Australian Credit Law Bulletin - Vol 2, No 2, March 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:

Not just Australian, Australasian Law Bulletin
Working for a client you know is insolvent
Administrators to disclose relationships?
Death of a Bankrupt
21 days means 21 days
Unconscionability outside of credit
Identifying the credit risk early
New Zealand PPSA is coming
Finance rate of 217% not oppressive (NZ case)

1. Not just Australian, Australasian Law Bulletin

A great deal of Australia's credit management law is similar to New Zealand's. Even that which doesn't apply is still of interest to New Zealand credit professionals, and we've had a lot of positive feedback from them about about previous issues of this Bulletin.

From now on we will be aiming to include on the last page of each issue at least one New Zealand case or other item relating to New Zealand credit management law. We think that Australian readers will find many of these of interest, too.

2. Working for a client you know is insolvent

Beveridge v Whitton [2001] NSWCA 6

When a company is sinking it is not unusual to engage an accountant to sort out the books. When that company goes under can a liquidator claw back the accountant's fees as an unfair preference?

Mr Miller was a bricklayer whose company got into severe financial difficulties.

Miller's bank manager advised him to engage a good accountant. He went to Beveridge who agreed to take on the task and advised him of the fee payable. Miller agreed to the fees and to the terms of payment. In spite of a good deal of work sorting out the shambles the company eventually went into liquidation. Whitton was appointed liquidator and sought the return of the fees on the basis that Beveridge had received an unfair preference.

Beveridge had insisted on payment within seven days of fees being rendered. He would not have agreed to work unless those terms were accepted. He argued that his services were "necessary if the company was to continue trading, and were inherently valuable even if they did not result in a quantifiable addition to turnover or inventory." Whitton disagreed, arguing that Beveridge's work had done nothing to benefit the company.

A payment gives an unfair preference where the result is a decrease in the net value of the assets that are available to meet the competing demands of other creditors. The court looks at the "ultimate effect" of the transaction. This does not depend on whether the payment, taken with all other circumstances affecting the company, improves or worsens the company's position. Rather, the focus should be on the particular transaction. There was no suggestion that the services were supplied at excessive fees, nor that they were not needed for the immediate purposes which Beveridge and Miller saw as being served

The liquidator won the first round but lost on appeal. The judge summed up, "If the argument of the liquidator was sound, then no person assisting a company in financial difficulties could recover if that company goes into liquidation, so long as the person assisting was aware of the company's insolvency".

3. Administrators to disclose relationships?

'Puppets' under pressure, a recent article in BRW by Nick Tabakoff says that "in some cases, administrators have become the `puppets' of the directors of ailing companies who appoint them." For many credit managers this will not be news.

What is news, and good news, is that a draft set of standards for voluntary administrators is being circulated amongst IPAA (Insolvency Practitioners Association of Australia) members. It proposes, among other things, that administrators should provide a written `statement of interest' at the first creditors' meeting (where the creditors have an opportunity to replace the administrator). The statement would require them to disclose their relationships with any interested parties.

The article, while critical of the actions of some administrators, is positive about the regime in general. It quotes Max Prentice, principal of the insolvency firm Prentice Parbery Barilla, as saying that "given the right set of standards, the Australian system is the best in the world."

4. Death of a Bankrupt

Colquhoun v Graffione (Administrator), in the matter of Colquhoun [2000] FCA 325 (22 March 2000)

Graffione issued a bankruptcy notice in relation to Colquhoun, a solicitor. Unlike barristers, solicitors can't practice while bankrupt. Colquhoun applied to the Court to set aside the bankruptcy notice and also applied for an extension of time to comply with the notice. An extension was granted and a date for hearing fixed. Two weeks before that date, Colquhoun died.

The Bankruptcy Act 1966 (Cth) provides that where a bankrupt dies undischarged, the proceedings continue, as far as they can be continued, as if the bankrupt were still alive. If death calls after a creditor's petition is served but before that petition is dealt with, the estate may be administered in bankruptcy. There is no provision for a case like Colquhoun, who died after notice had been served and before the time for compliance had expired.

The judge decided that in failing to comply with the bankruptcy notice the estate did not commit an act of bankruptcy. Section 244 makes no mention of failure to comply with a notice as giving a right to an order that an estate be administered in bankruptcy. This was the key reason for the decision.

5. 21 days means 21 days

Calquid Pty Ltd v A & D R Illes Pty Ltd [2000] NSWSC 558

Section 459 Corporations Law states that if a company seeks a Court order setting aside a statutory demand it must do so within 21 days. The company must file an affidavit supporting the application with the Court, and serve copies of both application and affidavit on the other party. The 21 days does not include the actual date of service of the statutory demand. This case illustrates the guillotine effect of the section.

A statutory demand for payment of a debt exceeding $200,000 was placed under the door of Mr Bonser, a director of Calquid, on the afternoon of 1 December. Bonser and his family apparently left for a holiday in Noumea on 2 December and Calquid claimed not to have received the statutory demand until it arrived at its registered office by fax on 3 December. The Plaintiff's proceedings to set aside were commenced on 23 December. Therefore whether or not proceedings were validly commenced within 21 days turned on the date of service of the statutory demand.

The judge accepted that it had been served on 1 December. Mr Bonser proved not to be a persuasive witness. It certainly helped Illes that its process server had carried out his task properly and efficiently, and gave clear and unambiguous evidence of service.

6. Unconscionability outside of credit

Australian Competition & Consumer Commission v CG Berbatis Holdings Pty Ltd (ACN 008 799 040) [2000] FCA 1376 (26 September 2000)

Many creditors will be familiar (from previous issues of this Bulletin rather than personal experience) with unconscionablility as it relates to getting little old ladies to sign guarantees they don't understand. A case outside of credit may help explain the ambit of the concept.

In this case Berbatis was a shopping centre owner which, ACCC claimed, would only renew leases for its tenants if they withdrew proceedings in the Commercial Tenancy Tribunal of WA. ACCC argued that they were at a "special disadvantage".

In two cases, the Court disagreed, but the case of the Roberts was different. They had a potential buyer, and were very keen to sell, therefore they needed the lease. They were particularly vulnerable.

Creditors generally think about special disadvantages in terms of illiteracy, lack of English, age and infirmity, or lack of explanation, and the like. When dealing with desperate businesses (in particular) they should bear the Roberts' case in mind.

7. Identifying the credit risk early

The January issue of Vantage , the Data Advantage Group newsletter, points out that mass marketing by utilities and telcos is often very successful in picking up the customers no-one really wants - the bad debts and frauds.

Creditors can add a level of sophistication and intelligence to mass marketing campaigns by identifying the level of risk associated with the target audience. A Market Advantage product called Credit Risk Indicator allows creditors to do that.

Creditors can append the Credit Risk Indicator to any mailing list or geographical area, and then rank the prospects by levels of credit risk and align it with their policies. This allows them to focus on customers who have a higher propensity to be profitable long term.

The Credit Risk Indicator looks at the credit history with a group of 10-15 households (street segment level of geography), and feeds it back as an overall credit score. Because the information is aggregated and depersonalised, this complies with the Privacy Act. It's not the same as credit checking customers individually, but it gives creditors an indication of which groups have a level of credit risk which at least justifies the marketing investment. Credit managers should be aware of this tool not only for marketing applications but also assessment of applicants who have no credit history to assess credit worthiness.

8. New Zealand PPSA is coming

Just in case any New Zealand creditor doesn't know, the Personal Property Securities Act is coming.

The main thrust of the Act is to simplify the procedures for registering and searching securities. The PPSA will (finally) create one electronic register. It will do away with, among other things, chattels security registration at the High Court, registration of motor vehicle securities on the Motor Vehicle Securities Register, and registration of floating charges at the Companies Office. This morass of registers and rules relating to registers (depending as they do on type of chattel, type of security, and type of legal entity) is often called "the quagmire".

Goods sold under hire purchase will now also be subject to the same rules relating to registration as other types of security. Romalpa (retention of title) clauses will also be substantially effected. They will need registration to be valid against a receiver or liquidator, but trade creditors also gain new benefits. At the moment, if the goods covered by their clause are mixed with other goods or on-sold the creditor is generally out of luck. Under the PPSA their position is substantially strengthened.

The Personal Property Securities Register (PPSR) site is at www.ppsr.govt.nz and we recommend that creditors should subscribe to the electronic newsletter available from that site to keep updated on when the register will become operational. (The date keeps moving.)

Creditors and others will be able to search the register via the Internet. Registration of security interests will also be possible via the Internet. Advances in technology mean that this type of registration has never been more practical, more feasible, and cheaper. The fees for registration are $5 and for searching $1.50. Australian creditors should be jealous.

9. Finance rate of 217% not oppressive (NZ case)

Greenbank New Zealand Ltd v Haas [2000] 3 NZLR 341

Haas, a director of Transworld, guaranteed a loan from Greenbank for the deposit on a block of land for subdivision. The interest rate was 21.7% rising to 25% on default. The deal had a term of 60 days and stipulated a one off fee of $45,000. The short duration and the high fee resulted in a finance rate (under the New Zealand Credit Contracts Act 1981) of 217.3%.

Transworld defaulted on the loan and was unable to complete the purchase of the land. Greenbank took over the purchase so as not to lose the deposit, and applied for summary judgment. Despite having signed a deed that recorded the loan agreement, the guarantee and Greenbank's agreement to a further 12 months to repay the balance, Haas opposed summary judgment. He was successful, hence the appeal.

The court can reopen a credit contract where the contract, or any term of it, is oppressive. In this case the Court of Appeal said it wasn't. Even such an extremely high finance rate did not automatically mean it was oppressive. It was relevant that there was a high degree of risk for the lender and that the borrower had been engaged in a speculative transaction which, if successful, would have yielded big profits.

David Francis LL.M. B.A. has been presenting legal seminars to credit staff since the 1970s and is a Fellow of the Australian Institute of Credit Management. David holds masters degrees in law from both the University of Sydney and the University of Technology, Sydney. He presents legal seminars for Hattaway & Associates throughout Australia.
David Francis

Elke Meyer has vast experience in credit management and debt collection, the security industry, and the police and Corrective Services. She currently holds a position as Credit Manager at John Paul College in Brisbane.

Alan Liddell LL.B. B.A. presents our Law of Credit Management seminars in New Zealand. He is the principal of law firm Capamagian Liddell and a leading expert on the Personal Property Securities Act. He is the co-author of Credit Revolution: A Practical Guide to Surviving the Personal Property Securities Act and all attendees will receive a copy of this book. Alan has worked with the credit staff of Australian-based businesses for a number of years and says: "It is enormously difficult for Australian creditors to understand the New Zealand Personal Property Securities Act. It's so different to retention of title."
Alan Liddell

There are other important differences between New Zealand and Australian credit law - no voluntary administrations yet, some different views on privacy, a regime for enforcing judgments which is generally more effective than in Australia, and a variety of other issues. However there are lots of similarities. The Personal Property Securities Act is dramatically different and this is the main focus of this seminar. Any creditor selling into New Zealand and attempting to take security under what in Australia would be a romalpa clause should move heaven and earth to attend. Failing to understand the PPSA could cost your company an awful lot of money.