Australian Credit Law Bulletin - Vol 5, No 2, February 2004
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:
- A lesson in the importance of serving documents correctly
At least try to remember who you gave the papers to, and getting the dates right helps as well! - Real life in Northwood: sewage, defamation and bankruptcy
A salutary lesson in the anguish and expense produced by feuding neighbours - Bank puts company into receivership. Can a director get the company to sue the bank?
The director concerned wanted to set aside his guarantee - Company’s bankruptcy does not discharge director’s personal guarantee
Even a Deed of Arrangement with creditors did not prevent a creditor pursuing payment through enforcement of a personal guarantee - Debtor company argues that extended credit arrangement should prevent winding up
Allowing extra time to pay must be supported by a debtor’s promise to give something extra in return - Bankruptcy trustees recover a house “sold” to avoid its distribution to a bankrupt’s creditors
A trustee in bankruptcy’s powers to cancel a dodgy sale extend up to 5 years before the bankruptcy
1. A lesson in the importance of serving documents correctly
Rafaraci v Pearce & Heers [2003] FCA 1307
In 2000 Rafaraci entered into a partnership running the Italian restaurant “Vee Jaes”. His partner left the business in 2001. Early in 2002 Rafaraci was asked by Independent Recovery Services (IRS), a debt collection agency, to pay $6,000 for advertising services supplied to Vee Jaes by Shop-a Docket Pty Ltd. Rafaraci denied that it was his debt but made an offer of $4,000 to settle the matter.
Shop-A-Docket then filed a Statement of Claim in Queensland on 13 May 2002. A default judgment was issued on 10 July 2002 ordering Rafaraci and his ex-partner to pay $7,003.90 plus interest and costs.
In March 2003 Rafaraci registered Vee Jaes business in his sole name. Three months later a bankruptcy notice was issued which Davidson also claimed he had delivered to Rafaraci’s home. The “debt” remained unpaid at the time the notice expired and this amounted to an act of bankruptcy. Shop-a-Docket issued a creditor’s petition. During the process, the date on the creditor's petition was amended by an officer of the court.
After the amended creditor’s petition ran out Rafaraci was advised of the bankruptcy by the court, Pearce & Heers were appointed trustees in bankruptcy and Rafaraci's bank accounts were frozen. Rafaraci applied, under s.153B of the Bankruptcy Act, to the court to have the sequestration order against him removed. The creditor, Shop-a-Docket, opposed the application.
Rafaraci denied that he had been served any of the documents. The process server, Mr Davidson, was unable to identify in Court Mr and Mrs Rafaraci as the persons he saw at their house.
The judge said, "[t]here were substantial inconsistencies in the evidence of Mr Davidson between his affidavits, and the statements which he made both in chief and in cross-examination at the hearing, as to what he said and did on service of the three documents in question. His record keeping procedure was unsatisfactory. In particular, in relation to service of the Statement of Claim in the proceedings in the Queensland Magistrates Court, Mr Davidson said in his affidavit that he handed the document personally to Rafaraci. However, his oral testimony and his handwritten notes do not state that the document was handed to Rafaraci. Mr Davidson said that there had been a statement by a person at the address for service, to the effect that Rafaraci lived at the premises, but that he was in the shower, and that another person was seen coming to the door. That person was not served. Mr Davidson's two versions of the service of the Statement of Claim are significantly inconsistent and cast significant doubt on the reliability of his recollection in relation to the service to such an extent that I am not satisfied that service of the Statement of Claim was effected as required.
The judge was also unhappy with an affidavit sworn by Ms Simmonds, the credit controller for Shop-a-Docket, verifying the Creditor's Petition. He seems to be saying that she had verified the amended document on 6 August which perhaps hadn't been amended at that date.
He said that “it is critical that the requirement of service of … essential processes should be established with sufficient certainty … to warrant the making of the order in an appropriate case”. That is, if the originating proceedings were not properly served, the default judgment which is later given must be treated as invalid.
There were some questions raised as to whether Rafaraci had followed the correct requirements in applying to the court to have his bankruptcy annulled. The judge said however, he would waive compliance with the court rules because the failure to serve the documents correctly was so fundamental that the sequestration order should never have been made. Rafaraci’s bankruptcy was invalidated and Shop-a-Docket had to pay all the court costs.
Back to top
Information on our current seminars
2. Real life in Northwood: sewage, defamation and bankruptcy
Green v Official Trustee in Bankruptcy, in the matter of Schneller [2003] FCA 164
Richard Green lived next to the Schnellers in Northwood. In 1993 the Schnellers re-built their house. During the work a sewer pipe began to leak and discharged waste over the Greens' property. The pipe was fixed but the effluent was not cleaned up. The resulting dispute quickly escalated out of all proportion
In 1995 Jennifer Schneller appeared on the Channel 7 programme “Real Life” where she made some less than complimentary remarks about Green. She accused him of throwing sewage at both her and her daughter. Green sued Schneller for defamation. In her defence Schneller argued that since 1988 Green had continually trespassed on her property and had called her “a snotty-nosed bitch”.
When the case was finally heard in 2000 the judge rejected Schneller’s explanations describing her as “probably the most truculent witness I have ever seen, barring a few unfortunate victims of substance abuse”. Green was awarded $20,000 damages and Schneller was ordered to pay Green’s costs.
Schneller then embarked on a series of unsuccessful court actions to try and get the award of costs against her reduced. She also transferred her interest in the family home in Northwood to her husband for $1 and some effectively worthless shares in a family company. Schneller then claimed that that she was unable to pay Green’s damages. Green was forced to apply to the court to have the transfer of the property declared void as an attempt to defraud creditors under s. 37A, of the Conveyancing Act , 1919 (NSW).
The story was not over however, for in August 2001 Schneller was declared bankrupt by her own debtor’s petition and Green had to obtain further permission from the courts to continue his litigation. The transfer of the Northwood property was eventually set aside and finally, in late 2002, Green was paid $218,323 from Schneller’s assets by the Official Receiver. This represented the damages and the costs he was able to recover.
Green was not yet finished. He applied for interest to be paid. He argued that it was Schneller’s attempts to put her assets beyond the reach of her creditors which had caused a delay in payment. He said he should therefore get interest for the period from the time he should have been paid until the time the time he actually was paid. He also tried to get a declaration that those payments should be made in preference to the payments to Schneller’s other creditors.
The judge decided that Green had not established a suitable reason for his claim in Schneller’s estate to have priority over other creditors. Even though he had begun the action that resulted in her share in the house being returned to her estate, that was not enough to give him priority. The judge said that the purpose of the Bankruptcy Act was “that any property that is sought to be recovered is held ultimately for the Trustee in Bankruptcy for the benefit of creditors generally”.
Green had also been ordered to pay the costs of bringing the court actions after Schneller’s bankruptcy. The saga ended, as most disputes between neighbours do, with everyone unhappy and out of pocket.
Back to top
Information on our current seminars
3. Bank puts company into receivership. Can a director get the company to sue the bank?
Deangrove Pty Ltd (Rec & Mgrs Aptd) v Commonwealth Bank of Australia [2001] FCA 173
Deangrove Pty Ltd was a developer involved in the construction of the "Cairns Beach Resort" at Holloways Beach, Queensland. The project received $7.55 million of finance from the Commonwealth Bank (CBA). Mr Jeans, the sole shareholder and director of Deangrove signed a guarantee for Deangrove's debt.
Ultimately, Deangrove was placed in receivership in 2000 by the bank. Jeans then applied to the court in the name of the company and in his own name to have the guarantee set aside. He argued that he had been persuaded to purchase the property in Cairns and execute the charge over it, and give the guarantee after misrepresentations made by CBA. Jeans said this was a breach of s 52 of the Trade Practices Act 1974.
CBA argued that Jeans could not bring the action. The bank contended that it was only the receivers who had power to bring or defend proceedings in the name of the company.
The judge pointed out that it was not uncommon in this sort of situation that a director wished to bring legal proceedings against the bank. Of course, it was unlikely that receivers appointed by CBA would take action against CBA, and in this case they wouldn't. The question then was whether the director could do so.
After an exhaustive study of relevant cases the judge decided that “where a company in receivership has a claim against the debenture holder and the receiver declines to pursue the claim, the directors are entitled to initiate and maintain proceedings in the name of the company, provided the directors offer the company a satisfactory indemnity against costs”. Because Jeans had provided the necessary indemnity, he was allowed to proceed with his efforts to have the guarantee set aside.
Post-script: after a number of delays (which included Jeans at one point claiming that he had not in fact, even signed the guarantee) the case over possible misrepresentation was finally heard in mid-2003. Jeans lost and judgement was entered against him and Deangrove for the amounts due under the equitable mortgage and the guarantee which totalled $4,749,813.30 plus interest.
Back to top
Information on our current seminars
4. Company’s bankruptcy does not discharge director’s personal guarantee
Helou v Mulligan Pty Limited [2003] NSWCA 92
Helou was a director and shareholder of Belmore Meats Prestons Pty Ltd which purchased meat from Mulligan Pty Ltd. In 1999, Helou gave Mulligans a written personal guarantee for "payment of all and any monies due and payable", so that Belmore could purchase on credit.
In September 2001 Belmore entered into a deed of company arrangement. Belmore still owed Mulligan $107,304.98 which had fallen due on 22 June. In November, Mulligans sued Helou for payment under the guarantee.
Helou argued that the debt had ceased to be “due and payable” because Mulligans was bound by the Deed of Arrangement. That meant that Mulligans was prevented from starting any action against the company without leave of the court. The District Court, however, held that the deed of arrangement did not override the rights of a creditor against any guarantor. Mulligans was entitled to proceed against Helou on the basis of his personal guarantee.
Helou appealed but the Court of Appeal upheld the original decision. “It would frustrate the purpose of a guarantee if it ceased to operate according to its terms merely because the debtor had become bankrupt, gone into liquidation, or had entered into a scheme of arrangement”. This was consistent with a long line of cases. Mulligans was able to enforce the guarantee against Helou.
Back to top
Information on our current seminars
5. Debtor company argues that extended credit arrangement should prevent winding up
Electic v Todaytech [2003] NSWSC 211
Electic Australia Pty Ltd and Todaytech Distribution Pty Ltd had dealt with each other buying and selling electronic equipment for a number of years. Following a particular trade Electic owed Todaytech a substantial sum which it was unable to pay.
In October 2002 Mr Yang of Electic and Mr Chong of Todaytech met to discuss the outstanding debt. Chong demanded that the debts were paid immediately but Yang told him that he could only pay once his customers paid him. He said that his Korean customers were having difficulties with lines of credit. Yang could not be definite about the time of payment and explained that it could take up to a year. He then gave Chong a cheque for $100,000. Yang said this was to show his sincerity in meeting the debts but he still asked or more time to pay, promising to do his best to pay up as soon as possible.
In December 2002 Todaytech issued Electic with a statutory demand for the outstanding amount of $753,472.17. Electic applied to the court to have the demand set aside.
The question for the court was whether the amount was actually due and owing. Using s.459H of the Corporations Act, Electic argued that the demand should be set aside on the grounds that there was a genuine dispute. This arose from what Electic said was an agreed contractual term, arising from the conversation between Yang and Chong, which allowed Electic a further year (from October 2002) to repay the debt.
One of things necessary for an agreed contract is that there must be some form of “consideration”. Consideration is best described as “the price of the promise” – a contract cannot be one-sided and each side must be giving something and getting something in return.
The judge decided that the $100,000 Yang had given Chong was not consideration. It was merely "past consideration" for payment of a past debt. In other words, it was not given in return for the promise to extend the time to pay for a year but was only paying part of the debt due. Yang would have had to have offered something extra as consideration. (For example, Yang could have promised to pay interest on the amount owed for the year in return for Chong agreeing to allow the extra time to pay.)
Because there was no consideration, the judge concluded that there was no contract and so there could be no genuine dispute. Electic's application was dismissed .
Back to top
Information on our current seminars
6. Bankruptcy trustees recover a house “sold” to avoid its distribution to a bankrupt’s creditors
As a result of apparently unsuccessful litigation in various courts Robyn Green had been ordered to pay costs to a Dr Chenowerth. Her house in The Grange, Brisbane was her only asset of substance.
In July 2000 Green transferred the house to Nowbrook Pty Ltd. This was a company she effectively controlled, and which was a trustee for the Robin Patricia Green Estate Planning Discretionary Trust. She later claimed that the transfer was part of her estate planning. The house had been “sold” for its full market value of $150,000 but soon afterwards Green arranged a deed of forgiveness of debt between herself and Nowbrook. This meant that the trust no longer had to pay the debt. Green said that her intention was to distribute her estate while she was still alive.
By August 2001 Green was declared bankrupt. In January 2002 the trustees in bankruptcy applied to have the house transfer set aside under ss.120 and/or s121 of the Bankruptcy Act 1966. Section 120 says that a transfer is void if completed at less than market value up to 5 years before bankruptcy. Section 121 means that transfers are void if they were made in order to defeat the bankrupt’s creditors, especially if the debtor was about to be insolvent.
Green argued that the sale of the property to Nowbrook had been at market value. She also contended that the purpose of the sale had not been to stop the property being available to be divided between her creditors and that she was in any case, still solvent at the time.
In January 2003 the Federal Court decided that it did not believe her. Green appealed but the court’s decision was confirmed and the “sale” of her house was annulled.
