New Zealand Credit Law Bulletin - Vol 3, No 7, July 2003
A free, plain English review of recent law and items of interest for creditors, produced by Hattaway & Associates Ltd, Credit Consultants. To subscribe, visit the New Zealand bulletin index and enter your details on the right
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:
- Veteran farmer guarantees cows
Trustees of deceased estate sue solicitor for money recovered pursuant to a guarantee made by the deceased after advice from solicitor - Tickled Pink Ltd not so tickled pink following court decision
Company tries to set aside statutory demand on grounds it was served to the wrong floor of the companies registered address for service - Nice try but no cigar!
Man tries to leapfrog secured creditors by acquiring mortgage - Convicted fraudster applies to have bankruptcy removed whilst still serving time
Bankrupt previously convicted of fraud and breach of prohibition from management applies to have bankruptcy discharged
1. Veteran farmer guarantees cows
Bindon v Bishop [2003] 2 NZLR 136, 13/02/2003
In 1995 Mr McCullough asked his former neighbour Mr Upton if he would guarantee a loan with Wrightson Farmers Finance Ltd for $91,000 to enable him and his wife to buy some cows. Mr Upton agreed. He was himself a farmer of considerable experience and wished to assist Mr McCullough who he believed was a hard worker and a good farmer. He also felt he could repay the McCulloughs for their assistance and kindness to his wife when she fell terminally ill.
Due to time constraints related to the transaction and the fact that Upton’s usual solicitor was unavailable a Mr Bishop was retained to advise Mr Upton on the guarantee. On 2 June 1995 Mr Upton, who was 86 at the time, attended Mr Bishop’s office. In this meeting Bishop went through the guarantee with Mr Upton and emphasised the legal risks and liabilities. He did not advise him on the prudence of the transaction. After hearing the advice Mr Upton proceeded to sign the guarantee with Wrightson.
Unfortunately the inevitable happened. Within a year Mr McCullough defaulted in his loan payments. He had become insolvent and there were no prospects of him being able to make further payments on the loan. Accordingly Wrightson sought to enforce the guarantee. Sadly Mr Upton had passed away in August 1996 so Wrightson attempted to recover the money from his estate.
The trustees of the estate were not happy about this. They believed that Mr Bishop had acted negligently by not advising Upton of the wisdom of the transaction. They issued proceedings against Bishop claiming reimbursement for the sum of the guarantee from Bishop.
The case failed at first instance and on appeal. Both courts found that case law had well established the fact that a solicitor “was under no duty to go beyond their instructions by proffering unsought advice on the wisdom of the transaction”. They found that the terms of engagement between Upton and Bishop was limited to the provision of advice on legal risks and liabilities. Both Courts were satisfied that Bishop had competently done this and therefore was not in breach of his fiduciary duty to Upton.
Furthermore the trustees gave no evidence supporting the argument that, had Bishop advised him that entering the guarantee was unwise, Upton would have declined to sign it anyway.
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2. Tickled Pink Ltd not so tickled pink following court decision
Tickled Pink Design Ltd were issued with a statutory demand on 10 March 2003.
Section 387 of the Companies Act acknowledges that service can be made to the registered address of the company. The registered address for Tickled Pink was c/o KPMG, Level 10, 9 Princes St, Auckland. The demand, however, was served to the KPMG client reception on level 11.
Tickled Pink filed an application to set aside this demand on the grounds the demand was incorrectly served..
There were two issues for the judge to consider in this case. Firstly, were there grounds to allow the application to be heard given the fact it was made outside the statutory time limits. Secondly, was the statutory demand validly served on the registered offices on the company.
The law requires an application to set aside a statutory demand to be made to the court and served on the creditor within 10 working days of the service of demand. Here the application was made 16 days after the demand was served. However the application could still be saved if it was found that the demand was not validly served. Tickled Pink argued that the service had not been valid as it was made to level 11 when the registered address of the company was in fact level 10.
The Court found that the service was effective to the extent that the company clearly knew of the existence of the documents within 24 hours of the service. The issue was therefore whether the fact they were served to level 11 instead of level 10 had any significance.
The master decided that it was not. The registered address was the office of KPMG. The documents were served to that office. The master took the view that the floor number was only to enable interested persons to find the exact location in the building of the registered offices. The service was valid and so the application to have it set aside was struck out as it was out of time.
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3. Nice try but no cigar!
Phillip Arthur McGaveston v NMFM Mortgages Ltd [2002] NZCA 312 (12 December 2002)
n November 1997 First Investments Limited agreed to sell an Auckland property to McGaveston for $640,000. Settlement was not until March 1999, some 14 months later. First retained a right of cancellation until August 1998 on the grounds that if they exercised this right they were to pay McGaveston $200,000 ($160,000 for his deposit and $40,000 in damages).
First went into liquidation in April 1998. The Auckland property was included as part of the company’s pool of assets available to creditors. Secured creditors of First were Elders Finance with a mortgage and NMFM Mortgages Ltd with a first ranking debenture. Money owing to them exceeded the value of the Auckland property.
McGaveston had a problem: The liquidators were not going to exercise First’s right to cancel the contract as that would mean they would have to pay McGaveston $200,000 out of creditors funds. However, neither were they going to settle with McGaveston as it had become clear that the purchase price McGaveston had secured in the sale agreement was far less than the actual value of the property. McGaveston was going to be out of pocket as he would lose his deposit and the capital gain he would have made had he got the property and sold it.
McGaveston was having none of this. He devised a plan to leapfrog other creditors. Firstly he acquired the Elders mortgage (requiring a payment of $562,598). Secondly he exercised his power of sale under the mortgage and sold the property for $900,000. Finally he kept the profit made from the sale on the grounds it was secured by the terms of the mortgage.
NMFM opposed this arrangement as it meant they had effectively been overtaken as first secured creditor. They applied for a summary judgement to have the profit McGaveston had kept for himself awarded to them as secured creditor.
In summary judgment and on appeal NMFM’s claim succeeded. The Court of Appeal found that the mortgage contract relied on by McGaveston did not cover his claim. This was because the mortgage could not secure his pre-existing right to damages for breach of contract as the mortgage had been entered into after the right to claim damages had arisen. Furthermore they found that the mortgage agreement did not cover unliquidated debts. The debt owing to McGaveston was in the form of damages and therefore was not a liquidated debt.
The Court placed McGaveston’s plan under the heading of “Mix and Match arguments” and noted that if the Courts were to allow these types of arrangements to succeed it would be a "time-bomb" for subsequent charge holders and unsecured creditors.
Accordingly the Court dismissed McGaveston’s appeal and awarded NMFM the money it claimed from McGaveston.
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4. Convicted fraudster applies to have bankruptcy removed whilst still serving time
Edwards v Official Assignee unreported, 13 May 2003, Salmon J, High Court, Auckland
Since 1983 Mr Edwards was involved in a multitude of white-collar offences including fraud, intention to deceive and managing a company whilst an undischarged bankrupt. He cost his victims excess of $2.4 million by his offending. For these crimes he has served sentences of periodic detention and prison.
Mr Edwards is currently serving a five and a half year prison sentence for fraud which resulted in eight people losing $400,000 each in a failed franchise business which Edwards created and managed whilst an undischarged bankrupt. In his sentencing the judge noted that the franchisees got nothing from the liquidation of the company. He referred to the victim impact reports as a “series of harrowing accounts of heartbreak and pain for those people whom you defrauded.”
Despite these comments and a series of convictions Mr Edwards apparently feels he should no longer be labelled a bankrupt. Accordingly in December of last year Mr Edwards, whilst still in prison, applied to have his bankruptcy discharged. The master declined to discharge his bankruptcy. He felt that it would be difficult to impose appropriate conditions on a person in prison. He concluded that the only way in which the court could ensure that the public was protected was to refuse the application. Mr Edwards applied to have that decision reviewed.
The judge said that despite the fact that the act of bankruptcy had occurred 16 years earlier Edwards behaviour in that time did not warrant the bankruptcy order being lifted. He felt that the most important factor was that Mr Edwards’ “approach to matters of commercial reality is so deficient as to justify a considerably longer period as an undischarged bankrupt [than] would generally be the case. He is obviously a person from whom the public needs protecting in the commercial sense.”
The application for review was dismissed.
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