Australian Credit Law Bulletin - Vol 5, No 4, April 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:
- Are progress payments under a contract a “running account”?
If so, the creditor could keep the money. This is an important case for those in the construction industry. - Sad tale of a hoodwinked husband
An extraordinary tale of a wife’s financial mismanagement and deception - An important case for anyone repossessing goods
The outcome when Esanda's repo agents went too far, and the rules laid down by the court - Judgement not necessary in all cases for bankruptcy petition
… but in this case a claim based on a guarantee failed - As long as you have judgment you can collect – even 11 years later!
A chance meeting between debtor and creditor in an airport lounge was bad news for the debtor - Yamaha superbike seized to pay rent arrears
Court refuses to believe that the bike was actually owned by the 14-year-old son
1. Are progress payments under a contract a “running account”?
Wily v Eastern Elevators Pty Limited [2003] NSWSC 377
Goltep Constructions (NSW) Pty Limited had a contract with Oceanview Apartments Pty Limited to build the Oceanview Apartments complex in Bronte. Part of the construction required the installation of a passenger lift which was sub-contracted to Eastern Elevators Pty Limited for $170,000. The sub-contract included terms for a deposit and subsequent monthly progress payments. Eastern Elevators carried out work on the lifts from January to 9 September 1997. Throughout this period Eastern Elevators invoiced Goltep for the work done 8 times. Payment was received for each invoice although not always on time.
Progress payments number 4 (for $20,000) and 5 (for $19,000) were physically received from Oceanview Apartments even though they were Goltep cheques. Progress payments 6, 7 and 8 were however, paid direct by Oceanview Apartments. Goltep went into administration and was placed in liquidation on 8 August 1997 because it was unable to pay its debts from its own funds as they became due (i.e. it was insolvent). The amount owing to unsecured creditors was $2.9 million and there was only about $5,000 of assets by way of plant and equipment left in the company.
Wily, the liquidator of Goltep, sought to have progress payments 4 and 5 voided under the unfair preferences provisions in the Corporations Act 2001 (s.588FF). Those provisions allow a liquidator to claw back payments made when the debtor company was insolvent (s.588FE). (In an insolvency it is considered unfair for one creditor to be paid just before the debtor company fails, when other creditors get nothing: all are supposed to suffer equally.) An exception is where a series of payments form a “continuing business relationship” between the companies (s.588FA(3)). A continuing business relationship is where the level of debt a company owes to a creditor rises and falls from time to time as a result of a series of transactions. The main example of this is a "running account", where any money the debtor pays is balanced by the creditor supplying more goods, so that the debt remains the same.
Another exception which would allow the creditor to keep the money is ignorance: where the creditor didn't know and had no reasonable grounds for suspecting that the debtor company was insolvent or would become insolvent (s.588FG(2)).
The Local Court said that Eastern Elevators had been operating a “running account” with Goltep. This fell under the definition of a continuing business relationship which meant that Eastern Elevators could keep the payments. Wily appealed.
The Supreme Court decided that the Local Court was incorrect and that there was no running account. This was because each payment had been made against a specific invoice for work already done and there was a fixed overall amount eventually due. The contract also did not operate with a fluctuating balance of payments made from time to time against services provided and to be provided. This conclusion was in harmony with the Victoria Supreme Court which had earlier decided that progress payments under a building contract were not consistent with the concept of a running account (see Re Thompson Land Ltd; Walsh (as Liquidator of Thompson Land Ltd) v Salzer Constructions Pty Ltd [2000] VSCA 228)
Wily was however, still unsuccessful. This was because the court said Eastern Elevators had had no reason to believe that Goltep was insolvent when it made the payments. Eastern Elevators had never received any information that suggested financial difficulties on the part of Goltep. In fact, Goltep had invited Eastern Elevators to tender for another project in mid-1997. Late payment of invoices was common practice in the building industry. This meant that Eastern Elevators had no reason to even suspect that Goltep was in trouble. Wily’s appeal was dismissed and Eastern Elevators were allowed to keep the payments.
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2. Sad tale of a hoodwinked husband
Brandling v Weir [2003] NSWSC 723
Pauline and Mervyn Weir were married in 1969. They defaulted on the mortgage of their second home in Matraville and the property was sold by the mortgagee in 1986. They then moved in with Mervyn’s father. Pauline obtained finance using Weir senior’s house as security but that property also became the subject of a mortgagee sale. They next lived for a time in a house in Maroubra that was part-owned by Mervyn and a friend of his. The finance had been arranged by Pauline and she paid all the mortgage instalments. The family finally found a desirable property at Eastlakes. Weir sold his S! share in the Maroubra property to help finance the purchase of the Eastlakes house.
By that time however, Pauline had already completed the purchase. She did so solely in her name but used her maiden name of ‘Hinks’ to help conceal the family’s bad credit record. As with all their previous purchases Pauline was responsible for financial matters. She was an accountant and Mervyn, as usual, left all the financial decisions and major expenses to her. For example, on the Eastlakes property Mervyn paid about $200 per week for all the household expenses while Pauline paid approximately $1,200 per month from her income for the mortgage payments.
In March 2000 Pauline was made bankrupt. Mervyn found out that Pauline had a gambling problem and was being investigated by the police. Late in 2001, the Weirs separated. Pauline later pleaded guilty to six charges including fraudulent misrepresentation and the passing of a valueless cheque. The losses involved totalled nearly $1 million. She was sentenced to seven years imprisonment with a non-parole period of four years (see R v Weir [2003] NSWCCA 204).
Eventually, in August 2002, the house at Eastlakes was also sold by the mortgagee. After the mortgage was paid, the sale left a surplus of $366,000. Three people put in claims on this money. The three were Paul Brandling, Trevor Nudd and the hapless Mervyn. They came to an agreement that Brandling would be paid first. That left the judge to sort out the priority of the other two claims.
In 1996 and 1997 Nudd had loaned Pauline a total of almost $400,000. After becoming concerned that the loan was not being repaid, Nudd had Pauline execute a caveat over the Eastlakes property as security in the amount of $366,000. Following Pauline’s bankruptcy Nudd was successful in getting a declaration that the caveat showed that he held an equitable charge over the property (see Trevor David Nudd v The Official Trustee in Bankruptcy [2002] NSWSC 399).
Mervyn argued that he had thought that the Eastlakes house was to be a joint matrimonial home. If he and Pauline had intended this when the property was purchased in her name, Pauline would have been holding the property on trust for the two of them in equal shares. The judge disagreed. He pointed out that “Mrs Weir was engaged, by and large, in money making (or, as it so often turned out, money losing) operations … [but] any intention of assembling a family asset base to be enjoyed by both husband and wife played little if any part in her thinking”.
Mervyn also claimed that as he had provided part of the purchase price for the property, it meant that Pauline held the property in such a way that an undivided interest in proportion to his contribution belonged to him in equity. However, the judge found that Mervyn had not managed to establish that he had, at any time, any interest in the Eastlakes property. That meant that Mervyn could not “be regarded as having an interest in or claim upon the balance of proceeds of [the] sale”.
The proceeds from the sale were ordered to be paid out first to satisfy Brandling’s claim. Secondly, anything remaining (up to $366,000 plus interest) was to be paid to Nudd; and if anything remained after that it was to go to the Official Trustee. Mervyn was left, as before, with nothing.
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3. An important case for anyone repossessing goods
In July 1998 the McPhees bought a car. They paid $15,092.02 and they borrowed this from Esanda Finance. The loan was to be repaid through forty-eight monthly payments of $373.20 and it was secured by a chattel mortgage over the vehicle. The McPhees occasionally missed monthly payments due, at least in part, to problems Mr McPhee had with his job. He tried to replace the Esanda loan with a loan from another financier and also tried to get Esanda to agree to vary the repayment terms. Neither of these efforts was successful and by April 2000 the arrears totalled over $1,800. Esanda sent a formal notice to the McPhees demanding that they cure the default under the mortgage. A notice that included a demand to deliver up the vehicle was also issued although it said that Esanda could not lawfully repossess the vehicle without a court order authorising it to do so.
By mid-June the arrears had climbed to almost $2,180 and Esanda instructed its agents to repossess the vehicle.
Esanda had in fact, told the agents that they would not be paid anything unless they managed to repossess the vehicle or had the arrears paid off in full. Esanda’s agents proceeded to make numerous calls on the McPhees at their home and made it known that the McPhee’s movements were being monitored or kept under surveillance. In addition, an agent went to Mrs McPhee’s workplace. In the presence of her colleagues and members of the public the agent claimed that the vehicle had been sold, hidden and/or stolen, and demanded to know its whereabouts which resulted in much embarrassment and humiliation.
On 20 June six of the agents entered the McPhee’s property without the McPhee’s consent. One of the agents actually jumped a gate, entered the garage in which the vehicle was parked, and released the lock on the inside of the garage door. They did so knowing that McPhee would probably try to prevent seizure of his property and that if he did so it would be necessary to restrain him to allow recovery of the vehicle. That was in fact, what happened and McPhee was pinned to the ground while a tow truck was attached to his vehicle and the vehicle towed away.
The Australian Competition & Consumer Commission (ACCC) took action against Esanda accusing it of unconscionable conduct (under s. 51AB of the Trade Practices Act) and undue harassment, coercion, or physical force in connection with the payment for services (under s. 60). Esanda agreed that it was in violation of the Trade Practices Act and came to an accord with the ACCC over remedial action which the court was asked to endorse.
The remedies endorsed included a 3 year period restricting the activities of its agents and mandatory staff training in the relevant principles. Esanda was also ordered to reduce the total amount owing by $1,892.73 as well as pay compensation to Mr and Mrs McPhee of $15,000.00 and $5,000.00 respectively. Esanda also had to pay ACCC’s court costs.
Esanda was ordered "to instruct each of the agents that it engages for the purpose of seeking to repossess mortgaged, leased or hired goods from consumers in the terms set out in the Schedule". This schedule is set out below. Anyone involved in repossession or using repossession agents should take note!
SCHEDULE
Agents must not contact customers by attending or telephoning them at their place of employment unless:
(a) they have been requested to do so by the Customer;
(b) there is no effective alternative means to contact the Customer; or
(c) the Customer is a proprietor or a director of a business to which the relevant contract relates.
Contact should only be made by Agents with a member of a Customer's family if the purpose of that contact is to seek to contact or to locate the Customer.
Agents must not contact Customers by attending at their home or place of employment on more than 5 occasions in total unless:
(a) they are specifically requested to do so by the Customer for the purposes of a Repayment Arrangement or for the voluntary surrender of the Asset;
(b) a repayment Arrangement has been made by the Customer, but has subsequently been breached (following which up to 5 further contracts may be made); or
(c) they are specifically authorised to do so by the Agent's Controller.
Agents must not repeatedly observe a Customer or a third party in or around their home or place of employment.
Agents may repossess an Asset that is not subject to a mortgage that is regulated by the Consumer Credit Code from residential premises only if:
(a) the occupier/s of those premises consent; or
(b) immediately prior to the repossession, the Asset is situated in an open area (including driveways) or in an open garage.
Agents and their Relevant Staff must not make contact with a Customer or an Asset, and must always withdraw from any situation, if there is any indication that a physical confrontation with the Customer or another person may result.
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4. Judgement not necessary in all cases for bankruptcy petition
Close Finance (CL) Ltd v Kountouris [2003] FMCA 188
George Kountouris guaranteed the rental agreement of a company overseas. The company was put into compulsory liquidation. The company which owned the rented equipment sold its assets to Close Finance (CL) Ltd which then tried to enforce the guarantee against Kountouris. CL got a default judgment against him, issued a bankruptcy notice and when he failed to comply, issued a creditor’s petition in order to sequester Kountouris’ estate.
Kountouris applied to have the default judgment set aside. It became clear that CL had claimed that there was a direct contractual relationship between it and Kountouris. That was incorrect as the guarantee contract had been between Kountouris and the original equipment owner and not CL. So the court set the judgment aside.
At the later hearing on the creditor’s petition CL could no longer swear to the truth of the matters in the petition because the default judgment on which it was based had been set aside. This led CL to ask the court to amend the petition and then adjourn the hearing of it until after a new hearing on an amended statement of claim. The point was that if the amended statement of claim established that Kountouris was indeed CL’s debtor then there would be no obstacle to the creditor’s petition going forward. The advantage for both CL and creditors generally would be that the relation-back date would be Kountouris’ original act of bankruptcy and not some subsequent act of bankruptcy that would have to be based on a later judgment.
The court said that under s.43 of the Bankruptcy Act a petitioning creditor only has to be a creditor, not a judgment creditor. Such a creditor only needs to claim the existence of a debt and is not obliged to establish the existence of the debt at the time it issues the creditor’s petition. That has to be done at the hearing. So a claim to be a creditor was sufficient provided that the requirements of s.44 of the Bankruptcy Act were met. First, the debt had to amount to $2,000 or more. Secondly, the debt had to be a liquidated sum (that is, a fixed amount or an amount that can be calculated accurately) which was due and payable either immediately or at a certain future time. The real question that had to be answered then was whether or not the debt claimed by CL was a liquidated sum.
The debt was being claimed under a contract of guarantee. The court explained that the legal nature of the obligation of a guarantor is not an obligation that the guarantor must pay a sum of money to the creditor, but an obligation to see to it that another person (the debtor) does something. The only remedy available to a creditor for a failure to perform that obligation is damages for breach of contract. CL argued that such damages would still qualify as a “liability”, which is included in the definition of debt in the Bankruptcy Act (s.5). The court was clear however, that s.44(1)(b) of the Bankruptcy Actexcludes general types of liability such as CL’s claim.
This meant that the debt on which CL’s petition was founded was not a liquidated sum as the amount of damages that might be awarded was still unknown. As such the debt was not capable of founding a petition in bankruptcy. That was the case even where the petition itself was not to be heard until after the debt became liquidated.
CL’s application to amend the petition was refused. The court went on to state that the existence of a bankruptcy petition against a person was a matter which was on the public record. It could affect the ability of a person to obtain credit or otherwise carry out his normal business activities. It was therefore, not appropriate to allow the creditor’s petition to remain outstanding either. It was also dismissed and CL’s only recourse was to begin the whole process again with an amended statement of claim.
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5. As long as you have judgment you can collect – even 11 years later!
Dennehy v Reasonable Endeavours Pty Ltd in the matter of Dennehy (A Bankrupt) [2003] FCAFC 158
On 28 November 1991 Reasonable Endeavours Pty Ltd (RE) was awarded a judgment against Graeme Dennehy for $339,719.26. RE tried to get payment but lost contact with Dennehy. In February 1995 RE ceased to trade and it was dissolved on 28 August 1995.
In June 1996 a chance meeting occurred in a Hong Kong airport lounge between Dennehy and Mr. Briggs, a director and former CEO of RE. RE promptly applied to be reinstated and served a bankruptcy notice on Dennehy on 25 March 1997.
Later that same year Dennehy and RE signed a settlement agreement over a payment schedule for the judgment debt and the by now, substantial accrued interest. The first instalment of $100,000 was paid but no other payments were forthcoming.
On 1 October 2001, RE obtained leave from the court to issue a writ of execution on the judgment (which asks a sheriff to seize goods to the value of the debt) . Such leave was required because more than six years had passed since the 1991 judgment took effect. No execution was levied, but a new bankruptcy notice was served on Dennehy. By this time the interest alone on the judgment (after credit was given for the payment of $100,000) totalled $387,355.37.
Dennehy did not comply with the bankruptcy notice and on 12 April 2002 RE filed a creditor’s petition requesting sequestration over Dennehy’s estate, which was granted on 29 November 2002.
Dennehy appealed against the sequestration order. He argued that the amount of interest had been overstated because it was, in part, barred by a limitations statute which, he said "prohibit[ed] execution for the stale interest and, therefore, a bankruptcy notice cannot [be issued] for any debt … in respect of which execution is not available."
The court agreed that the true position in bankruptcy was that a creditor who has a statute-barred debt was not a creditor who was entitled to lodge a proof of debt; nor can he petition for a sequestration order. Dennehy was in fact, relying on provisions in the Limitations of Actions Act 1958 (Vic). Section 5(4) prohibits an action on any judgment 15 years after the date on which it became enforceable and
s. 5(7) prohibits an action to recover arrears of interest due on money payable under a judgment six years after they become due. The question was whether these provisions prevented execution on a judgment for the principal debt or interest. That is, did the sections only apply to the commencement of new proceedings on a judgment or were they concerned with enforcement as well?
The court conducted a survey of the legislative history relating to the limitation statutes in both the UK and Australia. The court decided that s. 5(4) only affected new actions upon a judgment and did not deal with steps taken in the enforcement of a judgment. As the language of s. 5(7) was indistinguishable from s 5(4) the same result had to follow. The sequestration order was upheld and RE was able to collect the accrued interest on the judgment.
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6. Yamaha superbike seized to pay rent arrears
Spurway v Banerji No. SCCIV-02-449 [2002] SASC 278
Spurway rented his home in Norwood from Banerji. He fell behind with his rent. Banerji successfully applied to the Residential Tenancies Tribunal and Spurway was ordered to pay the arrears of $5800 within 28 days. Banerji had the order registered in the Magistrates Court for the purposes of enforcement.
An examination summons was issued against Spurway. This enables a creditor to assess a debtor’s means and his ability to pay a debt. Later a warrant of sale was issued and acting under that warrant, a sheriff seized a 1200cc Yamaha motor cycle from Spurway.
Before the motor cycle could be sold to satisfy the debt, a notice was served on the sheriff under section 16(2) of the Enforcement of Judgements Act 1991 (SA). The notice outlined an unregistered claim put forward on behalf of Spurway’s 14-year old son, Dale, which indicated that it was in fact, Dale who was the real owner of the Yamaha.
It was explained in court that in 1988 Spurway had sold a Harley Davidson and from the proceeds had purchased the Yamaha. Spurway argued that both the sale of the Harley Davidson and the purchase of the Yamaha had been conducted on behalf of his son. He also said that he was merely holding Yamaha on trust for Dale. Spurway further argued that even though he had signed the papers, he had done so as the agent of his son. He also said that, as the Yamaha cycle was registered in Dale’s name that was clear evidence that it was not his.
The court however, was not prepared to accept Spurway’s arguments. In particular, the fact that the motor cycle had remained in Spurway’s possession and had been ridden for some 3 to 4000kms counted against him. The judge said, "There was an interesting mistake in cross-examination when the defendant, Desmond Spurway, put a question in relation to 'my' bike but then quickly corrected himself to say 'my son's' bike. I think that showed the truth in his mind, it was his bike."
Possession was said to be a “common coincidence” with ownership and there were no factors showing otherwise. The court also said that registration in Dale’s name was not necessarily evidence of his ownership and cannot be taken as conclusive proof as to who the real owner is. The court suggested that the registration in Dale’s name had been done to protect the Yamaha from Spurway’s creditors.
Spurway appealed but the Supreme Court upheld the original finding. The Yamaha was taken to be sold to pay the outstanding debt.
