Australian Credit Law Bulletin - Vol 5, No 1, January 2004
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:
- Death, infidelity and bankruptcy in Drummoyne
Previous contributions to the matrimonial home overrode the claims of other creditors - Expensive, prolonged, unsuccessful litigation leads to bankruptcy
Although still feeling persecuted a litigious client had to pay the costs of failed court actions - Splitting of proceeds of sale unfair on guarantor
CBA and AGC’s agreement to divvy up the proceeds of a sale could not work to the disadvantage of the guarantor - Failure of a debt collection agency
Majority shareholder could not force the liquidator to renege on a compromise deal made with a creditor - Mortgage enforced where parents understood the implications of signing guarantees
If you've worked in a debt collection agency, it's hard to convince a court you don't know what a guarantee is. - Genuine disputes can still exist even when complaints not made at the time
Problems raised after the service of a statutory demand will be believed unless they are pretty incredible
1. Death, infidelity and bankruptcy in Drummoyne
Parianos v Melluish (Trustee) [2003] FCA 190
Mr and Mrs Parianos were married on 25 March 1966. Just prior to their marriage the Parianos’s purchased a property in Drummoyne. Part of the deposit and purchase price was contributed by Mrs Parianos with contributions from her mother in Scotland. Without this contribution, finance for the full price of the house would have not have been obtained. However, the property was only registered in the husband’s name although he constantly explained that it was “our home”. After the birth of her children, Mrs Parianos stopped working full-time. Her husband's view was that "wives of Greeks don't work; it's an (sic) slur on the family…their place is in the home”. Mrs Parianos looked after their two children and helped out as a receptionist in one of Mr Parianos’s business. She helped convert part of the Drummoyne property in to a flat and maintained it and the garden as well as collecting the rent which helped to pay off the mortgage. Mr Parianos paid no allowances to his wife for any of the reception work or her other efforts around their home.
In August 1999, Mrs Parianos found out about her husband’s mistress of 12 years and separated from him. That was a bad month for Mr Parianos who also had brain surgery for a tumour. In October 1999, Mrs Parianos began proceedings to have her interest in the family home recognised and was, in the interim, granted exclusive occupation of the Drummoyne property. Mr Parianos made a new will, then died two weeks later. In his will Parianos left a life interest in the property to his wife and left legacies and the remainder of his estate to his mistress and his two children.
However, distribution of his estate did not go as he'd planned. Mr Parianos’s estate was declared bankrupt by the Federal Magistrates Court, owing $600,000. This led Mrs Parianos to apply to the court for a declaration that the property in Drummoyne was hers and not part of the bankrupt estate. The Trustee in Bankruptcy opposed the declaration. He claimed that the property was part of the bankrupt estate as Mrs Parianos had failed to lodge a caveat or take any steps to assert her beneficial ownership prior to August 1999.
The court accepted that Mrs Parionos held an equitable interest in the property. She had contributed much to the original purchase, had made lots of other contributions and had acted to her detriment by accepting, at her husband's insistence, a frugal lifestyle. The judge said that “it follows in my view that Mrs Parianos' equitable interest in the Drummoyne property stands outside the bankruptcy.”
The court determined that the Drummoyne property had been held on trust for Mr and Mrs Parianos as joint tenants. When one joint tenant dies, the property goes to the sole ownership of the other joint tenant. This meant the property was not available for the creditors of the bankrupt estate. The trustee in bankruptcy was ordered to transfer the whole interest in the property to Mrs Parianos
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2. Expensive, prolonged, unsuccessful litigation leads to bankruptcy
Kellow v Dudzinski [2003] FCA 103
In 1997 MrDudzinski enrolled in a post-graduate combined law and environmental science course offered at Griffith University. He was not allowed to attend the course as the university believed he would first need to complete several undergraduate papers before enrolling in the course. Dudizinski was not happy about this and he sued the university and several of its staff for, amongst other things negligence, defamation, breaches of the Racial and Sex Discrimination Acts and assault. In addition, Dudzinski made a complaint to the Human Rights Commission (which was eventually decided to be unfounded). His action in suing the university was unsuccessful. Most of the claim was struck-out before it reached a full hearing; and all claims were denied a right of appeal bar one which is still before the Supreme Court and which one judge has described as "likely to fail".
The unsuccessful court action resulted in Dudzinski being ordered to pay the costs of the university and its staff but he refused to do so. The university and the staff members (now creditors of Dudzinski) applied to the court to have him declared bankrupt. Dudzinski, representing himself, opposed the application on the basis that there was "sufficient cause" that a sequestration order should not be made.
After giving Dudzinski’s lengthy submissions a substantial amount of consideration, Justice Spender dismissed Dudzinski’s application. The judge acknowledged that once it had been proved that Dudzinski could not pay his debts, the court would ordinarily proceed to make a sequestration order. He said it was "for the debtor to show some cause overriding … the rights of the individual creditors who are unable to get their debts paid to them as they become due." Dudzinski had not been able to prove any such cause.
The court acknowledged "the plethora of litigation that lies behind this petition" and highlighted previous judicial comments that "[Dudzinski] has instituted in relation to this matter, a great deal of expensive, prolonged, collateral litigation in none of which has he been successful." The judge continued by deciding that Dudzinski was indeed bankrupt and made a sequestration order against Dudzinski’s estate as well as another order for costs against him
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3. Splitting of proceeds of sale unfair on guarantor
Commonwealth Bank of Australia v Duggan [2003] FCAFC 64
Mr Duggan was a director and shareholder of Raffindale Pty Ltd (and other related companies) which owned a waterfront property at Point Piper, NSW and leased an adjoining marina from the Maritime Services Board. The Commonwealth Bank of Australia (CBA) held a number of mortgages and charges over the property. The Australian Guarantee Corporation (AGC) held securities over the lease. All were guaranteed by Duggan. For reasons which are not explained in the case, but which we assume related to non-payment, the secured creditors had to sell the land and lease.
Land access to the marina was solely via the property. The property and lease were more valuable together than as separate units. In mid-1994, after some years of negotiations concerning the best way to realise the securities they each held in respect of the debts of Raffindale and its associated companies, AGC and CBA agreed to sell the property and the lease by public auction in "one-line" (that is, as one parcel) and to split the proceeds of the sale in the ratio of 60:40 (CBA:AGC), as long as CBA received no more than $1.3 million.
In December 1995 the waterfront property and the lease were sold together for $2,150,000. The net proceeds of the sale ($1,980,025.75) were distributed according to the sale agreement. CBA received $1,188,015, but at that time Raffindale’s indebtedness including interest totalled $1,505,397.
Two years later Duggan became bankrupt on his own petition and in December 1999 CBA lodged a proof of debt under the guarantees for $717,961 - the difference between what it had been owed by Raffindale and what it received after the sale of the properties, plus interest and costs. The trustee admitted it as a debt of Duggan’s estate. In October the following year Duggan sought an order that his “debt” to CBA be erased. In essence, his argument was that the portion of the sale relating to the land was greater than $1,505,397 and should have cleared his debt to the bank. If the bank chose to give some of the proceeds to AGC, that was it's decision, but it couldn't then chase Duggan for that money. At the hearing the judge found that the proof of debt had been wrongly admitted by the trustee and wiped out the debt. The bank appealed that decision.
The Court of Appeal first determined that although CBA had not breached any of its obligations to Raffindale or Duggan by entering into the revenue-splitting agreement with AGC, the agreement had no power to affect the interests of Duggan. This was because of a fundamental principle of contract law - a contract cannot bind or benefit anyone who has not entered into it. Duggan wasn't bound by an agreement that he wasn't a party to.
The court went on to determine whether the proceeds of sale had been properly distributed. After considering a number of valuations of the properties and the lease the judge found that the value of the waterfront property alone should have accounted for 82.5% of the proceeds of sale. This amounted to $1,633,521. If that amount had been credited against the debts of Raffindale then Duggan’s labilities would have been discharged. The fact that CBA had agreed to pay 40% of the proceeds to AGC (and not merely the 17.5% that the valuation indicated) did not allow CBA to try and pursue Duggan for the shortfall. CBA’s appeal was dismissed and its proof of debt wiped out
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4. Failure of a debt collection agency
Naumoski v Parbery [2002] NSWSC 1097
Mr Naumoski was the company director and majority shareholder of The Credit Connection Pty Ltd (CC). CC contracted with NCR Australia Pty Ltd (NCR) to collect NCR’s debts. For this CC took a commission of 12% of the value of the debt recovered plus any of the costs or expenses incurred in recovering the debts. Soon afterwards problems arose. NCR claimed that CC was keeping money for disbursements when they had not incurred those costs. For example, the accounts for November/December 1998 show that CC had collected $314,010.24 but had attempted to offset legal costs and commission of $314,051.00. As there was no adequate explanation from CC concerning these costs, NCR sued CC for the amounts owing. In a counter-claim CC alleged that NCR owed them $39 million damages for lost commissions based on the interesting notion that CC were entitled to 12% on all debts that had fallen due to NCR after 60 days.
While the claims were moving through the courts CC went into liquidation at the suit of NCR. Once in control of the company the liquidator (Parbery) decided it was best to come to an arrangement with NCR. He agreed that the cross-claim against NCR would be dropped in exchange for $5,000 inclusive of costs and CC would be released from the claim against it by NCR, which amounted to a provable debt in the winding up of at least $544,000. Naumoski was not happy about this. He saw the cross-claim as CC’s only substantial asset and felt that Parbery had sacrificed CC’s rights in respect of the cross-claim without proper consideration of its merits. Naumoski bought an action against Parbery requesting an order that the liquidator could not enter such an agreement or, alternatively, to have the agreement set aside.
The court found that while Naumoski as majority shareholder had standing to challenge the liquidator’s decision, the action was wholly unfounded. The judge pointed out that a court will not interfere where the liquidator's decision is one of commercial judgment "unless he is doing that which is so utterly unreasonable and absurd that no reasonable man would so act.". It was irrelevant that Naumoski had personally indemnified the liquidator against any liability in order to get him to continue with the cross-claim.
In fact, the deed of indemnity had gone as far as to give the liquidator specific authority to reach an agreement with NCR. It had granted the liquidator "the absolute right to…negotiate a commercial settlement on terms which the liquidator considers to be in the interests of all the creditors of CC".
In any case the judge thought that the cross-claim CC had made against NCR "was a difficult action; it was likely to fail; the costs of mounting it were considerable; and so a liquidator would be wary, despite holding an indemnity, to run the risk of maintaining [it]". Naumoski’s action was dismissed.
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5. Mortgage enforced where parents understood the implications of signing guarantees
Watt v State Bank of NSW Limited t/as State Bank of NSW [2003] ACTCA 7
In 1989 the Dyers borrowed $40,000 from their in-laws (the Watts) to purchase a news agency business (Dyspurrs Pty Ltd). Later Mr and Mrs Watt each took 15% of the shares of the business and become directors. The Watts also provided a mortgage over their home in McGregor, ACT to secure a loan for Dyspurrs although Mrs Watt was reluctant to do so and later claimed that she left she left all business arrangements to her husband. The Watts never received any wages or dividends for their role in Dyspurrs.
Dyer changed from Commonwealth Bank (CBA) to the State Bank of New South Wales (SBNSW) to obtain a lower finance rate. Dyspurrs was approved for a loan of $500,000 and the directors were required to transfer their mortgages and guarantees.
Dyer had the Watts sign all the documents granting a first mortgage over their McGregor property in Europe where they were on an extended holiday. The Watts later claimed that they did not read them or realise they were providing a personal guarantee or mortgage over their property, although the effect of the paperwork was merely to swap their existing obligations from CBA to SBNSW.
In 1992, the overdraft facility was extended to $100,000.00. This was initialed by the Watts in documentation that made reference to the security of personal property. In late 1992 the Canberra Times decided to deliver newspapers direct to subscribers. This had a disastrous affect on Dyspurrs’ business. In 1994 in another attempt to restructure the business, Dyspurrs increased their loan to $682,000.00. The Watts again signed documents that referred to the security over their property.
In November 1994, the Watts resigned as directors and asked their solicitor to write to the bank and dispute the validity of the guarantee and mortgage over their property. They claimed that Mrs Watt had signed even though her husband had failed to adequately and accurately explain a suretyship transaction; that the transaction was not for the economic benefit of either Mr or Mrs Watt; and that married women were under a special disadvantage in any transactions involving their husbands.
The Supreme Court dismissed their claim and the ACT Court of Appeal agreed. The court explained that the Watts were experienced in previous business dealings and mortgages, and knew from these that default of payment results in guarantors paying the debts. It was also pointed out that the shareholding in Dyspurrs (15% each) was of some economic benefit to the Watts. The argument concerning the special disadvantage for wives could only possibly apply if Mrs Watt didn't know what she was doing. "Whilst Mrs Watt may have been inclined to leave business dealings substantially in the hands of her husband, it was inherently implausible that a person who had been employed at a debt collection agency, albeit as a typist, would not have understood at least in a general sense, that creditors who are not paid may take steps to recover monies they are owed by enforcing guarantees."
Although the judges had much sympathy for the Watts, in the absence of some fraud, undue influence, unconscionable conduct or some other recognisable cause of action, the courts were unable to intervene to relieve people of liabilities they have knowingly incurred. The SBNSW was allowed to take possession of the Watt’s home in order to try and recover $1,263,020.89.
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6. Genuine disputes can still exist even when complaints not made at the time
Anderson Formrite Pty Ltd v Rapid Metal Developments (Australia) Pty Ltd [2002] WASC 232
Anderson Formrite Pty Ltd provided formwork for concrete structures in the building industry. Rapid Metal Developments (Australia) Pty Ltd agreed to provide all the equipment necessary for Formrite to construct the formwork for the Woodside Building in Perth.
In April 2002 Rapid Metal served a statutory demand on Formrite for $2,695,381.89 claiming that Formrite had not made payments of amounts due under the contract. Formrite applied to have the statutory demand set aside within the required 21 days on the grounds that a genuine dispoute existed between the companies. Formrite supported its application with two affidavits which set allegations concerning overcharging and substandard work by Rapid Metal and a list of losses resulting from that work. This was followed by an exchange of what the judge described as an "avalanche of affidavit material" that eventually totalled over 1000 pages. However, all of that paper was concentrated on the deceptively simple question of whether there was a genuine dispute between the parties.
Rapid Metal claimed that Formrite had made no complaint about its services prior to the serving of the statutory demand. Formrite had also never suggested that the debt claimed was not due and owing. Rapid Metal was in effect, arguing that Formrite’s claims should be seen as matters of "recent invention". As such Formrite’s claims should not be believed and any dispute therefore, could not be properly viewed as genuine.
The judge however took the view that evidence admitted in an attempt to get a statutory demand set aside should be viewed in the same way as evidence produced by a witness in court. That is, where the arguments presented were "not incredible" and where no cross-examination had taken place, then truth had to be assumed.
The court decided that where there is a dispute between the parties which requires a determination of which of the witnesses is to be believed, that dispute cannot be resolved on an application to set aside a statutory demand. Unless the evidence is inherently incredible, the conclusion must be that there is a dispute between the parties and that it is genuine. The statutory demand was set aside
