Australian Credit Law Bulletin - Vol 5, No 3, March 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:
- Creditors share the pain equally when things go wrong with travel agent trust account
Which is tough on the people who paid after the company was put into administration! - Bank winds up company that was suing it
The company pays the price for not opposing a statutory demand - Does ripped-off employer get payment ahead of other creditors?
Employee stole money, got caught, partially reimbursed her employer, then went bankrupt. - Directors say they didn't understand English when they signed the guarantees
Would your sales staff get the guarantee filled in in a way that was enforceable? - Who gets the $2.5m - the bank or the unsecured creditors?
Liquidator recovers under unfair preference and for insolvent trading claims - who gets paid from the $2.5m? - Was the $168,000 "debt" recoverable after the doctor came out of bankruptcy?
The key question - was it a debt when he went into bankruptcy?
1. Creditors share the pain equally when things go wrong with travel agent trust account
Re French Caledonia Travel [2003] NSWSC 1008
French Caledonia Travel Service Pty Ltd (FCT) was a travel agent that sold travel packages, including airfares, accommodation and transfers to travel agents. FCT also sold the packages on behalf of those travel agents as well as selling such packages directly. On 15 January 2002, Mr Sutherland was appointed administrator of FCT. A meeting of creditors in February 2002 resolved that FCT be wound up. Mr Sutherland became the liquidator.
By June 2002 the liquidator had received claims of around $1.43 million. FCT’s funds amounted to about $172,000 - a shortfall of $1.25 million. The liquidator had trouble analysing those claims because the books and records of FCT had not been adequately kept. There was no documentation to show how amounts had been transferred between FCT’s accounts; there were no individual transaction listings; and he did not have copies of all bank transactions relating to the deposits and withdrawals on FCT’s trust account.
One of the creditors, QT Travel Pty Ltd paid $2,082.80 into FCT's trust account after the administrator was appointed. FCT failed to provide the travel that QT had paid for and QT had to reimburse their client. QT demanded its money back. It argued that as the liquidator was able to identify the payment that QT had made to FCT after it had gone into administration, then it should get it all back. This argument follows what is known as “the rule in Clayton’s case”. The rule, which dates from 1816, creates a presumption of FIFO - first in, first out. As QT's money was more or less the last in, the rule in Clayton’s case said it would be last out. It would therefore still be there and be able to be paid back to QT.
Sutherland applied to the court for clarification as to how to distribute the available funds among the various creditors. Without all the necessary information on which to base the identification of which funds belonged to who, Sutherland wanted to distribute the funds on a pro rata basis between all the people who had a claim on FCT.
The judge conducted a very long and comprehensive consideration of the relevant case law. He concluded that it was not fair to say that a fund in which the assets of several beneficiaries have become mixed, should always be distributed pro rata amongst all the beneficiaries, with everyone getting 10 cents (or whatever) of every dollar owed. The judge also explained however, that many previous decisions had not used the rule in Clayton’s Case to allocate losses suffered by beneficiaries whose funds were mixed - even when there had been sufficient information to enable an allocation of withdrawals against deposits to be made.
Where travel agent trust accounts were being operated properly, any money drawn from the account to pay the expenses of any particular traveller was taken to be the money of that traveller, regardless of whether that traveller’s money had been paid in first, last, or somewhere in between. By contrast, if the operator of a trust account misappropriated money from it, the assumption had to be that the money was being wrongly taken from all the people whose money was in the account.
In effect, the court decided that after both QT’s and Sutherland’s costs and expenses had been paid, the remaining funds should be distributed pro rata amongst all the creditors who had a valid claim against FCT.
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2. Bank winds up company that was suing it
State Bank v Tela (No 2) [2002] NSWSC 20
State Bank of New South Wales held a mortgage over property of Tela Pty Ltd. According to Tela, State Bank said it would make further financial accommodation available to Tela and, relying on that assurance, Tela turned down an offer of $1.6M for the property. The property was later sold at auction for $615,000 which wasn't enough to cover Tela’s debt. Tela sued State Bank for misrepresentation.
State Bank served a statutory demand on Tela. Tela neither paid nor applied to have it set aside, so State Bank applied to the court to have Tela wound-up. Tela opposed the application on the ground that the winding up proceedings were an abuse of process. It claimed that State Bank was trying to stifle the other proceedings already underway .
However Tela faced a major hurdle in opposing the winding up application. Tela had not challenged the statutory demand on the grounds of the impending litigation at the time the demand had been served nor had it indicated that there was any off-setting claim. This meant Tela was prevented from using those grounds as a basis for their opposition to the winding up application.
The court said that it is now abundantly clear under s. 459S of the Corporations Act 2001 that unless the debtor opposed the statutory demand, it was perfectly legitimate for the creditor to proceed with a winding up application, even though a dispute or off-setting claim may in fact exist.
Cases where winding-up applications are dismissed on a basis other than solvency were “exceptional and extremely rare in reality”. To successfully oppose the application Tela had to establish a very convincing argument that, despite an indisputable debt, SBNSW’s motivation for making the application was to achieve some entirely different purpose other than the recovery of its money. The court found that Tela had not shown that this was one of those extremely rare cases. Nor had Tela made any serious attempt to put before the court any evidence of its solvency. Tela was therefore ordered to be wound up.
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3. Does ripped-off employer get payment ahead of other creditors?
Jones v Southall and Burke Pty Ltd [2003] FMCA 27
Ms MacNeil-Brown had been stealing large sums from her employer, “Ballarat Books”, (a shop run by Southall and Burke Pty Ltd) for about 8 years. The theft was discovered around the end of 1998. MacNeil-Brown was convicted in 2000 and ordered to pay Ballarat Books the sum of $71,011.12. In July 1999, before the conviction, Ballarat Books had secured a further $70,000 by way of a charge over MacNeil-Brown’s house at Alfredton. In August Ballarat Books received $67,500 following the sale of MacNeil-Brown’s property. On 17 November 1999 MacNeil-Brown was declared bankrupt on her own petition. Jones, the trustee of MacNeil-Brown’s estate, tried to have the $67,500 paid back on the grounds that it was a voidable preference under s.122 of the Bankruptcy Act 1966.
Jones argued that the charge and the payment had been made within 6 months of the bankruptcy and had not been made “in the ordinary course of business” and in good faith. The court refused Jones’ application. While it acknowledged that the payment had been made within the six month period, it found that Ballarat Books had acted in good faith and in the ordinary course of business.
The court decided that where an employee has stolen a substantial amount of money from their employer, arrangements made by the employer for the repayment of money stolen could be regarded as being undertaken in the ordinary course of business. While the act of stealing itself was clearly not conduct “in the ordinary course of business” it was in the ordinary course of business to arrange a charge over MacNeil-Brown’s property as a consequence of the theft.
The court also found that Ballarat Books were not “on notice” that MacNeil-Brown was in financial difficulty. That is, they had no evidence that MacNeil-Brown was financially compromised and even if they had been informed of the situation by MacNeil-Brown, they would have been justified in not believing it given her dishonest and fraudulent nature. This meant that Ballarat Books were taken to be acting in good faith at all times. Ballarat Books also had an immediate right of restitution against MacNeil-Brown when they discovered the theft and this right had occurred outside the six month period.
In any case, the court said that Ballarat Books had priority over the other creditors. MacNeil-Brown had breached her "fiduciary duty" (duty of trust) towards Ballarat Books. She had to compensate them for her "unjust enrichment". A constructive trust existed which meant that MacNeil-Brown was deemed to be holding the money she had stolen on Ballarat Books’ account.
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4. Directors say they didn't understand English when they signed the guarantees
Lu & Anor v Boral Australian Gypsum Ltd [2003] NSWSC 127
Xia Ping Lu and Vasily Belomesoff, were directors of Bel Ami Pty Ltd, a supplier and fixer of Gyprock products. In 1994 Bel Ami arranged for Boral Australian Gypsum Ltd to supply it with plasterboard on credit. In 1998 Bel Ami was placed in voluntary liquidation. At the time it owed Boral more than $32,000. Boral sued to recover the debt from Bel Ami and from Bel Ami’s directors as guarantors.
Lu told the local court that he had moved to Australia from China in 1985. He could not read or write English and his spoken English was poor. Lu explained he had gone to the Boral store in Minchinbury alone and the manager of the store (Connell) had suggested he open an account. He said that Connell filled in the forms and indicated where Lu should sign without offering any explanation about the guarantee. Lu said that he took the documents to his fellow directors and had them sign them. He did so himself, although he did not understand the nature of the guarantee.
Belomesoff’s evidence was much the same. 'He came to Australia from China in 1979, and he said that in 1994 he also could not read or write English and his spoken English was “very poor.” According to him, Mr Lu came to his home and asked him to sign “a blank form”, saying that it was for the purpose of opening an account with Boral. He also did not understand that he had signed a guarantee.'
Connell explained that Lu had picked up the forms and later returned with his fellow directors. Most of the information needed on the form had been filled in, and Connell filled in some missing details. Connell said that he had explained to the directors the legal effect of the guarantee. None of them asked any questions and Connell assumed that they understood what he had said. Connell observed that Lu was not confident in writing English but spoke the language reasonably well. Furthermore, Lu had earlier formed another company and Connell had dealt with him then concerning another credit application and guarantee.
Lu and Belomesoff did not seek legal advice before signing the guarantee, and Connell had not suggested that they should.
Judgment was obtained against both Lu and Belomesoff. "In particular, his Worship found that Mr Lu had an adequate grasp of English at the relevant time and he accepted Mr Connell’s account of the circumstances in which the credit application and guarantee were signed." On the facts, the judge "did not find either appellant to be under a special disability as a guarantor... He was satisfied that both of them understood the guarantee, notwithstanding the lack of legal advice. He found no unusual features attending the transaction and no failure on Mr Connell’s part to disclose any pertinent matter."
Lu and Belomesoff appealed. Using the Contracts Review Act 1980, they argued that Boral’s conduct had been unconscionable and had resulted in an unjust guarantee. The existence of the debt was not in dispute, nor was the fact that Lu and Belomesoff had signed the credit application and guarantee. The issue was the circumstances in which Lu and Belomesoff had signed the documents, particularly the guarantee.
On appeal, the judge was very brief and succinct. After reviewing the facts and the conclusions of the Local Court judge he said, "An appeal such as this is confined to a question of law... No such question arises in the present case. The appeal is dismissed."
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5. Who gets the $2.5m - the bank or the unsecured creditors?
Tolcher v National Australia Bank [2003] NSWSC 207
Lloyd Scott Enterprises Pty Ltd (LSE) entered into a first ranking debenture with National Australia Bank (NAB) to secure some finance to be provided by NAB. The debenture provided for a fixed and floating charge over all the assets of LSE.
LSE went into liquidation in 2001 and Tolcher was appointed liquidator. He found that he had possible claims against Key Equipment Finance Australia Pty Ltd in respect of an unfair preference and for insolvent trading. It was alleged that Key was answerable for insolvent trading because it was said to be a “shadow director” of LSE meaning that LSE’s directors were accustomed to act in accordance with Key’s instructions or wishes.
The two claims against Key became the subject of mediation. They were resolved by Key paying to the liquidator of the sum of $2.5M in return for Tolcher promising not to sue Key in respect of his claims. Tolcher then asked the court to decide whether the money recovered from Key was LSE’s property which was subject to the NAB charge. If not, was it property which was available for distribution to LSE's unsecured creditors in the administration of the winding-up?
Where property recovered by a liquidator is the subject of a specific charge it will, in many circumstances, not be available for distribution to the company's unsecured creditors. When however, non-specific property, which would have otherwise been subject to a floating charge (such as money of a company), comes into the possession of a liquidator as a result of action taken by the liquidator, the position is different.
The judge said the money recovered from Key did not become subject to the floating charge. The important point was that as the money had been recovered under Tolcher’s statutory rights of recovery, it could never become the property of LSE. It could not therefore, be subject to the floating charge. This meant that NAB missed out and Tolcher was able to use the money he had recovered to pay the unsecured debts provable in the winding-up of LSE.
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6. Was the $168,000 "debt" recoverable after the doctor came out of bankruptcy?
In the year to the end of June 1995 Dr Alekozoglou received payments of Medicare benefits of nearly half a million dollars. On 26 June 1995 a Professional Services Review Committee, set up under the Health Insurance Act, reported back that Dr Alekozoglou had engaged in “inappropriate practice”. The Determining Officer made a draft determination that Dr Alekozoglou should repay $264,187.85.
In 1997 Alekozoglou completed a statement of affairs showing that he owed $2,524,379 to unsecured creditors including $264,000 to the Health Insurance Commission (HIC). His debtor’s petition was accepted by the Official Receiver. He became bankrupt on 23 June 1997.
Six weeks later, on 5 September, the Determining Officer made the final determination that Alekozoglou repay $168,054.10 for his Medicare benefits. This debt became recoverable just over a month later, on 9 October 1997. HIC wrote to Alekozoglou requesting he repay the $168,054.10. Following an invitation from the trustee in bankruptcy, the HIC sent a proof of debt dated 27 October for $168,054.10 stating that debt was incurred on 9 October 1997 - the date the debt became recoverable. The proof of debt was accepted as part of his bankruptcy.
The trustee worked out a first dividend to creditors of 1.9390 cents in the dollar and a final dividend was paid in April 2001. In June 2000 Alekozoglou was discharged from bankruptcy. Under section 153(1) of the Bankruptcy Act, a bankrupt, when discharged from bankruptcy, is released from all debts provable in the bankruptcy.
The administration of his estate was completed in early January 2002. Soon afterwards HIC claimed that the money owed to them was not a debt provable in the bankruptcy because it had been incurred after the date of bankruptcy. HIC requested that the trustee revoke his decision to admit their proof of debt but the trustee refused to do so. HIC then asked the court to cancel their proof of debt.
The key issue was whether Alexozoglou owed the money on the day he went bankrupt, 23 June 1997. The judge felt he didn't. On that date the Determining Officer was still considering the amount of the final determination. The obligation for the debt only arose on the final determination and therefore, only became operative when that debt fell due on 9 October. The court erased HIC's proof of debt. This of course meant that Alekozoglou was still liable to pay HIC the $168,054.10.
