Australian Credit Law Bulletin - Vol 6, No 3, April 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:
- 10 years of litigation ends in bank taking possession of mortgaged house
Another futile legal saga which no doubt enriched the lawyers involved but did no good for the parties - Debtor convicted of fraud, gets off on appeal and sues bank
Was the bank in breach of banking contract? - Businessman with MBA argues mortgage unconscionable...
...among other arguments. - Aggrieved shareholders attempt to recover as creditors in company’s administration
Court looks to roots of company law from 1800s to find answer - The five keys to successful reminder letters
Phone calls are best but when you have to send letters, make them tailored and effective - some insights from our upcoming Sydney seminar
1. 10 years of litigation ends in bank taking possession of mortgaged house
Citibank v Stergiou [2004] ACTSC 31 (21 May 2004)
Stanley and Ekaterine Stergiou took out a mortgage with Citibank on 8 April 1988. This was registered on the Stergiou’s family homes certificate of title on 25 May 1988. This secured for them a limit of $100,000. This Citibank mortgage discharged the Stergiou’s previous mortgage with Natwest Finance, with approximately $38,000 left over.
On 31 October 1989 the limit was increased to $140,000 with the corresponding variation entered on the certificate of title on 11 December 1989. Further credit of $40,000 was granted to the Stergious on 24 November 1989. This time it was deposited in a separate account. This was not entered on the certificate of title.
On 23 July 1990 the original line of credit was again further increased, upon the Stergiou’s application, to $160,000. This increase was recorded on the certificate of title. By November 1991 the original line of credit had been fully drawn to its credit limit of $160,000 and the second account was also fully drawn to its maximum, $40,000.
Until 30 November 1991, the Stergious had met all of the credit charges required of them by Citibank. After this date no further payments were made. They claimed they were disputing a range of items shown in the banking records. These included certain bank charges and disputed cheques.
The court was not satisfied the Stergiou’s were in default, when Citibank first issued a section 93 notice. A section 93 notice is a statutory notice given to parties warning them that unless they remedy a default in their mortgage, the bank will seize the mortgaged asset.
At the first hearing, the court found there was no default. The judge noted that the Stergiou’s had two accounts with Citibank. One was a mortgage (registered against the Stergiou’s home) and the other was a simple debt which was never registered. Citibank had failed to prove, on the evidence, that the Stergiou’s were in default of the debt that was registered.
Citibank appealed this decision. This appeal court found that because of the disparities in the Stergious' accounts which the court credited the Stergiou’s with, it meant that they was no default at the date that Citibank issued the section 93 notice. The Stergious, the court found, still had available to them $1,725 worth of credit.
The Stergious then sued Citibank alleging that the bank was engaged in an “unlawful conspiracy” against them together with various members of the legal profession. They represented themselves in the matter. This counter-claim had the effect of protracting the proceedings. The Stergiou’s also made a claim for damages for “mental anguish” in respect certain errors made by the bank. These claims also involved various proceedings against various firms of solicitors.
The claims only delayed the original proceedings, as they were always unsuccessful. Citibank did not seek to re-open their claim until these futile proceedings were completed.
Upon completion (in 2002), Citibank sent the Stergious a letter detailing that they were now going to proceed to recover the $160,000 mortgage which was in default. According to the previous judgement, the official default was sometime after 23 March 1992. Interest accrued from this date. The letter was sent on 20 December 2002 and alleged a sum owing of approximately $350,000.
The Stergious didn’t respond to the letter. In January of 2003 Citibank then executed another section 93 notice. This notice updated the latest amount owing, including interest up to that date, which set the amount now owing at just over $381,000.
The appeal judge was satisfied that the Stergious were officially in default from March 1992 and made an order for Citibank to take possession of the mortgaged property. A costs order was also given against the Stergious.
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2. Debtor convicted of fraud, gets off on appeal and sues bank
Matthews v National Australia Bank [2004] WASCA 177 (17 August 2004)
On 18 January 1994 Douglas Matthews opened an account with the National Australia Bank. Matthews claims that he wrote the bank a letter in July of that year making two requests. Firstly that the bank provide “special answer clearances” on cheques deposited in that account, and, secondly that the bank should never allow the account to go into overdraft.
On 28 November 1998, Matthews entered into an agreement with an overdue creditor that the creditor would pay $300,000 into another bank account on or before 10 December 1998. Between 29 and 31 December, in the belief that the payment was made, Matthews drew four cheques totalling $140,000 from this other account. He then banked them into his account with National Australia Bank. Over the next few days he proceeded to withdraw 11 cheques from this account. These were cashed at 5 different branches of the National Australia Bank, in the Perth metropolitan area, totalling $87,000. Matthews told the court that the money was used for “gambling purposes”.
The bank allowed Matthews to draw on the cash cheques presuming that the original cheques would clear. They bounced. The $300,000 payment was never received. The bank approached Matthews and asked him to repay the subsequent overdraft on this account of approximately $83,000. When it became evident to the bank that Matthews did not have the money they referred the matter to the police.
Matthews was consequently charged on four counts of fraud, one for each of the cheques that bounced. At the criminal trial, Matthews was convicted of the fraud charges and sentenced to a total of 40 months imprisonment.
Matthews brought an appeal against his criminal conviction and won. He was acquitted. He then proceeded to sue everyone that he thought was involved in his original prosecution, including the Attorney General of Australia; the Director of Public Prosecutions for Western Australia; the Minister of Police; the Commissioner of Police; and the National Australia Bank. All claims, except those against the National Australia Bank, were struck out.
Matthews claim against the National Australia Bank alleged that the bank had breached his banking contract and that they were involved with the police in his malicious prosecution.
Matthews produced the 1994 letter as evidence of his banking contract. The bank has no record of the letter. Matthews claimed that he cashed cheques relying on the “continuous special answer clearance” facility and his request not to have an overdraft facility. He believed that when the bank cashed the cheques it meant that the bank had sought a special answer and confirmed that money was available.
The court accepted the bank's evidence that no such letter existed. Interestingly, the court noted that evidence of the letter would still not help Matthews. They said that Matthews was never authorised by the bank to overdraw his account. Rather, “the bank, in the exercise of an internal discretion, permitted him, without saying anything to him in that respect, to draw against uncleared cheques in the hope or expectation that those cheques would be met. This is a rather different thing from expressly authorising the appellant to overdraw funds.”
Secondly, Matthews claimed the bank was responsible for a malicious prosecution against him. This involved allegations that the bank wrongfully informed the police of a fraud in an attempt to cover up its own breach of its banking contract. He alleged that the bank deliberately didn’t disclose the terms of the banking contract to the police, sent the police to interview him, and persuaded the police to search his home with the aim of collecting the alleged debt.
However, the court failed to find any deliberate suppression of evidence by the bank. The evidence from officers of the Western Australian Police showed that the police actions were part of their usual enquiries when there is an allegation of a crime. They did not act on behalf of the bank.
The court rejected all claims made by Matthews against the bank. It found that there was no substance to any claims by Matthews that the bank’s actions led to the appellant’s subsequent conviction and imprisonment on fraud charges, causing him to suffer a loss of earnings. Matthews claims were dismissed outright.
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3. Businessman with MBA argues mortgage unconscionable...
Kwok was a stockbroker. He set up a stock-broking business in Victoria, through a business called Tiffit Securities (Australia) Ltd. Kwok was also a major shareholder of Tai Fat Securities Pty ltd, which wholly owns Tiffit. Another shareholder in Tai Fat was Cheung. Cheung often introduced stock-broking clients to Tiffit. One of these clients was a man called Tien.
On 22 November 2000, Tiffit, acting as Tien’s stockbroker, entered into a transaction to purchase shares in Timemac Solutions Limited (“TML”). Payment was required by 5 January 2001. Nearing the completion date, it became apparent that Tien did not have the funds available to settle the TML purchase. A cheque that Tien had provided as a deposit for the purchase had been dishonoured on presentation to a bank.
Kwok was concerned. If Tiffit were to default on its TML purchase, it could face trading restraints from the Australian Stock Exchange which might result in the collapse of Tiffit.
In late December 2000, or early January 2001, Kwok met with Tien, Cheung and a director of TML. Kwok claimed that Tien said that he was expecting funds from China to cover the TML purchase within the next 2 months. This wasn’t fast enough, so Tien arranged a loan from a man named Howe. However, Tien did not have any security available for the loan that was acceptable to Howe. Kwok stood in and agreed to provide two properties that he owned as security. Kwok claims that this security was only for 90 days.
Tien subsequently failed to repay Howe within the given loan agreement. Howe, in turn, called upon Kwok’s security. Kwok refused on the basis that it was outside of the 90 days. Howe then sued Kwok to enforce the security agreement.
At the court hearing there were three issues discussed.
First, Kwok argued that his security had expired. Howe denied that such a time limit existed. No limitation was recording in writing in the security agreement. The court found, given the lack of evidence, that no 90-day limitation existed.
Second, Kwok argued that the security was “unconscionable” and therefore illegal. Unconscionability requires Kwok to prove that he was somehow under a real disadvantage. Kwok claimed that he had a poor command of the English language, that he was never given the opportunity to seek legal advice, and he didn’t understand the loan documents. The court found that although Kwok’s command of English was “less than perfect” it was outweighed by the fact that his tertiary qualification (an MBA) was in English, and all of his correspondence on this matter had been composed in English. The court concluded that Kwok wasn’t under a real disadvantage because of his English skills.
Third Kwok argued that the whole security arrangement breached the Contracts Review Act 1980. Section 7 of the Act allows the court to grant relief where a contract has been “unjust in the circumstances… at the time that it was made”. Factors the court will take into account include whether negotiations took place in arranging the security agreement; and whether any provision of the contract imposes unreasonably difficult conditions to comply with. The court found that negotiations had taken place and there were no unreasonably difficult conditions for either party to perform.
The court found against Kwok on all of his claims. Kwok had 28 days to find $300,000 to repay Tien’s debt to Howe, or Howe could take title to the Sydney properties.
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4. Aggrieved shareholders attempt to recover as creditors in company’s administration
Crosbie, in the matter of Media World Communications Ltd
Media World Communications Ltd (MWC) is a public company with shares listed on the Australian Stock Exchange (ASX). MWC is a technology stock. Their principal asset was the intellectual property rights to “a unique technology for the representation of very large data sets, such as video, in a much more efficient format”.
In April 2004 a prospectus was issued to raise $4.6 million. This was to be used to enable MWC to exploit the technology. The capital raising was successfully completed on 10 May 2004.
Within a few months the effectiveness of the company’s technology was questioned. This was announced to the ASX on 20 September 2004. The share price immediately slumped. On 22 September the directors called in an administrator.
The administrator called a creditors' meeting to assess the debts of the company. These were assessed at $5.56 million. A second meeting of creditors was set down for 11 February 2005. At this meeting a vote was scheduled to occur on whether the company should enter into a deed of arrangement. The deed would allow for a further $5 million to be invested by the major shareholder, with $3 million earmarked to pay outstanding creditors.
A number of persons who initially subscribed to shares in MWC felt that they had been misled by the prospectus. They alleged that the prospectus contained false statements about the usefulness of the technology. The aggrieved shareholders stated that had they known the true position they would not have subscribed as shareholders.
These shareholders believed they had numerous claims against the company. These were based on deceit and negligence; s9 of the Fair Trading Act for misleading conduct; and under s728 of the Corporations Act for offering shares under a misleading prospectus. These claims would, they believed, result in damages against MWC. The shareholders sought to prove those damages (as probable debts) in the administration.
The practical effect of treating the shareholders as creditors is that they would be entitled to vote at the second meeting of creditors. They would then have a say on the new capital acquisition plan. If the court refused to allow the aggrieved shareholders to be treated as creditors, then their fate would be determined by the rest of the creditors. It would be likely that the shareholders would then lose the entire value of their shares (and therefore all of the money that they had invested in MWC).
The administrator took the matter to court to see whether he should recognise the aggrieved shareholders as creditors. The court answered by referring to Houldsworth’s Case (a company law case from the 1880’s). The rule, from that case, is that:
* a person who has subscribed for shares in a company may not,
* while he or she retains those shares,
* recover damages against the company
* on the ground that he or she was induced to subscribe for those shares by fraud or misrepresentation.
The reason for the decision can be found from basic company principles. In liquidation, the company’s outstanding shares are called up. In determining priority to any left-over funds, creditors’ interests take priority. The shareholders are at the bottom of the priority list. This rule has statutory backing, per section 437F of the Corporations Act. This voids all transfers of shares made during a company’s administration.
In the end, the court ruled that the aggrieved shareholders, who had not renounced their shareholding prior to administration, were not permitted to stake their various claims as creditors. They were prevented from participating in the second creditors' meeting.
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5. The five keys to successful reminder letters
"This is the sort of English, up with which I will not put." Winston Churchill, a master communicator, poking fun at a written report
Imagine a car finance company which, among its customers, has at least two obvious types. One type is "boy racers". The finance company can generalise about them that they tend to be young, single, with few responsibilities, few assets, little thought of the future, and a negative "don't care" attitude to the legal process and the consequences of damaging their credit record. The second type is "South Auckland families". These borrowers tend to be older. They have kids and jobs. They're often of Pacific Island background and have strong religious beliefs. Their understanding of written English is probably below that of the average customer.
So these are two very different and distinctive types of customers. When their accounts are overdue, the chances are that our hypothetical finance company sends both types the same standard overdue letter. We think that's a mistake.
We've just done a major rewrite of our seminar on this subject. As we tend to do with our training, we've gone outside the bounds of credit management to borrow ideas from other disciplines - marketing, advertising, psychology, publishing and journalism. Here are five keys to success in reminder letters.
1. Use letters in the right circumstances. Much of the other training we do is focused on how to talk to debtors on the phone. In credit management, the temptation is to send a letter to avoid the stress of a confrontational phone call, but phone calls generally work much better than letters. Letters have their place - most obviously, there are some debtors who can't be contacted by phone and there are some creditors who have too many debtors to ring - but we've probably all fallen into the trap of spending half an hour on an ineffective letter when a five minute phone call was the answer.
2. If the text is too small and you make it too hard for people to read, they won't bother. So the first challenge with any written communication is to get people to read it. One of us got a marketing letter from an airline a few years ago that made an interesting noise. Naturally it was opened first. The noise was a packet of "hundreds and thousands" - the coloured sugar sprinkles that go on kids' birthday cakes - and the airline promised that there were hundreds and thousands of reasons to use its services. Design, typography, colour, the look of the envelope, and attention-grabbing tricks like that of the airline, all help determine whether your letter is read or thrown straight in the bin. You need to understand how people read letters. They generally start with the heading, then skip to the bottom and look at the signature and read the PS.
3. Understand your debtors and tailor your bulk letters as much as possible. Different customer types will respond to different threats and incentives, different types of language, different ways to attract their attention. Self-employed, small business owners are likely to have different attitudes to those of accounts payable clerks in large businesses. Why send them both the same overdue letter? Marketing people look at two different types of characteristics of customers. One is 'demographic'. In terms of individuals these are the tangible characteristics such as age, sex, family size and age, occupation, education, religion, language spoken and read, ethnicity, and life stage. In terms of businesses, it is the tangible characteristics of the businesses (size, industry, etc) and the people in those businesses you will deal with (owners or employees, sex, job title, education, etc). The other type of characteristic is 'psychographic'. How easily offended are they? What is their attitude to being in debt, familiarity with the law, knowledge of business, and so on?
4. Structure your letter to explain the benefit of what you want them to do (or detriment of not doing what you want them to do) then tell them exactly what it is that you want (and when and how). It's very easy for creditors to fail to spell out the benefit/detriment properly. They assume, for example, that the customer knows what it means to have a judgment against them. Generally, you need to go further in terms of consequences. "And this means that this will be on your credit history on the Baycorp database for five years and that creditors who check this will be likely to refuse to lend you money to buy a phone, a car, a house, or other goods or services…"
5. And lastly, you need to know how to make your writing easy to understand. We like Churchill's example, at the start of this article. Another of our favourites is, "In case of fire, do not use lift." We have seen people read this message next to a lift call button and waver, wondering whether they are supposed to use the lift. It's much clearer, but not quite as impressive-sounding to say, "if there is a fire, do not use the lift." In this case, it actually makes the message longer, but usually, shorter is better. Most of us have an almost overwhelming desire to sound clever and impressive, and to this end we use as many fancy words and phrases as we can come up with, and stretch our sentences until they are as long as they can possibly be, generally by adding extra clauses and phrases, but also by adding clichés - hackneyed phrases - and redundancies and by repeating ourselves again and again, ad infinitum.
So that's the theory (or at least the short version of it). In practice, you need to spend a long time agonising over the letter, and get plenty of "second opinions". Get it right and you'll save yourself a lot of phone calls. And with that, we've written all the words we're allowed to write for this article. Up with more the editor will not put.
This article, by Peter Hattaway and Christine Toner, first appeared in "MG Business" in 2004. Hattaways Credit Management Training is running its Credit Writing for Results seminar on 26 May 2005 in Sydney. A practical outcome of this seminar is that you go away with a rewritten version of at least one of your current collection letters. Click here
