Australian Credit Law Bulletin - Vol 5, No 9, December 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:
- Solicitor gets off a charge of professional misconduct on a mortgage transaction.
Bank hadn't sent documents which lawyer signed off on - Bank loses security on a loan of $2.6 million
How important is independent legal advice when parents are asked to guarantee a loan for their son? - $80,000 of legal fees at stake
Can a creditor, who incurs costs in bringing a court action to have a company wound up, be prevented from recovering those costs by a deed of administration? - Rubber stamp signatures on Statutory Demands ok?
or should the Deputy Commissioner of Taxation sign everything personally?
1. Solicitor gets off a charge of professional misconduct on a mortgage transaction.
PG v The Law Society of the Australian Capital Territory
On 25 October 2001, lawyer x (whose name has never been released) received a letter from Mr and Mrs Galbory’s (his clients) bank. It asked him to return to the bank a signed solicitors certificate certifying that he had explained a mortgage that they were about to enter into, in particular the risks involved with taking on a mortgage.
A meeting was scheduled with the Galborys on the following Friday (26 October) at 5pm. The lawyer soon realised that the bank had not in fact included a copy of the memorandum of provisions. He tried unsuccessfully to contact the bank and obtain a copy. A memorandum of provisions for a mortgage is a document which is widely used in the banking industry. It sets out the general terms and conditions of a general mortgage agreement.
Realising that the lawyer was unable to obtain the memorandum from the bank before the following Monday, he told the Galborys that they had a choice. They could either schedule another meeting for the following week or they could accept his advice as to the memorandum’s contents and proceed to execute the mortgage documents. The Galborys chose to save the costs of an extra meeting by proceeding now and accepting the lawyer’s advice as to the nature of the memorandum.
The lawyer signed the certificate to say that he had received the memorandum and explained its contents to the Galborys. The Galborys also signed at the foot of the certificate saying that “the above information” (i.e. that the lawyer had a copy of the memorandum and had explained it to them) was correct.
The clients also executed another document entitled “Acknowledgement Authority and Undertaking” which included a statement that they had received a copy of the mortgage including the memorandum. But the lawyer never actually received the memorandum and the Galborys were never given a copy of the memorandum.
The Law Society of ACT later bought proceedings against the lawyer for professional misconduct as a lawyer for allegedly knowingly and wilfully certifying to the bank that he had received the memorandum and that he knowingly allowed the clients to sign both the certificate and associated documents which were untrue.
The solicitor was successfully able to argue (which was backed up by evidence from four senior solicitors with extensive experience in land law) that the conduct was not unprofessional or unsatisfactory professional conduct. This was for two main reasons.
First, the certificate that the lawyer and the Galborys signed did not in fact contain any false statement. The certificate stated in clear wording that if the memorandum was not available then it was permissible to seek “independent advice from a qualified person as to the nature and effect of the documents.” Hence, the advice provided by the lawyer as to its nature and effect overrode the fact that the memorandum was not actually available.
Second, the fact that the memorandum was a pro forma document (a document in an approved form by the Land-Registrar-General under section 80A of the Real Property Act 1900) meant that the lawyer had in fact been provided with copies in the past. Hence the statement that he had been “provided with the memorandum” as required by the “Solicitors certificate” was true.
As a result, the lawyer was cleared of the unprofessional conduct charges.
Back to top
Information on our current seminars
2. Bank loses security on a loan of $2.6 million
*St George Bank Limited v Domenico Trimarchi & anor*
In June 1994, Mr & Mrs Trimarchi (Senior) mortgaged their properties as part of a complex set of transactions to secure a loan for their son, Anthony, for property investment purposes. Mr Domenico Trimarchi (“Mr T Senior”), 77, came to Australia in 1948. He had only received formal education up to age 10. His English comprehension and literacy was poor. His knowledge of business affairs was also limited. His wife, Mrs Lucia Trimarchi (“Mrs T Senior”), 70, also had little education, poor literacy and even less business experience than her husband. Over time Mr & Mrs T Senior had acquired a number of properties in Australia. Their son, Mr Anthony Trimarchi (“Anthony”), was at the time a practicing solicitor and was also involved in the property development industry. Anthony often traded properties in Australia funded by various mortgages. When Anthony defaulted on this 1994 loan the bank called on the guarantees seeking to sell the mortgaged properties. The T Senior’s then challenged the validity of the guarantees.
The first of a complex set of loans began with mortgages over various properties with Westpac Bank in the late 1980s. Three of these mortgages were over properties owned by Mr & Mrs T Senior. One of these mortgages was found by the trial judge to be totally invalid. This was because Anthony, who was acting as a power of attorney for Mr T Senior while he was away overseas, had arranged a mortgage for his own benefit, while supposedly acting on his father’s behalf. The mortgage was void because the relevant powers of attorney restricted Anthony to use the powers only for acts which were in the interests of Mr T Senior. A mortgage on Mr T Senior’s property, of which Mr T Senior did not derive any benefit, was not seen as being in his interests.
The second set of loans arose out of Anthony trying to refinance the above Westpac mortgages. Anthony approached National Mutual. Again, Anthony had been able to persuade his parents to guarantee this arrangement. To ensure that there was no undue influence by Anthony over his parents National Mutual had required a certificate from a solicitor stating the T Senior’s had received independent legal advice as to the nature of this transaction. Such a certificate was produced but in somewhat dubious circumstances.
The solicitor who signed the certificate was Anthony’s then fellow law firm partner, Mr Matiussi. The appeal court upheld the trial judge’s view “as the partner of Anthony Trimarchi, he could hardly be regarded as an independent person in this context”.
This loan, made by National Mutual, was due for repayment at the end of June 1995. National Mutual pressed for repayment after this time by issuing various notices under section 57(2)(b) of the Real Property Act 1900. Such notices are prescribed by statute allow the bank or lending institution, after the passing of various time periods, to take control of the mortgaged property. Mrs T (Senior) became distressed upon receiving such notices. Anthony told his mother “not to worry” and that he would “fix it up”.
So Anthony then tries to refinance the National Mutual Loan. In order to refinance it he approached St George Bank. St George Bank appeared willing to lend Anthony the money on the condition that Anthony was able to give appropriate guarantees for the loan. Anthony again arranged for his parents to guarantee this re-financed loan. This re-financed loan stood in excess of $2.6 million.
It is important to note, at this stage, that Anthony had presented himself to his parents and others as a successful suburban solicitor. However, by his own omission, Anthony stated that by mid 1995 he was in financial distress and had commenced “defalcating” (embezzling funds) from his clients. It was also found on the facts that he had forged his parent’s signatures on a form provided by St George Bank as a statement of his parent’s assets and liabilities. This had the effect of materially misrepresenting his parent’s true financial position to the bank. Eventually Anthony was disbarred from the legal profession and subsequently imprisoned for embezzling clients monies.
However, when the St George Bank loan also fell into default, the Bank approached the T Seniors seeking to call on their guarantees. The T Senior’s then questioned the legality of their guarantees and the bank commenced court action to enforce the guarantees.
It was found when the T Senior’s signed the guarantee documents without any independent legal advice or financial advice as to its implications. Therefore, given the T Senior’s limited education, literacy and business experience coupled with the lack of independent legal advice, the court held that they had “no real meaningful appreciation of what they were becoming involved in”.
An argument was raised by St George’s Bank that it would be unfair to allow the T Senior’s to be excused from this mortgage, as allowing this guarantee to be voided would be effectively allowing the couple a lopsided remedy in-so-far as the discharge of the earlier mortgages. However, the appeal court held that the Contracts Review Act 1980 requires separate attention to be given to the transaction being enforced as separate from the overall “justness” of the contract. The judge said that simply because money advanced by St George discharged an earlier National Mutual mortgage was not enough in itself to have relief withheld from the Mr & Mrs T Seniors.
Overall, the appeal court was very strong in their condemnation of the activities to which the T Senior’s were subjected to. There were ample findings, well supported in the evidence, as to the unfair conduct of Anthony as regards his parents. The judge concluded: “At the end of the day, the appellant [St George Bank]… only approved the loan on the basis of obtaining the mortgages from the respondents [The T Seniors]. These mortgages made the risk acceptable to [St George Bank]. Yet the [St George Bank] took inadequate steps to ensure that the [The T Seniors] received proper independent legal and financial advice. It follows that the [St George Bank] was on notice that the transaction was risky for the [T Seniors] because the security offered by Anthony Trimarchi was inadequate in its own right and that Anthony Trimarchi’s capacity to repay the debt was problematic.”
Back to top
Information on our current seminars
3. $80,000 of legal fees at stake
Expile Pty Ltd v Jabb's Excavation Pty Ltd & Anor*
On February 14 2002, Expile Pty Ltd (“Expile”) filed an application to wind up Jabb’s Excavations Pty Ltd & Anor (“Jabb’s”) upon the failure by Jabb’s to comply with a statutory demand.
One of the main requirements for the courts to satisfy a creditor’s petition for liquidation is that the company in question must be insolvent. That is, they can’t satisfy the debts of the company as they fall due. A company is solvent if it can satisfy the debts of the company as they fall due.
This first application made by Expile was rejected by the courts. The judge said that Jabb’s was able to prove that it was in fact solvent. Expile appealed the decision on the 29 May. During that subsequent appeal hearing, Jabb’s acknowledged that the appeal was now likely to be allowed (that is, Jabb’s was acknowledging that it was now insolvent).
Following this about-face by Jabb’s, on 7 June, an administrator was appointed to look into Jabb’s by Jabb’s Directors. A first meeting of creditors was then scheduled on 13 June pursuant to section 439A of the Corporations Act. This meeting informed the creditors that Expile’s appeal was likely to be successful and that an administrator had been appointed to ensure the best outcome for the company’s creditors.
A few months later the Court of Appeal (NSW) released its reserved judgement, and as expected, allowed Expile’s appeal. The court reasoned that Jabb’s had not proved its solvency and was therefore subject to be wound up. But the court did not make an order winding up Jabb’s as Expile had wanted, rather it allowed Jabb’s the opportunity to make an application under s440A(2) of the Corporations Act for an order that the winding up be adjourned on the ground that it was in the interests of the creditors for Jabb’s to continue under administration, rather than be wound up immediately. A subsequent order was also made by the appeal court for Expiles costs “both at trial and on appeal, to be paid out of the assets of [Jabb’s]”.
On 8 August the creditors voted in favour of a “deed of company Arrangement” for Jabb’s. The deed allowed for a part payment of 20 cents in the dollar to all creditors in respect of admitted claims. More importantly the deed provided that the arrangement bound all creditors and that it also prohibited creditors from making an application winding up Jabb’s (or proceeding with any application which had already commenced).
Could all Expile’s court costs be recovered or was it only entitled to 20%?
Section 553(1) of the Corporations Act clearly says that all monies which are owed by the company, at the time that the company is to be wound up, do include contingent claims. A contingent claim is a debt that is subject to the happening of some future event. That is, the debt does not exist at the moment, but the company knows that there is a possibility of it existing in the future. A common form of a contingent claim is where a case has gone to court over, say, the recovery of a debt - but both parties to the case won’t know if they have to pay the debt until the judge makes his ruling. Here, the claim by Expile for court costs from its application to wind up Jabb’s was contingent on there being a successful winding up order being granted by the courts.
When the “deed of company arrangement” was entered into, however, Expile had already made the application for winding up and had incurred the costs. But the successful outcome of the case was not known until after the deed was entered into. That is, the court costs could only be claimed by Expile if the judge granted them the order to wind up Jabb’s. If the judge refused to grant the winding up order then Expile would have to absorb the costs themselves.
Hence, Expile argued that its claim for the winding up costs were contingent on the court granting them the ruling in their favour. Because the costs arose, contingently, before the deed was entered into, then they should be recoverable from Jabb’s administrators, along with Expile’s existing business debt, under the terms of the deed.
On the facts, the judge agreed that the application to wind up Jabb’s had occurred before the deed was entered into. However, he found that there was another section of the statute, section 466 of the Corporations Act, which declares that Expile actually has a personal obligation to bear its own costs of a winding up application until the winding up order is actually made.
Here, the final order winding up the company had not been made so Expile was still obliged to bear its own costs for the winding up petition. Once the winding up was ordered, Expile would be reimbursed, in priority, to all other claims against the company. Hence Expile could not claim the winding up costs under the deed. So Expile asked: was the deed legal?
As regards to the legality of the deed the Supreme Court held the deed to be “contrary to the policy of the Corporations Act”. This was because Part 5.3A of the Corporations Act allows Expile priority in respect of its costs of the winding up application. The deed sought to deprive Expile of such a right. At the time of the appeal Jabb’s distributable assets totalled $43,500, but the costs incurred by Expile in the winding up application and appeal totalled approximately $80,000. If the deed was legal, then Expile had virtually no chance of recovering this sum. They may have been granted a mere 3 cents in the dollar for it.
The policy of insolvency law that gives priority to successful applicants for winding up a company is that it is in the public interest that insolvent companies be wound up rather than be permitted to continue to trade. Creditors are encouraged to take on the financial burden of bringing proceedings to wind up a company. This is because it is seen as being for the benefit of all creditors for which he or she is a member. In the end, if the deed was allowed to stand, there was no way that Expile could retain its priority for the winding up costs. Hence, the other creditors of Jabb’s would have benefited by the destruction of Expiles statutory rights. The NSW Supreme court therefore held that the continuation of the deed was oppressive and unfairly prejudicial to Expile as a creditor and declined to allow it to stand.
Back to top
Information on our current seminars
4. Rubber stamp signatures on Statutory Demands ok?
Deputy Commissioner of Taxation v Jetbird Holdings Pty Ltd
etbird Holdings Pty Ltd (“Jetbird”) was served a statutory demand, dated 1 August 2003, for payment on behalf of the Deputy Commissioner of Taxation (“DCT”). Jetbird failed to meet the demand and the DCT then brought a petition to have Jetbird wound up.
Jetbird, obviously not wanting to be wound up, questioned the validity of the statutory demand, especially whether an assistant to the DCT had the ability to sign off on a statutory demand by attaching a facsimile of the signature of Erin Holland, the DCT, with a rubber stamp. The DCT argued that it was legally entitled to delegate the signing process. Because the time for payment had expired the DCT sought an order for Jetbird to be wound up under the Corporations Act.
Jetbird accepted that the DCT had the power to authorise a person to sign a document on her behalf but argued that this couldn’t be done by attaching a facsimile to the statutory demand. Jetbird argued that section 459E(2)(f) of the Corporations Act required that the signature had to be a personal signature (i.e. hand written by a person).
Jetbird’s reasoning what that while section 459E(2)(f) did not expressly forbid a rubber stamp signature, the provision implied that it required a personal signature. Jetbird cited cases where a statute requires a personal signature, as opposed to a rubber stamp and argued that this case was the same. Jetbird argued that if the signature was not legitimate, then the statutory demand was also not legitimate, and therefore the DCT could not petition to wind up the company.
Unfortunately for Jetbird, the judge did not accept that argument. He said that the common law rule is that a document is signed by a person if it is signed in that person’s name. This includes the affixing of a facsimile copy of their signature by means of a rubber stamp. The judge reasoned that if Parliament, who had enacted the Corporations Act, had intended to displace the application of this common law rule, it would have been expected to do so by clear language. There was nothing in section 459E(2)(f) that indicated any intention otherwise.
Because the statutory demand was perfectly legitimate and the time for payment had expired, the judge made an order to wind up Jetbird.
