New Zealand Credit Law Bulletin - Vol 3, 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: 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:
- Is this guarantee enforceable? Indeed
It didn't say it was a deed but maybe it was one anyway. (And a pat on the back to the regional sales manager.) - "You can't bankrupt me, the security exceeds the debt," argues guarantor
Prove it, says the judge. - The devil's in the detail
Service of the document on the creditor's solicitors was not good enough in this case. - Avoid deals like this! A really messy finance deal with a car dealer
An ugly deal and an interesting point for financiers to note. - Did mistake in proof of debt create an abuse of process?
Creditors overstated the amount of money owing and therefore got a bigger vote at the meeting than they should have.
1. Is this guarantee enforceable? Indeed
Fletcher Steel Ltd v Trigg [2003] DCR 81
Fletcher Steel Ltd supplied steel products to Onsite Products Ltd. Onsite would usually pay Fletcher Steel’s invoice on the 20th of the next month. However this was not always the case and for some time Fletcher Steel continued to supply Onsite with steel despite the non-payment of the account. In November 2001 Fletcher Steel made it clear that the debt had become so big that they required some security from Onsite and that if they did not receive it then they would issue liquidation proceedings against Onsite.
At the end of November, payments had not been made and Fletcher Steel pressed for a personal guarantee from Trigg, a director. On 5 December 2001 he signed a guarantee form.
In April 2002 Onsite was placed in liquidation. Fletcher Steel sued Trigg on the basis of his personal guarantee for the $98,377.99 owed by Onsite. Trigg argued that the guarantee document was not enforceable as there was no consideration. Consideration is “the price of the promise” in a contract and is vital for a contract to exist.
However, Fletcher Steel argued that the guarantee document was a deed, rather than a contract, and as such it provided its own consideration. The crucial quality of a deed is that it is intended to create some binding obligation on some person. It does not necessarily have to proclaim itself as a deed. In order to qualify as a deed the agreement must satisfy the formalities (as regards such things as witnesses and signatures) under s4 of the Property Law Act 1952. The document was properly witnessed by Ms Douglas, the area sales manager for Fletcher Steel.
In this case it was obvious that the guarantee document was intended to create a binding obligation on Trigg. The execution of the agreement satisfied the requirements of s4, and although the guarantee was not expressed as a deed, its language was more akin to that of a deed than to a simple contract. The judge also agreed that even if it had not been a deed there was adequate consideration for it to qualify as a guarantee. This was the fact that Fletcher Steel agreed to continue to supply steel products.
Therefore the judge entered summary judgment against Trigg. The lesson for creditors - if you can get guarantors to sign a deed, you're in a stronger position.
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2. "You can't bankrupt me, the security exceeds the debt," argues guarantor
Allied Finance Ltd v Maurice David Blackwell B1335-IM02, High Court, Auckland, 12 March 2003
Maurice Blackwell was the sole shareholder in Wairau Stone (NZ) Ltd. He granted a debenture in favour of Allied Finance Ltd to secure advances made by Allied Finance to Wairau Stone.
Allied Finance later made demand on Wairau Stone, which failed to pay, so the creditor turned to Blackwell for the money. Allied Finance sued and was granted summary judgment against Blackwell for $510,841.54. Blackwell didn't pay so Allied Finance issued a bankruptcy notice against him. This was a step on the way to making Blackwell bankrupt.
Blackwell applied to have the bankruptcy notice set aside. His argument was that Allied Finance had a security over Wairau Stone assets which exceeded Blackwell's debt. Section 25 of the Insolvency Act says that the court shall not make an adjudication on a petition of a secured creditor unless the creditor satisfies the court that the amount of the debt exceeds the value of the security by at least $200. He argued that because of the security, the debt didn't exceed $200, therefore any subsequent bankruptcy petition would be doomed to fail, and therefore the bankruptcy notice was effectively a waste of the court’s time and should be set aside.
The judge said, that "the present application is premature." The issue should be decided at the hearing of any subsequent creditor's petition. At that point, the creditor would have to give evidence about the value of its security and therefore prove that its debt was greater than $200.
In the present application, only if the court were shown "cogent evidence to support the debtor’s assertion" would the court conclude that the bankruptcy notice was an abuse of process. However, in this case Blackwell produced no evidence that his security was worth more than the debt. The judge said that Blackwell simply made “a bald assertion that the company’s assets [had] a greater value than that of the judgment debt.” Therefore the judge was satisfied that the use of the bankruptcy notice by Allied Finance was not an abuse of process. The application for the order that the bankruptcy notice be set aside was dismissed.
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3. The devil's in the detail
Dallas Construction Ltd v Allied Workforce Ltd M947 IM/02, High Court, Auckland, 7 October 2002
On 17 July 2002 Allied Workforce Ltd served a statutory demand on Dallas Construction Ltd. A statutory demand is the first step to winding a debtor company up. The debtor company must either pay or apply to have the statutory demand set aside. Dallas Construction applied to have the statutory demand set aside.
A copy of the application was faxed to Allied Workforce’s solicitors on the same day that it was filed. However, it was never served on either the registered offices of Allied Workforce or by any other means described in 287(1) Companies Act 1993.
The requirements to apply to have a statutory demand set aside are set out in s290(2) of the Companies Act 1993. The application must be served on the creditor (Allied Workforce) within ten days of the date of service of the demand. In this case the application was filed within the required period.
However, the judge decided that serving Allied's solicitors was not good enough. (He didn't have to decide whether a faxed copy would have been sufficient; it may not have been.) The application to set aside the statutory demand was defective as it was not properly served. It was a “nullity” and was struck out.
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4. Avoid deals like this! A really messy finance deal with a car dealer
Loverich v Echo Investments Ltd [2003] DCR 301
Michael Loverich Motors Ltd went into receivership owing money to Echo Investments Ltd. Michael Loverich agreed to work off the company's debt by selling cars financed through Echo.
There would be an outright sale of the car by Loverich to Echo. Echo would then on-sell the car to a purchaser introduced by Loverich. The purchaser would then sign a contract for the balance of the purchase price. Loverich would become guarantor of the purchaser’s obligations. (Neither Loverich nor Echo were licenced motor vehicle dealers and, according to the District Court Judge in the first hearing of this case, Loverich had exposed himself "to the penalties attendant upon unlicensed dealing in motor vehicles.")
Thirteen purchasers defaulted on their loan repayments. In each of these cases Loverich had acted as guarantor. It is not entirely clear from the law report but it appears that Echo believed that Loverich repossessed and sold some or all of the cars concerned but failed to account for the proceeds to Echo. In such cases, the amount of money owed by the debtor (the person whose car was repossessed) was fixed at the point where the repossessed car was sold by
s34 of the Hire Purchase Act 1971. (This has now been repealed and replaced with a similar provision (s35) in the Credit (Repossession) Act 1997.)
However, because Echo still hadn't been paid, it sued Loverich for penalty interest accrued on these deals after these post-repossession sales. In August 1999 Echo obtained summary judgment against the Loverich for $136,009.12, much of which ($115,000, according to Loverich) was penalty interest accrued after the sales of the repossessed cars.
Loverich appealed to the High Court from a decision of a District Court judge refusing to set aside this summary judgment. Loverich claimed that the effect of s36(3) Hire Purchase Act 1971 (which has not been repealed) was to make his liability as guarantor the same as the debtors'. Therefore Loverich contended that he was not liable for the $115,000 extra penalty and interest components of the judgment sum of $136,009.12.
The District Court judge had considered this and concluded that Loverich was not a guarantor in terms of the Hire Purchase Act because he acted as a guarantor in the course of business. However, in the High Court, the judge reversed this. The exclusion of people who give guarantees in the course of their business seemed to be more aimed at guarantees given by guarantee corporations.
The judge decided that Loverich did have an arguable defence on the issue of how much he owed. The decision was to send the case back to the District Court for reconsideration of how much Loverich should have to pay.
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5. Did mistake in proof of debt create an abuse of process?
Stansfield v B Gould And Re Wolfe HC AK B 1378101 (3 December 2002)
JR Stansfield wanted to have a bankruptcy notice, dated 7 November 2001, set aside. He put forward two proposals, as per Part XV of the Insolvency Act 1967. Stansfield’s proposals were heard at a meeting of his creditors on 4 February 2002. For a proposal to succeed it needed to receive a 75% vote in support of the proposal from the creditors. The court then needed to approve it.
The first proposal obtained a 70% vote and was rejected. Stansfield abandoned his second proposal because he believed it would have also failed the vote.
However, when the creditors voted for the first proposal, they voted in regard to the full value of the debt and did not take into account any of the payments made by the co-guarantors. At the meeting the proof of debt was lodged as the sum of $446,313.48. Due to payments from the co-guarantors, the actual debt was $410,363.46. That total included interest. The principle sum was only $396,313.48. This inaccuracy, Stansfield argued, was an abuse of the process of the court and therefore the bankruptcy notice should be set aside.
Even if the correct figure applied, the required 75% in value would not have been achieved. The Master of the High Court in dismissing Stansfield's application to set aside the bankruptcy notice said, “[w]hilst one must recognise that a creditor is under a duty to complete an accurate proof of debt, it is apparent that the mistake made in this case was not deliberate, had no obvious effect on the outcome, and was not of such a kind that requires the Court’s intervention.”
Stansfield was ordered to pay costs.
