Australian Credit Law Bulletin - Vol 4, No 8, August 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:
- Another unconscionable mortgagee?
Stroke victim executes mortgage and later seeks leave to bring proceedings to have it set aside on grounds of unconscionability - Man "contumaciously thumbs his nose" at Mareva injunction
Man completely ignores a Mareva injuction and transfers large amount of money to some creditors and his wife - CFO sentenced to five and a half years imprisonment
Harris Scarfe group of companies report inflated profit levels after Chief Financial Officer fiddles with accounting records - Husband with “propensity to squander funds for his sole benefit”
Official Assignee unsuccessfully tries to retrieve interest in family home given by bankrupt to his ex-wife - Hattaways/Baycorp research - predictive power of consumer defaults on a credit report
If someone has a recent default listed on their consumer credit report, are they likely to default again?
1. Another unconscionable mortgagee?
Parker v Mortgage Advance Securities Pty Ltd [2003] QCA 275
In January 1999 Mrs Parker had a stroke. On 16 April 1999 she executed a mortgage over her home to secure an advance made to a Mr Stumer by Mortgage Advance Securities Pty Ltd (MAS). At the time of the transaction MAS had no knowledge of Parker's stroke but they were aware of the following circumstances surrounding the transaction:
* the whole of the loan was to be paid Stumer;
* Stumer provided no security himself despite the fact he owned his own property and conceded that he had $20 000 in cash;
* Parker was elderly and this property was her only investment;
* she had no income that she could service the loan with;
* the loan was at an interest rate of 28%.
The advance was never repaid and MAS sought to sell Parker’s property to recover its money. Parker applied for leave to bring proceedings to have the mortgage agreement set aside. She did so on the basis that the stroke she had in January had left her lacking in mental capacity to understand the mortgage document and that MAS had acted unconscionably in securing the mortgage.
After hearing medical evidence the Supreme Court of Queensland acknowledged there was an arguable case that she lacked the mental capacity. However the Court pointed out that for the transaction to be set aside it must be proven that MAS was aware of or, given the circumstances, should have inquired further into her situation at the time of the transaction.
In their defence MAS pointed to the fact that they received a certificate which confirmed that Parker had received legal advice. As the transaction was conducted through a broker (MAS itself had never met with Parker) they argued that it was entitled to rely on the certificate.
The Court found that the “transaction had about it the hallmarks of one in which a person, weakened at least by age, was prevailed upon by a younger and stronger person to mortgage her property in an improvident way for the benefit of that younger and stronger person. It is therefore arguable that [MAS], knowing what it did, was unconscionable in proceeding with the transaction which included the mortgage”. The Court granted Mrs Parker leave to institute the proceedings against MAS to set aside the bill of mortgage - that is, the matter could proceed to a full hearing.
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2. Man "contumaciously thumbs his nose" at Mareva injunction
Pico Holdings Inc v Voss [2002] VSC 319 (9 August 2002)
Dominion Capital Pty Ltd (owner of Dominion Wines Pty Ltd) needed a loan. After negotiations with Pico Holdings Inc, Pico agreed to loan them US $2.2M. Pico subsequently alleged that Mr Voss (the company’s chairman and managing director) had made a false representation that the shares held by Dominion Capital in Dominion Wines were unencumbered. Accordingly Pico claimed damages from Mr Voss for breach of the Trade Practices Act.
To ensure that Mr Voss did not transfer all his funds leaving him with no money to pay any judgment against him Pico applied for and were granted a Mareva injunction. A Mareva injuction is a court order that prevents a person from disposing or dealing with their assets. The terms of the injunction were that Mr Voss could not deal or dispose of his assets “other than for normal living expenses or payment of legal fees in relation to the defence of this proceeding up to a maximum of $5,000 per week.”
Despite the order Mr Voss did deal and dispose of his assets. Mr and Mrs Voss settled on a contract for the sale of their property and the purchase money was distributed to a variety of parties including Mr Voss’s bank, Mrs Voss and various other creditors of Mr Voss.
Once notified of Voss’s actions Pico issued a summons seeking an order that Mr Voss be punished for contempt of court.
The trial judge found that “Mr Voss defiantly and contumaciously thumbed his nose at the Court and its order, and diverted money away from a potential judgment creditor. His actions directly put at nought the object of the Mareva injunction and rendered it substantially futile.”
He had put money out of reach of potential creditors and therefore his breach was “deserving of a substantial penalty”. Mr Voss was adjudged in contempt of court in a criminal capacity, fined $25,000, and ordered to pay legal costs to the amount of $60,000.
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3. CFO sentenced to five and a half years imprisonment
R v Hodgson No. SCCRM-02-244 [2002] SASC 349 (24 October 2002)
Mr Hodgson was the chief financial officer of the Harris Scarfe group of companies. He was in charge of overseeing the production of the financial reports for the directors' monthly meeting, the annual and half-yearly reports, and reports for the Australian Stock Exchange.
From January 1997 until March 2001 Mr Hodgson directed his staff to make false entries in the accounts.
Mr Hodgson pleaded guilty to 32 counts of falsely representing the profits of a company. He was sentenced to eight years imprisonment with a non-parole period of three years. Eight years was reduced to six years because of his early guilty plea and continued cooperation. He appealed that sentence on the basis that the judge did not take a sufficient reduction off the sentence.
The false entries inflated the income of the companies by millions of dollars. According to the judge in the appeal decision, "the false entries enabled Harris Scarfe Holdings Ltd to borrow the sum of $24 million" from the ANZ.
In addition Harris Scarfe Holdings made two separate share issues raising, respectively, $20.3 million and $15 million. The financial reports provided to shareholders contained the false information prepared by Mr Hodgson or at his direction. "Plainly, those issues could not have been made but for the false reporting."
Mr Hodgson was aware of the bad state of the company’s affairs and was prepared to misrepresent it. He said he had a belief that the company could trade its way out of difficulties however the judge felt that that belief was “akin to that of a losing gambler who believes his luck will turn.”
The appeal judge felt that the sentence before reduction (eight years) was merciful in itself given the long period over which offending continued, its magnitude, its consequences and the number of people affected. He even went as far to say that there was much which would have justified a longer sentence, however the appeal court cannot increase the severity of a sentence.
Nevertheless, the appeal judge did find that the original judge did not fully comply with s21E Crimes Act (which allows for the reduction in sentences). Therefore the appeal judge gave a further reduction so that the sentence became five years and a half years (a reduction of 6 months). The non-parole period was reduced to two years and nine months because of Mr Hodgson’s undertaking to cooperate in future proceedings.
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4. Husband with “propensity to squander funds for his sole benefit”
Margaret Grace Lopatinsky was the main provider for the Lopatinsky family. Amongst other things she:
* provided the initial funds for the couple's first home;
* paid for their wedding and honeymoon;
* supported the couple financially in the early years;
* continued to keep the couple afloat financially with social security payments, financial assistance from her parents, and salary from her part-time job during the times when Mr Lopatinsky was without an income
* provided much of the equipment and secretarial work for Mr Lopatinsky's failed import-export business.
"She also raised the couple's children, completed or oversaw extensive renovations on the couple's first home and attended to other household duties.”
Throughout their years of marriage Mr Lopatinsky had periods of unemployment and was involved in a number of failed businesses. He continued to live a lifestyle that was beyond the family's means and “had a propensity to squander funds for his sole benefit”.
After their separation in 1998 the couple arranged for the sale of the family home in Peakhurst which they owned together. After the mortgage had been paid off the couple were left with $262,774. They agreed that Mr Lopatinsky could keep $50,000 and the remainder would go to Margaret and the children. With this money Margaret purchased a townhouse in Padstow Heights for $265,000 in October 1999. In April 2001 Margaret filed for divorce in the Family Court of Australia and the marraige was dissolved by 31 July 2001.
On 3 April 2001 Mr Lopatinsky was made bankrupt. The trustee of Mr Lopatinsky’s bankrupt estate sent a notice to Margaret requiring either $81,387.00 or the transfer to the trustee of a 30.71% interest in a property at Padstow Heights. He argued that the amount she had received from the sale was more that what she should have received. It was therefore an unfair payment and should be clawed back into the pool of assets available to Lopatinsky’s creditior’s. Margaret opposed the application.
The question was whether she had provided "consideration" - something of value in return for the payout she received - or at least consideration which justified a payout of $81,387.00. The exact amount that Margaret had contributed to the family’s home and expenses was arguable. However it was clear that the value of her contribution to the family income and living was such that the amount she had recovered from the sale of the Peakhurst property was fair and justified. Had she had taken the issue to the Family Court of Australia she would have undoubtedly have received a similar amount if not more. By not pursuing the matter under the Family Law Act 1975 (Cth) she had provided consideration in return for what she received. On this basis the claim made under s 120 failed and Margaret was able to keep the money.
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5. Hattaways/Baycorp research - predictive power of consumer defaults on a credit report
As we explained in last month’s bulletin, 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. (Any errors in the questions or the answers are of course Hattaways’, not Baycorp Advantage’s.) One of our questions was: how useful is a consumer default as an indicator of future defaults?
It's important to understand that a default is not necessarily a bad debt. A default is generally a debt of over $100 that has been owing for a minimum of 60 days. Telecommunications and utilities accounts such as electricity and gas bills may be reported when they are $20 or more in arrears. Defaults may only be listed once steps have been taken to recover the whole, or any part of the amount. The credit provider must have asked the borrower, either in person or in writing, to pay the outstanding amount.
We looked at 25,000 individuals with defaults lodged on the Baycorp Advantage database in November 1999. We wanted to know how many would default again over the next two years. The answer was about one in four. It turned out that 24% defaulted again within 12 months and 29% within 24 months. Bearing in mind that not all creditors lodge defaults in all situations where they could do so, this suggests that a recent default is a relatively strong indicator of future default.
