New Zealand Credit Law Bulletin - Vol 3, No 6, June 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:
- http://www.hattaways.com/publications/bulletin/bullview.php?id=43#item1
With $200,000+ of his redundancy payout at stake, this was a very lucky lender! - http://www.hattaways.com/publications/bulletin/bullview.php?id=43#item2
Who gets priority when the sale price is not enough to pay both the bank and the IRD? - Was the bank linked to dodgy Gold Coast deal?
And if it was, was the Australian bank liable in the New Zealand courts? - What happens when you assign a disputed debt?
The debt collectors owned a debt which turned out to be strongly disputed. - Buying a SAAB with investors money is not ok!
Man charged with conversion for using investors money for personal purposes. - "Old friends" save mate from bankruptcy
Man avoids bankruptcy after loan from mates
1. http://www.hattaways.com/publications/bulletin/bullview.php?id=43#item1
Larsen v Mountford High Court, Auckland (6 August 2002)
Mr Larsen left Fisher & Paykel's freight division in 1998. Maximax Limited was freight company and Mr Loy and his wife were its only shareholders and officers. Larsen helped Maximax tender to buy the F&P freight business, apparently under the understanding that he would become a 50% partner in Maximax (though this never happened).
In December 1998 Larsen (who had received a large redundancy payment when he left F&P) agreed to advance $200,000 for new computers to Maximax. The judge in the subsequent case described him as 'a "babe in the woods" of commerce'. There appeared to be no real discussion of how the money would be repaid. Larsen's cheque was made out to Maximax.
Larsen tried to finalise the documentation of the agreement with Mr Loy, however his attempts to do so proved fruitless. He sought legal advice. When no repayment was forthcoming, Larsen commenced summary judgment proceedings against Mr Loy and Maximax. In separate proceedings he applied for the winding up of Maximax.
Loy and Larsen then reached an agreement. Essentially, both Loy and Maximax admitted liability. Larsen took a second mortgage security over Loy's house. On 2 August 2000 Loy, writing on a Maximax letterhead, proposed a repayment scheme. Larsen accepted this plan.
On 9 August 2000 Loy told Larsen that he could repay the debt in full and did not need to rely on the repayment schedule. On 10 August 2000 Larsen was paid the $221,000 he was owed by a Maximax cheque. It has since been established that Maximax was insolvent when this payment was made. On 28 September the shareholders executed a special resolution to wind up Maximax.
The concept of voidable preference means that all unsecured creditors are supposed to suffer equally in a liquidation. It's not fair that one should be paid in full just before the liquidation while others miss out. However, there are situations where a creditor who is paid can be allowed to keep the money. The most important of these is where the payment is "in the ordinary course of business."
Here, Mr Larsen sought an order that the payment of $221,000 not be set aside as a voidable preference. Firstly there was a question as to whether the $221,000 paid to Mr Larsen was made to him as a creditor of Maximax (as opposed to a creditor of Loy). The judge accepted that it was. He pointed to the fact that the original cheque was made out to Maximax, that Mr Larsen at all times sought repayment from Loy and Maximax and that repayment was made by Maximax.
But was the payment in the ordinary course of business? It was a payment of a longstanding unsecured company debt
which had been the subject of creditor action. The company’s ability to pay the debt required the sale of substantial
company assets - not cashflow reserves or financing. If the company failed to pay the debt there was a threat Mr Larsen
would enforce his mortgage over the director’s property. Maximax’s business at that time was subject to regular dishonoured
payments and with overdraft excesses.
Despite this, the judge said, "I find nothing unusual in Mr Larsen threatening to enforce his security over Mr Loy’s property... I am satisfied when it is boiled down this payment was simply a payment by the company to repay a debt which it had undertaken to meet on due date." Larsen was allowed to keep the $221,000.
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2. http://www.hattaways.com/publications/bulletin/bullview.php?id=43#item2
Rob Mitchell Builder Ltd, a building company, bought a property. Part of the purchase money was borrowed from The National Bank of New Zealand Ltd, which took a first mortgage over it. In February 2002 the company decided to sell the property to Mr Emery for $430,000 including GST. The contract became unconditional on 2 April and the deposit was paid to the company.
On 15 April Rob Mitchell Builder Ltd was placed in liquidation. On 1 May Emery paid for the property. Out of the sale price, however, there was not enough money to repay both the first mortgage and the GST component of the sale.
So who should get the money - the bank or the IRD? The liquidators considered that they had an obligation to pay the GST component to the IRD. The bank considered that the entire proceeds of the sale (less solicitors fees, estate agents costs and payment of outstanding rates) were due to the bank.
It was submitted that the IRD should get first dip in the proceeds of the sale because, had the company not gone into liquidation, the IRD would have been paid the GST on the property in the taxable return ending 31 May 2002. Therefore the bank would have only been paid the net proceeds after taking account of GST, agent’s commission and rate arrears.
However the Judge decided that this overlooked the bank’s right to insist on full repayment. Practically, unless the bank provided the necessary discharge, on terms that were acceptable to it, the sale of the property would not have been settled. That is, if the bank had not allowed the property to be sold in the first place there would have been no money payable to the IRD for GST.
The judge decided that the net proceeds of sale are payable to National Bank as secured creditor.
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3. Was the bank linked to dodgy Gold Coast deal?
In 1997 New Zealanders Mr and Mrs Mason borrowed some money from the National Australia Bank to buy six residential units around the sunny Gold Coast as an investment. The units were used as security on the loan. Unfortunately for the Masons they had made a bad investment.
The Mason’s defaulted in their loan repayments and the bank sold the units. There was a shortfall of AU$442,095.99. The bank applied and was granted summary judgment in the New Zealand High Court for this amount plus interest of AU$29,802.21 and costs of NZ$7,410.00.
The Masons appealed to the New Zealand Court of Appeal to have the judgment summary set aside because they claimed the High Court had made errors of law.
They claimed that they were victims of a disreputable marketing practice by real estate agents in Queensland at the time of their purchase. The practice was that property was listed with two wildly different prices. One price was inflated and meant for persons unfamiliar with the market due to their not residing in the area. The second price was for those that knew the market and lived in the area.
The Mason’s claimed that the bank was linked to this practice. They claimed breaches of the New Zealand Fair Trading Act and Credit Contracts Act, among other things the Contractual Remedies Act,
The Court of Appeal found that there was no evidence of a link between the practice of the real estate agents and the bank. Furthermore because the contract was made in Australia, it was the Australian courts that would have to decide if any of these claims could be made under their equivalent law. The appeal was dismissed and the Masons were ordered to pay $5,000 costs and reasonable travel expenses to the Bank.
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4. What happens when you assign a disputed debt?
Impact Collections Ltd v Cornerstone Group Ltd High Court, Auckland, (6 May 1999)
Cornerstone Ltd was a developer which entered into a contract with Cricon Ltd in April 1997. Cricon was to supply and lift into place concrete panels Cornerstone required to construct a building.
In May 1997 the contract was terminated. Cricon claimed that it was because Cornerstone did not stick to the fortnightly payment schedule agreed upon and had therefore renounced the contract so Cricon then cancelled. Cricon said that Cornerstone owed it $52,767.50. Cornerstone however denied that it owed the money and claimed that Cricon had wrongfully renounced the contract. Cornerstone claimed a loss of $74,734.00.
In March 1998 Cricon assigned its contractual rights against Cornerstone over to Impact Debt Collections Ltd. Assignment meant that Impact now owned the debt (presumably having bought it). Impact then issued proceedings for the $52,767.50 plus $15,000 damages. Cricon was not a party to this action. However, Cornerstone counterclaimed against Impact and was also granted leave by the court to counterclaim against Cricon.
Impact attempted to have this leave set aside by the District Court. It failed, so it appealed.
It's not obvious from the law report why Impact did this. Clearly, it would have been better for Impact if it could get a judgment against Cornerstone for the $52,767.50, and for Cornerstone to have to pursue its counterclaim against Cricon in a separate action. Alternatively, it would have been better for Cricon if Cornerstone could only counterclaim against Impact.
It was submitted on behalf of Impact that Cornerstone must choose between pleading a set-off or counterclaim against Impact or issuing separate proceedings against Cricon. In rejecting this suggestion the judge said, "I know of no authority for that proposition and none was cited." He also pointed out that Impact had few assets, so it wasn't sensible for Cornerstone to pursue Impact and ignore Cricon.
Under Rule 173 District Court Rules 1992, if a defendant (Cornerstone) has a counterclaim against the plaintiff (Impact) along with any other person (Cricon) for any relief related to ...the original subject matter (the supply of the panels) then the defendant may file a statement of the counterclaim and serve a copy on both.
In this case the judge was in no doubt that the rights and obligations of the parties here arose out of the same contract for the supply and placement of concrete panels. He dismissed the appeal.
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5. Buying a SAAB with investors money is not ok!
The Queen v Gary Raymond Prestney [2002] NZCA 236 (1 October 2002)
In September 1999, Don Tomlinson invested $210,000 with Prestney. Significantly Prestney said that this money was to be invested in stock and shares in the Korean market. In addition to this sum Don invested a further $50,000 and his brothers, Bruce and Phillip, invested $40,000 and $60,298.81 respectively.
With each investment, Prestney issued loan documents. These stipulated that the money invested was a loan to Prestney and/or one of a number of companies that he traded under. The loan agreements said that the money was paid to Prestney for his disbursement and at the end of the investment period, it would be repaid to the Tomlinsons with interest.
The Tomlinsons all agreed that they thought the money would become part of a pool of money that Prestney would disburse into the Korean market.
Prestney, however, had other ideas. He used the money to pay off debts and buy himself a SAAB motor car.
Subsequently he was taken to court on charges ranging from conversion to fraudulent use of a document (this was because he supplied false financial and employment information in order to get credit to buy the SAAB). He was convicted in the District Court, under s222 of the Crimes Act 1961, of six counts of theft by fraudulent conversion and also under s229A, for one count of fraudulent use of a document.
Prestney appealed against the convictions received in relation to the Tomlinsons (the conversion convictions) on the grounds that the money was a loan. He argued that he was not required to pay the money or proceeds to any other person and could use the money as he saw fit because at the end of the agreement he was liable for repayment of all the money invested.
The judge thought differently. He said that if someone makes money available to a person on terms that it is to be used for a particular purpose they place their trust and confidence in that person that the money will be properly applied for that purpose. Accordingly the relationship gives rise to a fiduciary duty and, since it was to do with a specific fund, a trust is created. If the money is not used for the stipulated purpose then the fiduciary (trust) duty has been broken and the money has been dealt with illegally.
Accordingly Mr Prestney’s appeals against conviction and sentence were dismissed.
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6. "Old friends" save mate from bankruptcy
Swale v Commissioner of Inland Revenue Unreported, High Court, Auckland B673-IM01, 25 March 2003
Mr Swale had been involved in the earth moving business for many years. In 1995 Swale traded his Komatsu bulldozer for a new machine. As a result of this transaction he had to pay the Inland Revenue an extra $39,627 for the depreciation he recovered on the sale.
By late 1996 Swale had not paid this amount. So the Commissioner of Inland Revenue obtained a judgment against him for that amount plus interest. By 2001 the IRD had collected $22,189.01 from Swale leaving $26,169.19 in outstanding debt. By 2001, Swale also owed the IRD $19,295.00 in unpaid GST; $75,110.42 in unpaid income tax; $22,079.51 in unpaid ACC premiums; and $56,114.30 in unpaid Child Support.
As Swale failed to pay the $26,169.19 the Commissioner applied to the Court for an order adjudicating him bankrupt. Swale opposed this application. He contended that the Court should exercise its discretion against the making of a bankruptcy order due to his circumstances.
Swale argued that there were several reasons why the Court should not make him bankrupt:
First he could pay back $100,000 worth of debt (pursuant to a loan from two “old friends”). Second, according to s177 in the new tax provisions in the Tax Administration Act, the Court had a discretion to reduce his outstanding income and ACC tax payments as his company had been making net losses from 1996-2001. Third, if the Court were to bankrupt him using his unpaid child support as a reason they could be deemed to have pre-judged the issues currently before the Family Court. Fourth, Swale alleged that he had had a number of accountants who had failed to adequately describe to him the true state of his tax affairs. Finally there were no other creditors seeking his adjudication.
The Court accepted Swale’s submissions. Master Lang noted that throughout the proceeding the $26,169.19 contained in the original bankruptcy notice had been subsumed by the much larger debt which had been mentioned in the creditors' petition. The issue at hand was whether or not Swale could pay the amount contained in the bankruptcy notice. As Swale had not recklessly ignored his tax obligations there were no issues of commercial morality or public interest. Provided he used the $100,000 loan to extinguish as much of his tax debt as possible and applied for a reduction in his outstanding income and ACC payments the Court would not make him bankrupt.
