Australian Credit Law Bulletin - Vol 1, No 5, November / December 2000

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:

When debt collectors don't pay their clients
KISS applied to persuading debtors to pay
Chaos averted
"Pay day lenders" preferred to loan sharks
Court lets administrator take urgent action
Who gets to vote at creditors meetings?
Consumer bankruptcy comparison with the US
A creditor can issue 2nd statutory demand

1. When debt collectors don't pay their clients

Reuters Australia Pty Ltd v The Credit Connection Pty Ltd [2000] NSWSC 221 (13 March 2000)

Reuters asked the Court to appoint a receiver over the assets of Credit Connection under the Commercial Agents and Private Inquiry Agents Act 1963 (NSW). They claimed that immediately after the departure of their credit controller, a Mr Cannon, they found that some months earlier he had signed a deed for Credit Connection to collect Reuters' debts. They suspected "some serious conspiracy between Cannon and the defendant" relating to the list of accounts - the whole of its ledger in fact - that he allegedly gave Credit Connection to collect on his last day in the job.

Reuters ended the arrangement with Credit Connection and demanded the money - about $500,000 - that had been collected for them. Credit Connection claimed that the money matched the amount they were owed in commission and fees. Credit Connection's lawyers told Reuters repeatedly that the money was in the trust account. But it was later shown that it wasn't.

The judge was not required to decide on the suggestion of fraud. He said that because of the "misstatements, to use the weakest word I can find, that moneys were in the trust account when they were not, and the general circumstances... it seems to me that the public interest outweighs the other factors, and I should appoint a receiver."

2. KISS applied to persuading debtors to pay

It's not enough to tell debtors what you will do if they don't pay, says Hattaway & Associates' director, Peter Hattaway, in the November issue of Database, an on-line publication of leading New Zealand credit reporter, Baycorp . You also need to explain what this means to them.

From a psychological perspective, we persuade people only if they understand how the stick or carrot will affect them personally. We often simply assume that debtors will understand the consequences of our threat of judgment, or a statutory demand, or the lodgement of a debt on a credit database. The extreme (but true) example is the consumer debtor who doesn't understand that if the power is cut off, the television will no longer work.

Hattaway & Associates Ltd's seminar schedule for the first half of 2000 is now displayed on their website. The Psychology of Credit Management seminar is presented by Peter Hattaway and psychologist Dr Sarah Fifield.

3. Chaos averted

Re Macks; Ex Parte Saint and Re Macks; Ex Parte Johnson

The Corporations Law gave certain jurisdiction to the Federal Courts. But in Re Wakim; Ex Parte McNally (1999) 198 CLR 511, the High Court held that the Federal Courts did not have jurisdiction over matters arising only under State law, such as winding up companies.

This had the dramatic effect of invalidating a huge number of orders of the Federal Court, so the States enacted legislation to fix this. But was this legislation valid? A landmark High Court decision in Re Macks; Ex Parte Saint and Re Macks; Ex Parte Johnson [2000] HCA 62 found that it was.

Mr Macks, a partner at Prentice Parbery Barilla (SA) , was suing two firms of solicitors in his capacity as liquidator of the Emanuel Group of Companies. He had been appointed, and the funding arrangements for the litigation approved, by the Federal Court. The defendants argued that this was invalid.

The High Court ordered that the Federal Court winding up and funding orders be quashed, but said that this had no effect on the rights and liabilities of Mr Macks as liquidator. Under the State Jurisdiction Act the ineffective Federal Court judgment is treated as a valid judgment of the State Court.

Mr Macks was held entitled to rely on the relevant provisions of the State Remedial Legislation in South Australia and Queensland, although the High Court appears to have treated all the States' equivalent legislation as being basically the same.

If the High Court's decision had gone against Mr Macks, all appointments of liquidators by the Federal Court would now be invalid, as would actions taken by the liquidators in the course of their administrations. Chaos, it seems, has been averted.

4. "Pay day lenders" preferred to loan sharks

The typical "pay day loan" is $250 but the security may be a car worth several thousand dollars. Repayment is due next pay day. If the debtor fails to pay, the car is repossessed almost immediately without needing to comply with the Consumer Credit Code. The Code doesn't apply because the loan is for less than 62 days. A report of the working party to the Minister of Fair Trading in Queensland says that it should.

Pay day lending is a growth industry in Australia. In this respect, Australia is following a recent US trend. While the loan and fees are low in dollar terms, the annualised cost may range from 235% - 1300%. The debts may further balloon if rolled over.

The report recognises that pay day lenders fill a demand in the market and their recommendations are aimed at protecting their customers, not running the lenders out of town. "Loan sharks" are seen as a greater evil, though the distinction between loan sharks and pay day lenders is not adequately defined. (We suspect it may have something to do with strong-arm collection tactics.)

Primarily the working party wants the Code to apply either by careful definition or by licensing the lenders. This should ensure adequate disclosure to the borrower (of both the contract and the effective interest rate) and reduce some of the undesirable practices.

5. Court lets administrator take urgent action

EISA Ltd (administrator appointed); Application of Andrew Love [2000] NSWSC 940 (6 October 2000)

EISA, a publicly-listed internet service provider, got into trouble and Love was appointed voluntary administrator. Austar was a secured creditor which had been attempting to take over the shares in EISA.

A creditors meeting was held and a committee of creditors made up of the five largest unsecured creditors was formed. Four of these supported the proposed sale of the assets to Austar, and the other one said nothing. Love sought court direction to complete the sale without convening the usual second meeting of the creditors.

The Judge described EISA's affairs as being in a state of crisis _ if the phone companies (which were large creditors) pulled the plug, EISA's business would collapse. Accordingly, permission to complete the urgent sale was granted.

6. Who gets to vote at creditors meetings?

National Australia Bank Ltd v Market Holdings Pty Ltd [2000] NSWSC 1009 (26 October 2000)

This is a chapter in the ongoing litigation between NAB and Market Holdings, a business associated with John Maconochie. Market Holdings has claimed an impressive $US8.3 _ 29.3 billion damages from the NAB. NAB counterclaimed for $31 million.

In this episode, the shareholders of Market Holdings Ltd had resolved to put the company into voluntary liquidation. Only two of the company's creditors attended the creditors meeting when the liquidator was appointed. While the meeting was advertised in the newspaper, the NAB wasn't sent a meeting notice. NAB argued that because they hadn't been given notice, the meeting and resolutions passed, including the appointment of the liquidator were void.

The issue was whether the $31m counterclaim (and a costs order from other skirmishes) qualified the plaintiffs as creditors. Is a creditor only someone who is owed a debt or does it include someone with a claim? The Judge said that company directors must make a reasonable assessment as to the liabilities of the company, and must not completely dismiss claims against the company merely because they are disputed, unliquidated or subject to a pending court case. The plaintiffs should have been given the chance to vote or speak at the meeting. The chairman should decide who was allowed to vote.

(A second creditors meeting was subsequently held on 29 November. It is understood that NAB was again refused the right to vote. A report in the Australian Financial Review suggests that the bank may again take the issue to court.)

7. Consumer bankruptcy comparison with the US

American Bankruptcy Institute data shows that, despite a downward trend, America still leads the world in non-business bankruptcies with 1,230,436 in the 12 months to the end of September 2000. California alone had 143,967. This compares to 23,306 consumer bankruptcies in Australia (reported by ITSA) in the year to June 2000.

8. A creditor can issue 2nd statutory demand

South East Asia Communications Ltd v IT & Law Consultancy Pty Ltd [2000] NSWSC 1036

The creditor served a statutory demand on the debtor company. Failure to pay on such a demand can lead to the company being wound up. However, the creditor discovered defects in the demand, and so withdrew it, then issued a new demand. The debtor company argued that this was an abuse of process.

This was a relatively flimsy argument, but it's a point worth clarifying. The judge said, "It seems to me that frequently once demands are issued which seem to be in error, they are withdrawn. It seems to me that there ought not to be any reason for there not to be a fresh demand issued."

David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
David Francis

Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.

Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
Alan Liddell

There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.