Australian Credit Law Bulletin - Vol 5, No 6, June 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:
- Substitution of one bankruptcy petitioner for another
An extremely useful tool which creditors should understand - Was payment by the director's sister an unfair preference by the insolvent company?
The answer turns out to be good news for the bank concerned - Don’t delay when winding up a company
It must be done within six months of the application being made - Directors must have board authorisation before they can act
Even a two share, two director company has to have board meetings to authorise proceedings - Statutory demands cannot force payment for faulty goods
Building and Construction Industry Security of Payments Act does not stop debtor arguing there is a genuine dispute
1. Substitution of one bankruptcy petitioner for another
Marshall v General Motors Acceptance Corporation [2003] FCAFC 45
Garry Marshall had a number of debts. In September 1996 he borrowed a total of $82,175.40 from General Motors Acceptance Corporation (GMAC) in order to buy a 1996 Mitsubishi tabletop truck and a 1991 Nissan Patrol. He also owed EA Bourne Pty Ltd $4,978.16.
From mid-June 2000 Marshall stopped making payments on the vehicle loans although he later claimed that he had agreed with GMAC that all the overdue payments could be deferred until September 2001. GMAC sent Marshall a default notice in July 2000 but Marshall said he never got it.
Well before all that happened however, Bourne had got judgment against Marshall in the Local Court at Tumut, NSW. In January 2001 Bournes filed a bankruptcy notice based on that judgment. Then in May Bournes filed a creditor’s petition for sequestration of Marshall’s estate because Marshall had not complied with the bankruptcy notice. GMAC also began proceedings against Marshall in June and obtained a default judgment against him in November for $20,543.85.
In December 2001, under the terms of s.49 of the Bankruptcy Act 1996 the court made orders substituting GMAC as the applicant creditor (instead of Bournes). This section allows substitution of another creditor to whom the debtor is indebted if a creditor's petition is “not prosecuted with due diligence or where for any other reason the Court considers it proper to do so”. Generally, the first creditor (here Bourne) has been paid and the second creditor (GMAC) jumps in as a shortcut to get the matter before the court. Section 49 says that "the petition may be proceeded with as if the substituted creditor or creditors had been the petitioning creditor."
GMAC then issued its own bankruptcy notice and sought to bankrupt Marshall under s.43 of the Bankruptcy Act. Marshall opposed the order.
Marshall argued that a substituted petitioner must be a creditor at the date of the alleged act of bankruptcy (i.e. January 2001) but GMAC’s legal action had not been started until later. However, the judge explained that all that was required was a liquidated sum due and payable to the substituted creditor, either immediately or at a certain future time, at the time of the act of bankruptcy. The payment arrangements that Marshall had made indicated that those amounts were in fact, due and payable at a certain future time. This meant that GMAC was a creditor at the time of Marshall’s act of bankruptcy and so the substitution stood.
Marshall also complained that there was a defect in GMAC’s bankruptcy notice which rendered it invalid. Section 41(2) of the Bankruptcy Act says that a bankruptcy notice must be in accordance with the form prescribed in the Bankruptcy Regulations. Those regulations say that if interest is being claimed in the bankruptcy notice then there must be information attached to the notice which specifies the provision under which the interest is being claimed. GMAC’s bankruptcy notice indicated that Marshall owed $1810.45 in accrued interest under the rates prescribed by s. 95(1) of the Supreme Court Act (NSW) 1970. Unfortunately, the legislation which actually allows for the charging of interest is the Local Courts (Civil Claims) Act (NSW) 1970, s.39(1).
The court however, explained that Marshall could actually verify the interest entitlement by reference to s 95(1) of the Supreme Court Act and so the notice was not defective. Even if it was defective, the judge said, the notice still substantially complied with the proper form as permitted by s 25C of the Acts Interpretation Act(Cth)1901, which says that substantial compliance is sufficient. In any event, as there was no evidence of substantial injustice, s.306 of the Bankruptcy Act meant that the notice was not invalidated by the defect. So the sequestration was allowed to go ahead. Marshall appealed.
By a 2 –1 majority the Full Court of the Federal Court of Australia disagreed with the original judge. The Federal Court said that the Supreme Court Act 1970 and previous cases made it clear that the provision under which interest was being claimed had to be included in the notice to avoid any confusion. This meant that a notice issued in breach of that requirement would be invalid. It followed that because the bankruptcy notice was invalid, Marshall could not have committed an act of bankruptcy in failing to comply with it. The sequestration order was thrown out and GMAC even had to pay the court costs.
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2. Was payment by the director's sister an unfair preference by the insolvent company?
Prentice v St George Bank [2002] NSWSC 358
St George Bank granted an overdraft facility to Macquarie Construction Co Pty Ltd, and a personal home loan to its sole director, Peter Armstrong. The overdraft and loan facilities were secured by two mortgages over Armstrong’s house at Windsor but there was no security over the assets of Macquarie. In August 1999 St George demanded the balance of the overdraft facility of $154,363 from Macquarie. This wasn’t paid so St George began dishonouring Macquarie’s cheques. Around the same time Armstrong defaulted on his home loan repayments to St George.
In May 2000 Macquarie was placed in liquidation and Max Prentice was appointed liquidator. St George later began proceedings to take possession of Armstrong’s house. In an effort to save his house, Armstrong contacted his sister Sandra, requesting a loan of $100,000. His sister agreed and asked her brother where he would like the cheque to be deposited. Armstrong checked with St George and the bank officer said “put it into the overdraft account, it's a simple way and it shows up on my computer straightaway”. So Sandra had a bank cheque drawn in favour of Macquarie and deposited it in Macquarie’s overdraft account.
Prentice applied to the court under
s.588FF of the Corporations Act 2001 to try and get St George to pay back the $100,000. Under s 588FC a transaction is an insolvent transaction of the company if it is an unfair preference given by the company when the company was insolvent. Prentice argued that paying the $100,000 into Macquarie’s overdraft account was a voidable transaction because it had been made when Macquarie was insolvent
The court was satisfied that the payment to St George was made when Macquarie was insolvent. It was clear that as an unsecured creditor, St George would only have received $9000 from the liquidation and so by getting the $100,000 the bank had been “preferred”. The key question was whether the payment of $100,000 was a “transaction” by Macquarie within the meaning of s.588FA(1)(a) and whether Macquarie and St George were the parties to that transaction.
The court concluded that the payment was not a “transaction of the company” within the meaning of the unfair preference provisions. Macquarie did not at any time have a legal interest in Sandra’s cheque. She had provided the cheque on her brother’s request that it would be used to reduce his personal liability. It never became the property of Macquarie. The court also found that the payment to St George had not in fact, been made by Macquarie. When transferring the money Armstrong had been acting in his personal capacity to save his house and not in his capacity as the company director. This meant that the payment of $100,000 into Macquarie's overdraft account, and the arrangements preceding the payment, was not a transaction of the company and there was no transaction to which Macquarie and St George were the parties. As a result there was no unfair preference and no voidable transaction and so St George Bank got to keep the $100,000.
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3. Don’t delay when winding up a company
Expile Pty Ltd v Jabb's Excavations Pty Ltd [2002] NSWSC 851
On 14 March 2002 Expile Pty Ltd filed a notice of demand on Jabb’s Excavations Pty Ltd. Section 459R(1) of the Corporations Act 2001 says that an application for a company to be wound up in insolvency must be decided within six months of the application being made. That time ran out on 14 September but the date for the hearing had been set down for 20 September. Expile applied to have the time limit extended to allow the hearing to go ahead.
To grant an extension of time the court has to be satisfied that there are special circumstances which justify the extension. What qualifies as a special circumstance is not defined – it depends on the discretion of the court once all the circumstances of the case are taken into account.
Expile argued that Jabb’s actions in filing a notice of motion to have the demand set aside and then not actually applying to do so, had delayed proceedings. The extension Expile wanted was also only a short one for a fixed period of 6 days until the hearing date. Expile also claimed that it was the court which had been “tardy” in setting the hearing date outside the six month window.
The judge explained that Jabb’s actions had not delayed the process sufficiently to qualify as a special circumstance. There was no explanation as to why the hearing date had been set outside the six month period. The court was however, prepared to admit that fixing the hearing date outside the required time limit was a special circumstance. Against that, the judge said that even though Expile was aware that the court had fixed a date outside the six month period, it had taken no proper action to try to remedy it. Nevertheless, the judge weighed all the circumstances and decided that a short extension of time should be granted to allow the matter to be dealt with on 20 September. In exercising its discretion to grant the extension, the court explained that this was consistent with the interests of the parties as well as the public interest of ensuring that winding up proceedings are dealt with speedily.
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4. Directors must have board authorisation before they can act
Horizon Star Pty Holdings v Carina Holdings Pty Ltd [2003] WASCA 94
Philip Reimers was the sole director of Horizon Star Pty Ltd which ran a business called West Coast Heavy Haulage. He was friendly with Colin Atkins, an undischarged bankrupt who was bored and needed to start making a living. Around mid-October 2000, Atkins said he would "tip" $200,000 into Horizon, which he would “drip feed” in to the company in return for a 50 % shareholding. Reimers arranged for a new company, Carina Holdings Pty Ltd, to be incorporated as the vehicle for the proposed purchase. It was a $2, two share company. Reimers took one share and Janice Franke, who was Atkins' de facto wife, took the other share and they both became directors of Carina.
Early in 2001 Reimers became seriously ill and agreed to sell his interest in Horizon to Atkins for $100,000. $50,000 was to be paid immediately and the rest within six months. The payments were conditional on the National Australia Bank accepting a business plan for Horizon for the next year. The NAB also had to be willing to provide an overdraft facility of not less than $150,000. If the conditions were not met within 21 days the sale agreement could be terminated by giving written notice. The $50,000 was paid, but the finance was not obtained from NAB and Carina terminated the agreement on 28 June 2001. Carina demanded repayment of all advances in full within seven days. When that didn’t happen statutory demands were issued for repayment of all the outstanding advances, which totalled $219,727.08. Horizon applied to have the statutory demands set aside.
Horizon argued that there were a number of genuine disputes and/or offsetting claims. However, the only evidence that Horizon could produce concerning offsetting payments it said had already been made to Carina was not accepted by the court. The affidavit of the evidence was dated 8 October which was outside the 21 day period within which a debtor is allowed to challenge the statutory demand.
More importantly, when Horizon had applied to set aside the demand it had made no mention of this extra evidence. Under section 459G(3) of the Corporations Law 2001 the court had no authority to set aside the statutory demand if supporting evidence, or at least, the bare bones of the argument which can be filled in later, is not filed within the 21 day period. So the court determined that it was clear that the amounts were owed.
The court also dismissed Horizon’s argument that Franke had no authority from Carina to issue the statutory demand. No meeting of the board of directors of Carina (i.e. Reimers and Franke) had been held authorising the issue of the statutory demand. The judge however, said that if a directors' meeting of Carina had been held Reimers would have had a clear conflict of interest requiring him to withdraw from the meeting. Reimers could not use his position as a director of Carina to cause advantage to another company such as Horizon or to cause detriment to Carina (s.182(1)). To do so is a criminal offence (s.184(2)). Horizon appealed.
The Court of Appeal agreed that there was no dispute over the amounts actually owed. The judges explained however, that Franke had no apparent authority to act on behalf of Carina Holdings. Her only function was to participate in the dealings of the two person board of directors but she was not otherwise authorised to exercise Carina’s powers on her own (s.198A(2) and s.198D). Although the Supreme Court judge was correct in his assumptions about what might have happened if a board meeting had taken place, the fact was, no meeting had been held. This meant that no authority from Carina had been given to Franke to issue the statutory demand. This meant it was invalid and was thrown out.
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5. Statutory demands cannot force payment for faulty goods
Tooma v Eaton [2002] NSWSC 514
Eaton & Sons Pty Ltd was supplying frames and trusses to Tooma Constructions Pty Ltd on credit, for a unit project in Bexley. Tooma complained to Eaton that the frames had warped on installation, some of the frames provided had not been made correctly and some not made up at all. Although Tooma tried to get the material replaced it was eventually forced to purchase replacement timber from another supplier. The cost for repairs, labour and material came to $32,800.
After Tooma refused to pay for the faulty frames Eaton served a statutory demand on Tooma, claiming $10,486.93 for the “balance of credit account for frames and trusses delivered to Bexley”. Tooma applied to have the statutory demand set aside.
Tooma said that the demand should be set aside because there was a genuine dispute about the existence or amount of the debt being claimed (s.459H of the Corporations Act 2001) . Tooma said that they didn’t need to pay because under s.19(1) of the Sale of Goods Act (NSW) 1923 the supplied frames had to be fit and proper for the purpose for which they were ordered and not defective.
Eaton argued that Tooma could not use that reasoning because it had not been filed along with the application to have the statutory demand set aside within the mandatory 21 day time limit. The court said however, that principle did apply here as the supply of defective goods would allow a claim under s.54(1) of the Sale of Goods Act for a breach of the implied warranty to provide goods fit for the purpose. That inevitably raised the fact that there was a genuine dispute.
Eaton went on to argue that there could be no genuine dispute because the invoices Eaton had sent Tooma were “claims for payment under the Building and Construction Industry Security of Payments Act 1999”. The Act relates to the right to collect progress payments and section 14 says that if a claim for payment is made, the receiver of the invoice (the debtor) has 10 business days to provide a payment schedule. If no payment schedule is provided (which Tooma had not) then the “claimed amount” could be recovered as a debt due. Eaton said that this meant that Tooma could not now dispute the debt.
The court however, pointed out that even if that were right, the Building and Construction Industry Security of Payments Act did not affect Tooma’s right to argue that there was a genuine dispute under s.459G of the Corporations Act. It was clear from the evidence that there was a genuine dispute as to the quality of the goods supplied. So the statutory demand was set aside and Eaton had to pay Tooma’s costs.
