Australian Credit Law Bulletin - Vol 6, No 2, March 2005
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:
- Two parties claim ownership to $1 million worth of paintings?
Court looks to foundations of a sale-and-lease-back transaction. - Creditors' petition for bankruptcy needs correct information
or the resulting sequestration (property seizure) orders are liable to get quashed. - Important case for those operating a company under a family trust
Courts may look through trust barriers in order to pay liquidator’s remuneration. - Law Society attempts to bankrupt fraudulent lawyer
to help repay the legal practitioners fidelity guarantee fund.
1. Two parties claim ownership to $1 million worth of paintings?
Rohan Skea owned two paintings “Mining Scene” and “The Open Cut Mine”. In the middle of 2002 he entered into an arrangement to borrow money from Lelato Pty Ltd. Lelato paid a sum to Skea and became the legal owner of the paintings until he had repaid the money. Skea kept possession and was to buy them back under a hire purchase agreement.
In March 2004, Skea approached Greggs & Flannagan Fine Art Auctioneers. He asked them to find someone prepared to lend $1 million on a short-term basis (to finance a property deal in Adelaide) with a security over paintings, including “Mining Scene” and “The Open Cut Mine”.
Flannagans suggested Halse Holdings Pty Ltd. Halse was prepared to buy the art for $1 million and give Skea an option to buy it back within 60 days, for $1.1 million. Halse also sought from Skea a warranty that he had “unencumbered title to the paintings” (ie. that the paintings were not mortgaged). Skea gave the warranty and received $1 million for the paintings.
Lelato found out that Halse had the two paintings and asked Halse to hand them over. The court was asked to decide who was entitled to them in a summary judgment application (where one party asks the court to decide without the need to proceed to a full trial).
Lelato said that it was the legal owner because under its hire-purchase agreement it remained the legal owner until the loaned money was fully repaid. Halse said it was the legal owner. Under section 25 of the Sale of Goods Act 1895, a buyer “in good faith” and “without any notice of the previous sale” gets good title. Halse had, as proof of the “without any notice” requirement, a warranty by Skea stating that he was the legal owner. So the case turned on to whether Halse had purchased the paintings “in good faith”.
Lelato said that, on the face of it, the purchase by Halse of the paintings was an “unusual transaction” especially given that the transaction was for a large sum ($1 million) with an interest rate in practical terms equivalent to 30 per cent. The court said that an unusually high rate of interest is charged on a pledge may be evidence of a lack of good faith. Halse argued that, in fact, it was not a financing transaction and that the transaction fee was not interest. However, the judge noted that “it appears the intended practical effect remained that of a financing transaction.”
The judge refused to grant a summary judgment saying it would be unfair if Lelato was not given the opportunity of putting Halse “to proof of its claim of good faith and testing that claim at trial”.
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2. Creditors' petition for bankruptcy needs correct information
Evans v Duff [2004] NSWCA 430 (25 November 2004)
In late 2000, the Southport RSL Memorial Club had financial difficulties. A meeting of the club was called and proposals were presented to fix the club's financial problems. However, there was no agreement as to which proposal to follow. A receiver was appointed in early 2001. This appointment created some animosity amongst the members of the club. John Evans, 80, a former solicitor and distinguished military officer, questioned the legitimacy of the receiver, when he first visited the premises. Evans threatened to call the club's security guards to physically remove him and his staff from the premises.
So the receiver applied for a court order confirming him as the club’s legitimate receiver. Evans contested the application. The trial judge found against Evans and duly appointed Duff as the receiver. Costs were awarded against Evans on the basis that “the sole need for the applicant [the receiver, Duff] to bring proceedings… was occasioned by the resistance by Mr Evans”.
Evans then appealed the costs award. The court again found against Evans and ordered that he also pay the costs of the appeal. At the end of 2002 Evans owed approximately $31,000 to the receiver.
Evans failed to pay. The receiver issued a bankruptcy notice against Evans on 14 January 2003. It was served on 6 February 2003. Evans then applied to set aside the bankruptcy notice. Before this application was heard, the receiver issued a second bankruptcy notice. The application was decided on 15 July 2003 and was also unsuccessful.
The very next day, the receiver, in possession of a court order for costs, proceeded to bankrupt Mr Evans. The courts gave Duff a sequestration order (an order that allowed for the seizure of Mr Evan’s property).
The law of bankruptcy is meticulous. For the court to bankrupt a person, that person must first have committed “an act of bankruptcy” (per s40 Bankruptcy Act) It appears that the creditor got the two bankruptcy notices confused and used the date on the second one.
Under s52 of the Bankruptcy Act the creditor must prove all matters that are stated in the bankruptcy notice. This includes any description of the “act of bankruptcy”. If the description is incorrect then a creditor is not entitled to a sequestration order.
Here, the court found that the dates on the creditors’ petition were in breach of the Act. The act of bankruptcy actually occurred on 17 July 2003 on the dismissal of Mr Evan’s application to set aside the 6 February 2003 bankruptcy notice. This was not the act stated in the creditors’ petition. Therefore, because the creditors' petition was wrong then the creditor was not entitled to a sequestration order based on that petition.
The court set aside the sequestration (property seizure) order against Mr Evans and awarded him costs of the appeal. This didn’t mean that Mr Evan’s debt was cleared. It only meant that his property couldn’t be seized under that bankruptcy notice. The judge had “a degree of sympathy” with the present solicitors for the receiver, and left an avenue open for the receiver to issue another creditors’ petition - but this time with the correct information.
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3. Important case for those operating a company under a family trust
Grossman v E Katz Manufacturing
On 15 November the Supreme Court of New South Wales appointed Mr Palmer provisional liquidator of E. Katz Manufacturing Jewellers (ACT) Pty Limited. A month into his job, Palmer went to court seeking clarification that he was allowed to be paid out of the assets of the Ervin Katz Family Trust. The jewellery company had no assets but was the trustee of the Katz family trust. “Indeed, trusteeship of that trust, which appears to be a classic “trading trust”, is the company’s sole activity,” said the judge.
Palmer had been active in preserving and securing stocks of jewellery and other assets, and there was still significant work required before a final liquidation hearing took place. He wanted to ensure that he would be paid for his work.
A provisional liquidator has a right to remuneration. The relevant company is the source of that remuneration. If the company has no money, the liquidator generally won’t do the work, or if he or she does the work, doesn’t get paid. The problem here was that all of the assets of the company were held by the family trust. Could the assets of the trust be used to pay the companies liquidator?
The court, in referring to numerous cases on the issue, found that a formal liquidator’s costs, expenses and remuneration (as opposed to those of a “provisional” liquidator) may, “in a case where the company is trustee of a trading trust, be paid out of trust property”.
The court said that it is part of the duty of a corporate trustee to incur debts and pay those debts (that is, those required for the ordinary running of a business). During the winding up of the company, the trustee’s duty to pay debts can only be through the liquidator. The liquidator can only be expected to work if he or she is being paid. Therefore, the liquidator’s fees must be regarded as debts incurred in performing the duties of a trustee.
The trust assets were allowed to be used to pay for Palmer’s services.
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4. Law Society attempts to bankrupt fraudulent lawyer
Jensen v Queensland Law Society
On 25 July 2001 the Queensland Law Society convened a meeting which passed two resolutions. The first was to suspend Peter Jensen’s practicing certificate as a lawyer. The second was to appoint the law society as the receiver of trust property held by Peter Jensen’s law firm. These resolutions were passed pursuant to The Queensland Law Society Act 1952.
The receiver took possession of the appellant’s trust property. Two years later, the law society obtained a judgment against Jensen for approximately $590,000. The debt related to funds paid by the Queensland Law Society from their legal practitioners' fidelity guarantee fund to meet claims by former clients of Jensen.
Jensen was imprisoned from July 2003 as a result of fraud convictions relating to his legal practice. Two months before he was due to go to prison, Jensen had come across a copy of the Queensland law society’s annual report for the year 2000-2001. In the report, he discovered that the original resolution was not validly passed. This was due to an irregular quorum at the meeting which passed the resolution. Jensen argued that the resolutions were therefore invalid.
On 1 June 2004 the society issued a bankruptcy notice against Jensen. Jensen then applied to have the notice set aside. The society argued that the only way that Jensen could have the notice set aside because of the invalid resolutions was to show that he either had a counter-claim per s40(1)(g) of the Bankruptcy Act 1966.
Jensen argued that in fact he had a number of counter claims - deceit, trespass, and a breach of section 52 of the Trade Practices Act 1974 - but these appeared to be beyond the limitation periods for bringing them to court.
The general rule with respect to limitation periods is a complainant must bring an action to court before a set time limit. If the time limit (the amount of time between the date of the wrong being committed and the date that matter was brought before the courts) has expired, then the complainant will not be allowed to take the matter to court.
Here, the court concluded that any application to extend the limitation period required a “fraudulent concealment” of the validity of the resolutions of the Queensland law society. On the facts, the judge found that “there [was] no conduct on the part of the society which would have prevented or deterred the appellant from discovering the true facts”. No time extension was allowed.
In summary, the court found that Jensen did not have any counter-claims to the issue of the original bankruptcy notice. Therefore the original bankruptcy notice was lawful. If Jensen did not pay the amount claimed, then the normal bankruptcy procedures would commence.
