if it wasn’t “for the action of the contributing creditors, there would be no fund to divide between the creditors.” He also said that if he allowed a payment scheme that would leave some money for the non-contributing creditors, the amount they would receive would be so small, as to be worth ignoring.
The judge granted the liquidators’ request and the contributing creditors were paid.
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5. UK bankrupt, living in Australia, wouldn’t cooperate with local receiver
Capt'n Snooze Management Pty Ltd v McLellan [2002] VSC 432 (18 October 2002)
In late 2000 Dream Haven Bedding and Furniture Ltd, a furniture distributor, got into financial difficulties. It approached Capt’n Snooze Management Pty Ltd (CSM), a chain of bedroom furniture stores, and suggested that they merge their businesses. Meanwhile Dream Haven continued trading.
In June 2001 it became clear that Dream Haven did not have enough money to meet its obligations to its employees and creditors. At the end of June Dream Haven decided to let go its sales staff. That would require a redundancy payment to be made to those staff. Dream Haven told CSM that an immediate cash injection was required or it would not be able to meet the cost of the redundancies nor the cost of its wages bill. If wages were not paid then Dream Haven would most likely cease trading immediately. This was not in CSM’s interests if the merger were to go ahead.
On the basis of legal advice CSM then advanced approximately $225,000 to Dream Haven for the purpose of paying employees their entitlements. They did this believing that CSM would have a priority for this amount if CSM went into liquidation.
In August CSM decided not to go ahead with the merger. Dream Haven was wound up in November. CSM claimed a priority interest over the amount they lent Dream Haven to pay wages and redundancy. To prove this, CSM had to show two things:
1) The payment must have been made for the purpose of employee entitlements.
2) This payment must have been made out of the money advanced.
The judge found that the first element of purpose was made out – the money was advanced for the purpose of employee entitlements. However the second element was not. The money had been deposited into an overdrawn account and so technically speaking the redundancies and wages were not made “out of” the money lent by CSM; they were made out of the overdraft and CSM’s loan merely served to cut down that overdraft. Also the account the money was put into was a bit of an “everything” account and so it could not be said that CSM’s loan was definitely used for wages or paying creditors.
CSM’s attempt to have a priority recognised for it’s advances to Dream Haven failed.
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6. Problems with your phone bill? Who you gonna call? Not Billbusters!
Australian Competition and Consumer Commission v Billbusters Pty Ltd [2003] FCA 423 (8 May 2003)
Miles Kendrick-Smith ran Billbusters Pty Ltd. Billbusters claimed it had developed a method of reviewing and checking telephone accounts issued by Telstra Corporation Ltd. A customer would engage Billbusters to check their accounts and Billbusters would then check account information for the past seven years for mistakes and then calculate the amount owing to the customer. Finally they would pay money to Telstra on behalf of the customer, in respect of their telephone account.
Kendrick-Smith made bold claims in the media (on "A Current Affair" and elsewhere). "We have yet to find an account [where] we haven't found an error of some sort on. We find an average error rate on bills of a hundred and seventy-eight dollars." "We have looked at over thirty thousand individual consumer's accounts to arrive at that figure of a hundred and seventy-eight." Unfortunately for Billbusters' customers, all of these claims were false. Investigations of a sample of Billbusters' customers by both the Australian Communications Authority and the Telecommunications Industry Ombudsman found no systemic billing errors.
There was no software or equipment of the kind that Kendrick-Smith claimed Billbusters had to undertake its operations. When Billbusters' customers paid money to Bullbusters to pay their Telstra bills, Billbusters did not pass on this money to Telstra. Not surprisingly, the customers were then threatened with disconnection for not paying their bills.
In November 1998 the Australian Competition and Consumer Commission sued Kendrick-Smith and Billbusters for breaches of the Trade Practices Act 1974. The ACCC was granted various interim orders. Billbusters went into liquidation two weeks later, and Kendrick-Smith was made bankrupt in March 2000. However, the case dragged on, and was finally resolved this year.
Section 52 prohibits a corporation from engaging in conduct, in trade and commerce, that is misleading or deceptive, or is likely to mislead or deceive. The judge was satisfied that there was evidence supporting the facts on which the s52 claim was based, without going to a full hearing. Other claims were not proven to this standard (meaning that there was an arguable defence which meant that a decision could not be made without a full hearing.)
The judge awarded the injunction which the ACCC requested. He was, however, a little doubtful of its value. "There is no indication in the evidence or other material before me that Mr Kendrick-Smith appreciates the legal significance of his own and the first respondent's activities, and comprehends (and regrets) the injury that he has caused... to members of the public." However, as a result of the injunction, Kendrick-Smith, is not allowed to claim that he, or any business he is associated with, can perform audit services on accounts or invoices of Telstra, without telling the ACCC in writing first. So there!
