Australian Credit Law Bulletin - Vol 4, No 9, September 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 Australian 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:
- Shark attack
If you want a fascinating insight into the world of loan sharks, read the transcripts of the conversations recorded and put in evidence in this case - A way to prefer the children over the creditors?
Court looks at whether husband’s transfer of his interest in home following separation is a voidable transaction - Brother-in-law forced to honour guarantee despite misunderstanding
An example of why you should never go guarantor for your brother-in-law - This guy will be cursing his ex-co-director
Man flees the country leaving his business partner with a large debt to pay on company's overdraft - 25 years later the litigation continues
- Trap remains for creditors with complex Romalpa clauses
Queensland Court of Appeal reverses decision rendering director personally liable. Even so, creditors with complex romalpa clauses beware!
1. Shark attack
State of Queensland v Ward & Anor [2002] QSC 171 , State of Queensland v Ward & Anor [2003] QCA 366
State of Queensland v Ward & Anor [2003] QCA 366
If you want a fascinating insight into the world of loan sharks, read the transcripts of the conversations recorded and put in evidence in this case.
As a youth in New Zealand, Timothy Ward supported himself by playing pool for money. He became known by his associates as “Shark”. He kept the nickname when he migrated to Australia and used it as the name of his company – Shark Financial Services Pty Ltd - a moneylending business on the Gold Coast.
>From 1996 to 2000 “Shark” (meaning both Ward and his company) lent to people who could not get credit elsewhere. Shark would lend a minimum of $500 to anyone, at interest rates of 156 % and 208 % per annum. Late payment fees could raise the interest rate to 360% per annum. Imprisoned borrowers (there were a few as a lot of his clientele were described as “drug dealers and hookers”) did not have to pay interest while serving their sentence but were expected to “fix things up” on their release.
Repayments had to be made on a weekly basis between Monday and Friday. If not made in this time, Shark would send around collectors. As the debtors had no collateral as security for the loan Shark considered “their body as collateral”. His “collectors” would threaten physical violence or in fact carry it out until the debtor found some means to pay Shark. Some people were given one warning, others weren't. Threats of violence and actual violence wre common practice regardless of sex and age and were directed not only at the borrower but also the borrower’s family and friends. If Shark could not contact a borrower, he considered them a “runner”. Runners were pursued by “the boys”.
After various complaints and a three month surveillance operation from August 1998 until October 1998, the State of Queensland sought to have Shark prohibited from lending money and fined for breaches of the Consumer Credit (Queensland) Act 1994 and the Consumer Credit (Queensland) Code.
Shark claimed that all his loans were made for business and investment purposes and therefore did not come under the Act or the Code, and that some of the transactions were carried out in New South Wales, meaning they could not be considered in a Queensland court.
The judge did not agree. He said that even though borrowers had signed documents that stated the loan was for the purpose of business or investment, they were signed “with a wink and a nod” and that the borrowers could do whatever they wanted with the money. Shark also boasted of having 400 clients that were involved in drug dealing and prostitution. The judge said that this did not come under the business exemption. Furthermore the Act and Code were developed to control loan sharks. The fact that a loan was made by someone from across the Tweed River did not prevent him from ruling on it.
The judge prohibited Shark from providing consumer credit because he had provided it unfairly and repeatedly engaged in unjust conduct. He fined him on breach of 27 lenders contracts. Each breached contract received a fine of $10,000, the total being $270,000. Shark appealed the decision on the grounds that the penalties impose were too excessive. The Queensland Court of Appeal swiftly dismissed the appeal. The Court found that the penalties Ambrose J had imposed were totally justified.
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2. A way to prefer the children over the creditors?
Official Trustee in Bankruptcy v Mateo [2003] FCAFC 26
Mr and Mrs Mateo separated in January 2000 after 28 years of marriage and three children together. Several months later they made consent orders detailing how the matrimonial property would be divided. The major asset of the relationship was the family home. They decided that Mr Mateo would give his interest in the home to Mrs Mateo in return for payments from Mrs Mateo. In June 2000 the Family Court made these orders. The house was registered in Mrs Mateo's name by August of 2000.
Early the next year and within 12 months of the registration Mr Mateo made himself bankrupt (on what is known as a debtor's petition). After assessing his estate the Official Trustee decided that the transfer of his interest in the family home to Mrs Mateo was a voidable transaction which unfairly paid her ahead of other creditors. The Official Trustee issued a notice under the Bankruptcy Act to Mrs Mateo. It outlined the allegation and created a charge over that property in favour of the trustee. The notice required her to pay the Official Trustee $95,000 (the value of Mr Mateo’s interest in the property) or transfer a half interest in the property to the Official Trustee.
Mrs Mateo asked the court to set aside the notice given by the Official Trustee. The Official Trustee crossclaimed against Mrs Mateo, seeking payment by her of the value of Mr Mateo’s interest in the home, and against their children for the amount of any money found to be paid to them.
The judge allowed the application to set aside the claim and dismissed the Official Trustee’s cross claim. The Official Trustee appealed.
The issues raised in this case were important ones. On one hand there was a risk that a person who was already insolvent, or who fears insolvency, would seek an order from the Family Court in an attempt to put assets beyond the reach of creditors. On the other hand, to meet the purposes underlying family law legislation it was necessary to make sure the genuine property interests of one party to a marriage are safeguarded from the other party’s creditors.
The appeal court accepted the finding that there was a genuine marriage breakdown but noted that “there is room for the suspicion that the parties preferred the husband's equity in the home to find its way to the children rather than his creditors. This suspicion may be unfounded, but it warrants investigation. There was no such investigation when the consent orders were made; apparently, the Family Court was not informed of Mr Mateo's insolvency. There was no such investigation before Tamberlin J; because of the approach taken by his Honour, it was not thought relevant to his task. It seems the only way in which such an investigation might take place would be pursuant to an application to the Family Court under s 79A of the Family Law Act.” The Official Trustee had not made any attempt to set aside the orders of the Family Court. The appeal was therefore dismissed.
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3. Brother-in-law forced to honour guarantee despite misunderstanding
Kranz & Anor v National Australia Bank Ltd [2003] VSCA 92 (25 July 2003)
Tompet Nominees Pty Ltd was in the business of trading shares. The directors of the company were Peter and Tom Lefkovic. After the crash of October 1987 Tompet experienced major financial difficulties. One of Tompet’s directors, Peter Lefkovic, had a friendly relationship with NAB’s regional manager Lawrence Brooke. He was Brooke’s personal accountant and had frequently referred people to the bank. Drawing on this background relationship, in August 1989 Tompet proposed a further advance from the National Australia Bank to prevent the two family homes of Tompet’s directors being sold. The arrangement was quite complex but the main points were:
* Tompet was to buy shares in Phoenix Oil & Gas, hold them for three months, and sell them by December 1989 for a substantial profit which would go towards reducing Tompet’s debt to the bank
* The actual purchase of the shares was to be done by Starbronze which, up until this point, had been a shelf company of Tompet
* Tom Lefkovic was to resign as director of Starbronze to avoid any allegations of insider trading
The bank approved the scheme, however the cheque drawn from Starbronze’s account to purchase the shares was stopped as the bank decided it needed more security. To get around this problem Tom asked his brother-in-law Kranz if he would give his house as security for more credit from the bank.
Kranz, a property-developer, was unable to write English. Tom provided Kranz with the documents required to assign security on his house. His explanation of those documents was lacking. It was accepted that Kranz was not told nor fully understood the extent of the security transaction. However, Kranz, relying on Lefkovic’s advice, signed the guarantee on condition that their mutual parents-in-law also supply their house as security. On 25 August the bank supplied Tom with a line of credit and Tom supplied the bank with a list of Kranz assets and liabilities. On 28 August the mortgage and guarantee agreements were signed.
The share purchase was a disaster and the NAB ended up bringing an action against Kranz for the money he had guaranteed for Tom.
Kranz contested the action. He argued it should not be allowed on grounds of unconscionability and undue influence.
The court found that Tom had deliberately misled Kranz. However they held that the bank still had a right to recover the money from him. This was because “there was nothing in their association to put the bank on notice that the property developer (Kranz) would not receive adequate explanation from the accountant of the proposed transaction or that he necessarily required an independent explanation of it.”
On appeal the judge came to the same conclusion. “Given the limited extent of the information available to the bank, I do not accept that the bank knew or should have assumed that there was a relationship of trust and confidence between Kranz and Tom Lefkovic” so as to put them on notice.
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4. This guy will be cursing his ex-co-director
National Australia Bank Ltd v Firewood Processors Pty Ltd
Mr Hopes and Mr Henson were the directors of Firewood Processors Pty Ltd who were in the business of selling firewood. On 11 November 1998 the company provided a fixed and floating charge over its assets to the National Australia Bank Ltd (NAB). In February of the following year NAB granted Firewood Processors an overdraft facility of $150,000. The overdraft was to expire on 30 April 1999 and was guaranteed by Hopes and Henson to the extent of $150,000.
The company drew down against the overdraft facility. In or about April 1999, Hopes approached Michael James Clifford, an officer of the NAB, (“Clifford”) requesting an extension of the overdraft limit. According to Clifford, the NAB “was not prepared to grant a formal extension of the overdraft limit but allowed the company to exceed the limit to meet some immediate business expenses”. Following this allowance Hopes continued to draw on the overdraft until the company was $283,383.66 in the red. Henson knew nothing about Hope’s request or the fact that NAB had allowed the company to exceed its limit.
In June 2000 Hopes sold a substantial amount of the company’s firewood, kept the proceeds for himself, then skipped the country. This firewood was the company's principle asset and the company was then unable to meet its obligations to NAB.
On 27 September 2000 NAB demanded $174,270.24 from Henson, comprising an amount of $150,000, interest of $23,475 and costs of $795.24 under to his guarantee. Henson did not pay. NAB applied for a summary judgment against him. Henson opposed this application. He alleged that NAB had been a party to the deceitful behaviour by Hopes. He argued that because Clifford (an agent of NAB) was aware that Henson had no knowledge of the allowed extension of the limit, the bank was a party to Hopes' deceitful behaviour.
NAB pointed out that Henson was not in fact prejudiced by the increase of the overdraft in that his liability was fixed to $150,000 (plus interest). That is, he was not being asked to pay the remaining $133,383.66 that Hopes had allowed the company to draw.
The Court found that there was no evidence that could suggest that NAB was involved in any conspiracy with Hopes. They thought that the conduct of Hopes did not give rise to a "triable issue" in regards to this matter. Accordingly the Court did not grant leave to Henson to defend the action and entered judgment for NAB for $174,270.24 plus interest and costs.
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5. 25 years later the litigation continues
Wentworth v Rogers [2003] NSWSC 472
Wentworth v Rogers [2003] NSWSC 371
Ms Wentworth's appearances in the judicial system over the last 25 years have all related, in one way or another, to an alleged tortious assault by her ex-husband Mr Rogers in 1978. She was pursuing this in the civil courts rather than the criminal courts. The original decision dismissing the action in 1985 has been upheld and overturned several times. The delay in a final judgment is due to various appeals and cross-claims, including one incident when Wentworth managed to get most of the judges of the New South Wales Supreme Court to disqualify themselves from hearing her case on grounds of bias. The result to date (which is still not final) is that Wentworth has a judgment against Rogers for damages of $2,680 for personal injury. Creditors may be interested in two of her most recent judgments which illustrate the proper use of a garnishee orders and use of provisions in the Conveyancing Act relating to defrauding of creditors.
The first decision was based on an unsuccessful application by Wentworth to the Registrar of the court to file and serve a garnishment notice. (Garnishment is a remedial device used by a creditor to have property of the debtor or money owed to the debtor that is in the possession of a third party attached to pay the debt to the creditor). Wentworth served a garnishee notice on St George Bank Ltd on the basis that they held “Monies in the account for the Estate of the Late Laura Helen Cynthia Rogers, savings account No 3822, for Mr Rogers as sole beneficiary.”
St George Bank and the trustees (who were later joined in the proceedings) successfully denied that the trust account owed a debt to Mr Rogers for two reasons: First, the trust had two other beneficiaries. Wentworth could not make a claim over the trust monies as there were other beneficiaries involved. The Court stated “no [garnishee order] can be made if it appears that the money is trust money.” Second, the power of the trustees to give Mr Rogers money from the trust was discretionary. The money in trust could not be described as “a debt owed to Mr Rogers” as the trustees may chose not to give Rogers any benefit at all. Both of this arguments were correct.
The substance of Wentworth’s claim in the second judgment was that Mr Rogers had fraudulently alienated his interest in the family property by transferring it to his wife in 1994 with the specific intention of preventing Wentworth from collecting the damages awarded. Mr Rogers’ successfully argued that Mrs Rogers’ was one of his creditors and therefore the transaction was valid. Mrs Rogers was found to be a creditor of Mr Rogers under an agreement, formed in 1981, that if Mrs Rogers paid for his legal fees she would get Mr Rogers' interest in the family property. She had fulfilled her part of the deal and the transfer of the property was completion of the agreement. The Court did not find that the transactions in 1994 were a sham “whatever meaning might be given to that term” and did not set the transaction aside.
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6. Trap remains for creditors with complex Romalpa clauses
Rondo Building Services Pty Ltd v Casaron Pty Ltd & Anor [2002] QDC 128 (17 May 2002)
Christmas 2002 bulletin. Rondo recently appealed that decision in the Supreme Court of New South Wales. Here is a summary of what the Supreme Court had to say.
Rondo Building Services Ltd supplied steel framework products used in the construction of walls and ceilings to Casaron Pty Ltd. Mr Dance, a director of Casaron, provided Rondo with a guarantee for the debts incurred by Casaron. The contract for supply contained a Romalpa clause which would allow Rondo to take back goods that were not paid for.
Eventually Casaron defaulted on its payments. Unfortunately for Rondo, by this time the steel frames had been used in a building, so Rondo had no right to repossess them. The Romalpa clause provided, in this situation, that the entire proceeds from any sale were to be held in a separate account on trust for Rondo. However no money had been set aside. Rondo sued Casaron and obtained judgment against the company. They also sued Mr Dance, arguing that he was personally liable for Casaron’s debt under the guarantee.
At first instance the court found that whilst the guarantee did create personal liability for Mr Dance it could not been enforced. This was because the contract of sale said that once Casaron had put the steel framing into the building any proceeds from sale of the building should be held in a separate account on trust for Rondo. Thus the money became due on the basis of a trust, rather than a debt. The obligation of the debt was extinguished and the money was due on trust principles. As Dance had guaranteed all debts of the company he was no longer liable as guarantor.
On appeal the court found that in the course of their trading both Rondo and Casaron “completely ignored” the trust that was supposed to be created by the agreement. Proceeds of any sale by Casaron were, to the knowledge of Rondo, never paid into any trust account. Rondo allowed payments to be made directly to it and never protested the fact that the payments had not been made out of the trust account. As it turns out, this omission actually worked in Rondo’s favour. The court found that as the trust account had never in fact operated, the debt was never extinguished. Therefore Dance was liable to Rondo under the guarantee.
Although Rondo did succeed, it might be said that they were lucky. This is an area where creditors should be very, very careful!
