Australian Credit Law Bulletin - Vol 2, No 1, January 2001
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:
- Lodging a caveat? Beware!
- Solicitors lien fails
- Picking winners
- Classic example of why lenders register securities
- Liquidator voting in his own interest - case 1
- Liquidator voting in his own interest - case 2
- Don't try this at home
- Best price in a mortgagee sale, in a recession
1. Lodging a caveat? Beware!
Bagley v Pinebelt Pty Ltd [2000] NSWSC 655 (7 July 2000)
Mr Abdul-Karim, a barrister who had appeared for Pinebelt in proceedings against Bagley, assisted in the preparation of a caveat over Bagley's land. Caveats are a potent device. They are lodged on a property title and stop the owner dealing with it - selling or mortgaging the land, for example.
There is often confusion on the part of credit staff about when someone might have a right to lodge a caveat over a debtor's land. Mr Abdul-Karim also had some difficulty with the concept.
A caveat can only be lodged by someone who has an interest in the person's land - say the right to register a mortgage or buy the property. This is referred to as a caveatable interest.
In this case, the caveatable interest claimed was stated to be based on an option to purchase which the NSW Supreme Court had already said was unenforceable. It is rare for costs orders to be made against solicitors personally, and even rarer for a cost order to be made against a barrister, but that was the outcome in this case.
Creditors take note: if you lodge a caveat without an interest in the land, you run a high risk that the debtor will get the court to set aside the caveat and order damages and legal costs against you.
Credit managers may be able to use a caveat if their contract with the debtor includes an agreement to mortgage, or a power of attorney which allows a mortgage to be signed on behalf of the debtor. This is becoming more and more common, particularly in consumer loan situations (where the principal security may be a car but the financier has the right to secure the borrower's home as well if necessary). Nice if you can get it.
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2. Solicitors lien fails
CLC Corporation v Read & Ors [2000] WASC 109 (5 May 2000)
"Lien" is a legal term which causes almost as much confusion as "caveat". Penale Pty Ltd went into liquidation with insufficient funds to pay all its creditors, including CLC. Bennett & Co are a law firm who were also owed money by the company for work done. They had in their possession 2 certificates of title belonging to Penale, and they claimed a lien over these titles. The liquidators needed the titles for the sale of the properties, but Bennett & Co wouldn't hand them over unless they were paid first. The usual rule with possessory liens is that if you give up possession your lien is gone. Where liquidators are involved it gets more tricky, at least in relation to "books" of a company, which by the definitions in the Corporations Law included the certificates of title.
CLC got its solicitors to try to persuade the liquidators that under the Corporations Law the lien was ineffective against a liquidator. This was unsuccessful, and the liquidators (the defendants) paid Bennett & Co out and completed the sales. CLC took the case to court and successfully argued that the liquidators shouldn't have paid them. They got an order for the return of the money, for equal distribution among Penale's unsecured creditors (which included Bennetts).
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3. Picking winners
There are a lot of factors which make up a good collector. Persuasiveness has a lot to do with it. Typing speed is a factor which, surprisingly, is often overlooked by non-typing managers. One of the things that comes through from our research is that the less successful staff tend to waste more time on hopeless debts. Smarter staff put more effort into more likely opportunities.
According to an article in the October issue of Vantage , the newsletter of the Data Advantage group, Alliance Recoveries is using profiling of ledgers to focus collectors on the debtors with the highest propensity to pay - essentially helping the collectors to "pick winners".
Data Advantage company Market Advantage uses its scoring technology to identify which debtors have the highest propensity to pay, dividing them into 10 rankings. This technology is available only for clients who refer high volumes of accounts. Alliance contacts the best chances, then the second best, and so on. More cash is recovered for the client more quickly. Most importantly, overall collection rates, they say, are up 10-20%.
Alliance was formed in 1999 as a joint venture of Data Advantage and New Zealand credit industry leader, Baycorp. The Commonwealth Bank have since taken a one-third stake in the company.
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4. Classic example of why lenders register securities
Montedeen Pty Limited v Rossfield Nominees (ACT) Pty Limited [2000] NSWCA 112 (5 May 2000)
Rossfield is a car financier. It had leased cars to Capital Automotive Traders Pty Ltd, but had permitted Capital to register the vehicles in Victoria as owner under the Road Safety Act 1986 (Vic).
Capital had possession of the vehicles. In October 1996, Capital purported to sell five cars to Montedeen. Almost immediately thereafter, an administrator was appointed to Capital.
Rossfield was entitled to register the vehicles under the Chattel Securities Act 1987 (Vic). However, it had provided wrong registration details in respect of three of the vehicles and had not attempted to register its security interest in respect of the other two. Rossfield's interest in each vehicle was therefore classified as an unregistered security interest under the Act.
Section 7 provides that a purchaser in good faith can gain good title to the goods. At the initial trial in the Supreme Court, the judge concluded that this did not override the basic principle that a person can't sell what they don't own. The Court of Appeal disagreed. Montedeen were entitled to keep the cars. If, on the other hand, Capital had registered the charges properly, Montedeen would have missed out.
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5. Liquidator voting in his own interest - case 1
Hawkwood had received a payment of $620,688 from Merlino, but remained a creditor to the tune of $7500. Merlino then went into liquidation with debts that exceeded assets by at least $2m.
The liquidator considered the $620,688 paid to Hawkwood was an unfair preference, and proposed court action to get it back. If it was successful, the unsecured creditors were likely to get 15 cents in the dollar. But there was no money to fund the court action, and the creditors didn't want to fund it.
It was therefore proposed that an insolvency funder would provide the funding. A meeting was held for the creditors to decide whether to approve the funding agreement or not. The resolution had to be approved by both a majority of creditors by number, and a majority by value. The vote was tied: a majority by value voted in favour, while a majority by number voted against.
In this situation, regulation 5.6.21(4) of the Corporations Regulations enables the person presiding at the meeting (in this case the liquidator's representative) to exercise a casting vote. If he votes in favour of the resolution, it is carried. If he votes against, it is not carried. In this case, the action was the only chance he had of recovering his fees to that point ($39,324) and getting paid for ongoing work so the liquidator exercised a casting vote in favour of the resolution. So he was empowered by the resolution to sue Hawkwood and the funding agreement enabled him to do that.
Not unnaturally, Hawkwood, the creditor who would have to defend the unfair preference action, took exception to his vote, and applied to the Court to have the resolution set aside.
The Court considered there was nothing untoward in the liquidator voting in a way which was incidentally favourable to his own interests. Unless the liquidator acts fraudulently, or without bona fides, or acts as no reasonable liquidator would, the Court is most unlikely to interfere. In this case the liquidator had made full and proper disclosure of the proposed action, agreement, and his financial interest in the outcome. The funding arrangement could go ahead.
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6. Liquidator voting in his own interest - case 2
Re Imobridge Pty Ltd (In Liq), unreported; SCt of QLD; BC9907423; 12 November 1999 is not on the Austlii website, but is discussed in more detail in Hawkwood. In Imobridge, the liquidator proposed a funding arrangement to seek recovery of a payment to Westpac, which he considered to be an unfair preference. A creditor who was also a director and guarantor of the company opposed this _ she might have had to pay the bank under her guarantee if the payment to the bank was clawed back. The creditors voted against the funding arrangement, and the liquidator then sought court approval for it
The Court was critical of the liquidator. He didn't disclose to the creditors that he had unpaid fees of $25,000, and that the action had already been commenced. He told them that the solicitor was going to speculate some of his fees; this was untrue. The judge also thought he exaggerated the amount recoverable. In spite of all of this, the Court approved the funding arrangement in view of the company's financial state and the prospects of success of the action.
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7. Don't try this at home
Circle Credit Co-op Ltd v Lilikakis [2000] FCA 667 (19 May 2000)
Circle Credit got judgment against Lilikakis, and when she still failed to pay, issued a Bankruptcy Notice against her. However, she moved from Victoria to Alice Springs. The Notice therefore had the wrong address for the Federal Court _ it should have been the Northern Territory Office rather than the South Australian one.
In this case, the creditor's solicitors simply got the process server to make the amendment on the Notice before serving it. The Court did not approve of this innovative approach. The Creditor's Petition (the next step in the process) was dismissed because of the defect in the Bankruptcy Notice. A Bankruptcy Notice cannot be altered without the authority of the Official Receiver. The solution is to obtain a fresh notice from the court. Apparently there is no further fee charged.
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8. Best price in a mortgagee sale, in a recession
Westpac v Lakajev [2000] NSWSC 603 (27 June 2000)
In 1989 PTL Investments Pty Ltd bought 50 acres of land in Devonport Tasmania for subdivision and sale. The company was owned by Mr Lakajev and his wife, and they signed personal guarantees, and mortgages over their home and business premises.
The plan was to develop the land in 9 stages, selling sections as each stage was completed. According to the judge they were "extraordinarily unfortunate in relation to the timing of the venture". Only six of 26 lots in the first stage were sold. Ultimately the bank stepped in and sold the land by auction and tender after it took advice from a real estate agent and surveyor. Then it sued, successfully, for the balance due ($1.5m) and for possession of the Lakajevs' house.
The Lakajevs claimed the bank had not exercised its sale powers with due care _ particularly, it didn't advertise properly, didn't get a valuer's report before selling, and sold the land at an undervalue.
The Judge held that the mortgagee, was "bound to take reasonable steps to ascertain the value before selling" but the real estate agent's opinion was sufficient here. The advertising was also sufficient in the limited Devonport market, particularly given the marketing of the property by the Lakajevs over the previous couple of years.
The best prices for the land would only be obtained by selling progressively over a 10-12 year period, and the Judge accepted that the prices reached were the best achievable at the time. There was considerable argument about the value of the land. The values put forward by the plaintiffs were "demonstrated to have been over-optimistic by the facts shown by the auction sales," the Judge said. "One should not allow the theory of valuation to overwhelm the reality of the market place."
