Australian Credit Law Bulletin - Vol 4, 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 send a blank email to: aus-bulletin-join@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:
- Mortgagor refuses to seek advice from “those thieving bastards”
Elderly woman fails at setting aside mortgage and guarantee on grounds of unconscionability - Hattaways/Baycorp research – predicting business insolvency
Are the existence of judgments against a company an indication of that company's future solvency? - Liquidator tries to "foist" hazardous goods onto creditor
Liquidator unsuccessfully lodges notice disclaiming onerous property - Administrators of Pan Pharmaceuticals apply for extension of time for first creditors meeting
Extension granted for date for first creditors meeting for Pan Pharmaceuticals - Incompetence of One.Tel director cause of "large scale corporate collapse"
One Tel director pays $92 million in compensation and banned from management for 10 years - Prominent businessmen heavily penalised for breaching directors duties
Well known businessmen ordered to pay compensation, fined and banned from management for allowing company to continue to incur debt when they should have realised company was insolvent - "A very unfit manager" gets life ban
Bankrupt disqualified from management uses puppet directors to control his company
1. Mortgagor refuses to seek advice from “those thieving bastards”
Mitchell v 700 Young Street Pty Ltd & Ors [2003] VSCA 42 (30 April 2003)
Mrs Mitchell, a clever and astute woman, became lonely and depressed after losing her husband in 1996. After becoming aware of the situation her son offered to have her stay with his family in their family home. However because of certain factors, such as family trusts; receiving the pension; and buying a new home to house the now larger family, Mrs Mitchell had to enter into a mortgage and guarantee agreement with the Commonwealth Bank of Australia.
After entering these transactions Mrs Mitchell had a change of heart. She applied to the Court to have them set aside on the basis that she was at a special disability and disadvantage and that the son and the bank exploited her situation and had behaved unconscionably towards her. She alleged her special disability and disadvantage was that she was elderly and emotionally reliant on her son. The claim did not, however, stack up in Court.
The Court heard that:
a) The son had explained to her their terms and the consequences of any default; and
b) Mrs Mitchell had alerted her son about the potential future problems in terms of the increase in the debt level; and
c) Mrs Mitchell had always handled the family finances, which included many complicated property and trust dealings, and so was familiar with the nature of all the transactions; and
d) Mrs Mitchell on a number of occasions had flatly refused to consult a solicitor, saying that she would not waste money on "those thieving bastards".
The Court concluded that, given the evidence, Mrs Mitchell had in fact made an informed choice to enter the transactions and no unconscionability on part of the bank or the son had been proven. They added that: “It would be unreasonable to expect banks to deal with every transaction giving a benefit to a child upon the assumption that it was, or might in some undefined circumstances be held to be, unconscionable.”
Mrs Mitchell had “unreasonably sought to press the rules as to unconscionable dealings” and accordingly her case was dismissed.
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2. Hattaways/Baycorp research – predicting business insolvency
For some years now we’ve had a close association with Baycorp Advantage in its various guises. (Credit Reference Association of Australia evolved to Credit Reference Ltd, then to the Data Advantage Group. Then, in December 2001, it merged operations with the New Zealand company, Baycorp – which we’ve also worked with for many years – to form Baycorp Advantage). Last year Baycorp Advantage provided us with access to some quality data on default in Australia, which we used for statistical research. Our view was that some simple analysis of Baycorp Advantage data would be of immense benefit to credit staff.
So we sat down with a Baycorp Advantage statistician and prepared a list of questions we wanted to investigate, based on information on the Baycorp Advantage database. These questions were mostly about things that might or might not indicate risk. Over the next few Bulletins, we’ll look at some of those questions and their answers. Any errors in the questions or the answers are of course Hattaways’, not Baycorp Advantage’s. Our first question was: how good is a judgment as an indicator of future business insolvency?
Our belief, based on other studies that we’re aware of, was that judgment was one of the strongest indicators that a customer was high risk. We looked at 1,065 company businesses with judgments entered in November 1999, then looked at what happened to them. We found that after 12 months 16% of them were under administration or petitioned to wind up. After 24 months, that percentage had risen to 21%. This confirms, in our minds, at least, the fact that for businesses, a judgment is a very bad sign.
To put it another way – if you have sixty new credit applications from companies, all with judgments in the last year, probability says that about ten of them are likely to end up in a form of insolvency administration within a year. (And bear in mind that some of the other fifty, even though they don’t go that far in a year, may still leave you with a bad debt.) Compare that with the number of customers in your ledger who left you with bad debts last year.
A good rule of thumb is that the average trade creditor has a bad debt level of 0.5% of sales, or, other things being equal, one in every 200 customers. (A report of the Productivity Commission, Business Failure and Change: An Australian Perspective (Aus Info,Canberra, December 2000) supports this number. The report, written by Ian Bickerdyke, Ralph Lattimore and Alan Madge, concludes that a little less than 0.5% of businesses cease operations due to insolvency every year.) So a business with a judgment against it in the last year is 30 times more likely to go bust than the average business.
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3. Liquidator tries to "foist" hazardous goods onto creditor
Sullivan v Energy Services International Pty Ltd (in liq) [2002] NSWSC 937 (11 October 2002)
Energy Services International Pty Ltd carried on business in Australia. Part of its business was to service electricity generators by removing their hazardous waste products.
Energy never had a licence to store or transport the hazardous materials. To circumvent this problem it contracted with Sullivans Transport and General Services, who had a licence, to transport the hazardous material through NSW and also to store it.
Energy went into liquidation on 25 March 2002. At that time 481 barrels of contaminated material were stored at Sullivans depot in a Sydney suburb.
On 28 March, the liquidator issued two notices of disclaimer of onerous property in Form 525 to the Corporations Regulations – one of which related to the material in Sullivans depot. Section 568(1) of the Corporations Act permits a liquidator to disclaim property of the company that may give rise to a liability to pay money or some other onerous obligation. However an interested party can apply to the Court for an order setting aside the disclaimer before it takes effect within 14 days of the notice.
Accordingly on 10 April Sullivans filed an application claiming a declaration that the notice of disclaimer were ineffective and an order that those notices be set aside. A further order was sought that the liquidator take delivery of the products.
Chief Justice Young found that the notice of disclaimer was wholly unreasonable. The goods were costing them money every day they were stored on their premises and would possibly cost more to dispose of them. To allow the disclaimer would have the effect of foisting the goods on Sullivans.
“It seems to me that the policy considerations of s568 intend that the disclaimer is to cause as little prejudice as possible to all other interested persons.” Accordingly he ordered that the liquidator be directed to remove the goods from Sullivans' warehouse at Energy’s or his own expense within 14 days.
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4. Administrators of Pan Pharmaceuticals apply for extension of time for first creditors meeting
In the matter of Pan Pharmaceuticals Limited [2003] FCA 598 (6 June 2003)
For the last 29 years Pan Pharmaceuticals Limited has manufactured and supplied a variety of pharmaceutical products which have been distributed in Australia and world-wide. Problems arose for the company in January of this year after a series of complaints were made to the Therapeutic Goods Administration (TGA) in relation to one of its products “Travelcalm”. The product had caused several people major medical difficulties with one person almost dying. After an investigation by the TGA it was discovered that the manufacturing process of the “Travelcalm” product had been grossly negligent. TGA found that some tablets contained none of the active drug whilst other tablets in the same packet contained excessive amounts of the drug. The TGA recalled all Pan products up to consumer level and removed Pan’s manufacturing licence.
Pan went into voluntary administration on 22 May 2003. After an assessment of the situation the administrators soon came to the conclusion that they would not be able to supply creditors with the required information as to the company's current and future financial position by the time of the first creditors meeting. They applied to the Court to have the time extended to a period of 75 days to collect the relevant information to be given at the first creditors meeting. The director of the company opposed this application on the grounds that the extension of time would be more costly for the creditors in the long run.
The Court granted the extension. They held that an extension of time, which had approval of 62% of the creditors, would allow the Administrators to assess the companies assets and liabilities. These liabilities included the imminent litigation following the massive recall of products and faulty drugs. The Administrators also hoped to establish in that time whether Pan could obtain a renewal of its manufacturing license which the Court considered as essential to the future prospects of the company. In addition the time extension would allow assessment of tenders by prospective purchasers of the Pan company or at least the company's shell.
The court noted that “there is inevitably a tension between this objective (providing creditors with full and accurate information) and the broad aim of a speedy administration”. The Court was persuaded in this case that a further period of 75 days was needed if creditors are to have the benefit of the useful information from the Administrators which the Act intends that they have.
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5. Incompetence of One.Tel director cause of "large scale corporate collapse"
ASIC v Rich & ORS [2003] NSWSC 186 (21 March 2003)
One.Tel Ltd, a large telecommunications company listed on the Australian Stock Exchange, was in business from 1995 until 2001. It came to have 2.4 million customers worldwide. Whilst things appeared well on the surface, by 2001 the huge liabilities that One.Tel had incurred through major expansions began to catch up with it.
Mr Keeling was one of One.Tel's managing directors. He knew that One.Tel was making huge trading losses. Amongst other incidents Keeling had allowed, without correction or qualification, two public statements which had incorrectly conveyed the financial position and performance of One.Tel. Thus for the majority of One.Tel’s shareholders, employees and creditors its entry into voluntary administration on 29 May 2001 and into liquidation on 24 July 2001 was as unexpected as it was unwelcome. The final pay-out to creditors is projected to be just 25 to 30 cents in the dollar.
Due to Keeling’s conduct in the company's last trading year the Australian Securities and Investment Council (ASIC) applied to the Court for orders disqualifying him as a manager and requiring him to pay compensation to One.Tel for the net trading loss of $92 million One.Tel had made in its last trading year.
The case before the Court was rare, not only because of the large amount of money and interested parties involved, but because Keeling himself admitted full responsibility for his actions and agreed to the relief sought. He joined with ASIC in the Statement of Agreed Facts. He acknowledged his failure over a number of months to discharge a number of his core responsibilities as a director, including the fundamental obligation to take reasonable steps to be aware of the company's true financial position and circumstances, and to ensure that the board was informed of those matters.
When deciding on an appropriate disqualification penalty for Keeling the Court took into consideration his co-operation with ASIC and the liquidators of the company. He had already organised the payment of $92 million to ASIC for distribution to creditors and it was noted that since One.Tel’s placement into liquidation he had at all times assisted the liquidators with the sole intention of minimising loss to One.Tel’s creditors.
Furthermore the Court noted Keeling’s contrition and regret as to his conduct as managing director and the effect that it had had on so many people.
The Court stated: “Conduct such as that of Mr Keeling in acknowledging his breaches, expressing appropriate contrition and agreeing to be subject to remedies including judgment for an enormous sum, ought to be recognised when it occurs and given encouragement by accepting some moderation in what must be a severe outcome.”
After looking at the above factors but still giving weight to the fact that Keeling’s “incompetence” had brought about “a corporate collapse on a very large scale in the context of the Australian economy” the Court concluded that a period of disqualification of ten years was appropriate.
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6. Prominent businessmen heavily penalised for breaching directors duties
ASIC v Plymin, Elliott & Harrison [2003] VSC 123 (5 May 2003
The Water Wheel group (consisting of Water Wheel Mills Pty Ltd and Water Wheel Holdings Limited) were in the flour and rice milling business. The company had been trading since 1888 and had proved itself in the past to be a profitable business. After entering the rice industry in 1997 things took a turn for the worst. Over the next few years the company's profits diminished and it plummeted into debt.
Throughout the company's final trading year warning signs began to emerge. There were reports that the company was running at a substantial loss. One of the directors informed the board of “the Group's tightening liquidity, the increased legal recourse suppliers were taking to recover debts and the difficulty being experienced in paying debts when they fell due". The ANZ withdrew financial support following a bank report which revealed that their liabilities were greater than their assets. Despite these warning signs the board continued to allow the company to incur more debt.
The company was finally wound-up in February 2000. Following the placement of the company in liquidation the Australian Securities & Investments Commission (ASIC) took Bernard Plymin (the managing director), William Harrison (the chairman of the board of directors) and prominent businessman John Elliott (a non-executive director) to court for incurring debts when they knew or should have known the company was insolvent.
The Court found that these men had all breached Corporations Law. A reasonable director in a like position would have found the warning signs brought to the attention of the three directors as grounds for suspecting insolvency. None of the directors had shown that he had reasonable grounds for believing the company was solvent.
Elliott argued that his reliance on favourable reports to him by Plymin about the company’s financial position was a reasonable ground for a non-executive director to believe that the company was solvent. The Court rejected his argument.
They found that a non-executive director must have a reasonable basis for believing that a Company is solvent. Elliott had failed to make the appropriate inquiries as to the real financial position of the company and had in fact “turned a blind eye to the liquidity crisis”.
Accordingly all three directors were found to have contravened s588G on each occasion when the said debts were incurred. Plymin and Elliot were ordered to pay $1.4M each in compensation. They were banned from being directors for a period of 10 and 4 years respectively, and were fined $25 000 and $15 000 respectively. Because Harrison had admitted liability early on and had at all times co-operated with ASIC he was given a lesser penalty, namely $300 000 in compensation and was prohibited from directorship for 7 years.
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7. "A very unfit manager" gets life ban
Platcher, in the matter of Platcher v Joseph [2003] FCA 9 (13 January 2003)
Mr Platcher was somewhat lacking in business acumen and financial management skills. He had been declared bankrupt four times, namely in 1992, 1994, 1998 and 1999. While bankrupt, he was of course, unable to run a company. Section 206B(3) of the Corporations Act states that a undischarged bankrupt is disqualified from managing corporations. A similar provision applies under Corporations Law, which states that `an insolvent under administration' must not manage a corporation without the leave of the Court.
Not to be deterred, Platcher became involved in a company called Growthcorp (Aust) Pty Limited. Growthcorp was in the business of investment property. Put simply they received funds from people and supposedly used this money to buy and develop property with the view to later selling it. The profit the company was to make from these transactions would then be redistributed to the investors. These investors were mostly individuals unfamiliar with business. Many of them had borrowed the money for their investment by taking of first and second mortgages over their family homes. Unfortunately most of them never saw their money again.
Platcher had attempted to get around his ban on company management by employing “puppet directors”. In mid-1997 Platcher asked Dr Chia to act as director of the company. Dr Chia agreed, evidently because he had felt indebted to Platcher for a favour he had done for him. He was joined in directorship by Mr Pettenon in January 1999. Chia and Petternon to signed the company transactions requiring director authority and prepared documents at Platcher's direction only. Apart from these administrative duties Mr Platcher represented himself as director of Growthcorp to its clients at all times. He made all commercial decisions for the company and negotiated various deals with a number of lenders.
Eventually it became clear that most of the money he had organised to be invested had been “lost”. Growthcorp had a long list of unpaid wages and an even longer list of rent arrears for the large number of offices the company had resided in.
After investigation ASIC commenced proceedings against him. It alleged that he had managed a corporation while disqualified from doing so and sought to have him disqualified from managing corporations for life.
The Court agreed. A number of people had suffered extensive loss in connection with Platcher's management of Growthcorp. It was clear that Mr Platcher was not a competent person to be managing corporations. Given the very serious risk that he may once more cause serious losses to members of the public the Court disqualified Platcher from managing corporations for a period of 25 years. Given Platcher’s age this had the effect of a life ban.
