Australian Credit Law Bulletin - Vol 2, No 3, May 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:
- Stretching the concept of undue influence
- Consumer loan or business loan?
- Do not use statutory demands on disputed debts!
- Big news for ROT (Romalpa clause) creditors
- Directors liable for company debts
- More on oppression in New Zealand
- Future debts covered by the deed of administration
1. Stretching the concept of undue influence
Commonwealth Bank of Australia v Ridout Nominees Pty Ltd & Ors [2000] WASC 37 (28 February 2000)
The Ridout family controlled a complex web of companies involved in farming, silverware and motels. George and Dorothy Ridout ran these companies with their two sons and daughters-in-law but George made all the financial and business planning decisions.
Dorothy and the sons operated the farms. George ran the silverware enterprise largely single-handed. Bank loans which used the family farms as security, were channelled to the silverware business.
In the early 1990s things began to go badly wrong with the businesses. George died in 1993. The bank sought to enforce mortgages and guarantees securing the repayment of various loans. The family and their companies argued that the loans and guarantees be set aside for unconscionable conduct by the bank and undue influence.
The judge found that the sons’ personal guarantees were invalid because they were subject to undue influence from their father. “I was an employee of my father,” said one son (thirty-three at the time he signed the guarantee, and still living on a family farm), “and a very poor-paid one at that, and I did as I was told because he was my employer, and I had nothing, and I owned nothing to the day he died.”
What about the guarantees given by the companies of which these sons and their wives were the only directors? Most of the circumstances which give rise to “a special disadvantage” (age, sickness, drunkenness, illiteracy, etc) only apply to living persons, not companies. Here, the judge declared the companies’ guarantees invalid too. Essentially, the directors did what George told them.
The judge believed that this decision - finding that a company, rather than a person, has been subject to undue influence - was a first. If it is followed, the principle is likely to be restricted to family-owned or single-director companies where all directors are under the sway of a dominant parent, spouse or similar and therefore the company is effectively under undue influence. Creditors should take note.
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2. Consumer loan or business loan?
Giampaolo v Esanda Finance Corporation Ltd [2001] VSC 71 (8 March 2001)
In August 1998 Giampaolo entered into a hire purchase agreement with Esanda to buy a car - a Saab - for $38,000. He fell into arrears and was given a repossession notice. He then applied to the Victorian Civil and Administrative Tribunal (VCAT) alleging that Esanda had breached certain requirements of the Code.
The Consumer Credit Code applies to transactions where credit is provided wholly or predominantly for personal, domestic or household purposes. It does not cover business transactions.
Esanda argued that Code did not apply because the credit was provided for purposes other than personal, domestic or household. Under section 11 of the Code, where a party claims that the Code applies to a transaction “it is presumed to be [so] unless the contrary is established.” The onus was on Esanda to prove it did not apply.
Giampaolo used the vehicle to go to work. His employer assigned him security jobs at various locations and he drove to them in his car. He claimed tax deductions on the Saab stating he used the vehicle 82% in the course of his employment. At the VCAT hearing Giampaolo said, “I can't recall word by word because it's been so long ago. I think [the salesman] asked me did I use my car for work. I said to him that I used it in the course of my duties.” The Tribunal member held that the credit was not obtained predominantly for personal purposes and struck out the claim. Giampolo had to ask permission to appeal.
While considering whether there was a case which justified an appeal, the judge in the Supreme Court looked at the facts and appeared to disagree with the Tribunal. While his statements are not binding on the lower court, they seem persuasive.
“It seems to me arguable here that the credit ... was obtained predominantly for personal services,” he said. “No doubt in the course of employment he (Giampaolo) was requested to go from place to place. He utilised his own vehicle to do so. He was not conducting a business”. He allowed Giampaolo’s appeal to proceed.
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3. Do not use statutory demands on disputed debts!
Expressway Spares v CTK Engineering [2000] NSWSC 1200 (12 December 2000)
CTK served a statutory demand on Expressway who applied to set it aside, claiming a dispute. A statutory demand starts the winding up process. The statutory demand procedure is not to be used where the creditor knows that the debtor genuinely disputes the debt.
The test for a genuine dispute is “a plausible contention requiring investigation”. The parties were members of the same family of companies. CTK knew that the debt was disputed. The court saw this a gross misuse of the statutory demand procedure. The demand was set aside and CTK ordered to pay Expressway’s costs on an indemnity (full cost) basis.
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4. Big news for ROT (Romalpa clause) creditors
Associated Alloys Pty Limited v ACN 001 452 106 Pty Limited [2000] HCA 25 (11 May 2000)
We’ve avoided writing about this case, firstly because every professional firm’s newsletter seems to have covered it already, and secondly, because it’s long and complex. Very briefly, the High Court said that it is possible to write a retention of title (ROT) proceeds clause that works. This is big news for ROT drafters.
A basic ROT clause says, in effect, “these goods are ours until paid for, and if not paid for they can be taken back.” A proceeds clause says, in effect, “if you make our goods into something else, you have to hold in trust a proportion of the proceeds of the sale of the new goods for us.” Money which hasn’t been held but which should have been can be traced into, say, a bank account. The ROT creditor will have priority over this money ahead of the liquidator or the holder of a floating charge.
Romalpa clause update by the vastly experienced David Francis (who will be co-presenting most of Hattaway & Associates legal seminars in Australia from this month) of Sydney law firm Watkins Tapsell makes an interesting point. Aside from the obvious benefit of being able to trace your funds, creditors with such a clause are likely to be able to defend claims by a liquidator for preferential payments.
Imagine that a payment has been made to you by a debtor company which then goes into liquidation. Assume the payment would have been an unfair preference in the normal course of events. However, you have an Associated Alloys type proceeds clause which says that the debtor company had to hold proceeds in trust for you. This means that the money which was paid to you was your money which the debtor was holding in trust. The liquidator can’t take that off you.
If you sell a product, you should probably be talking to your lawyer about updating your ROT clause.
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5. Directors liable for company debts
Powell and Duncan v Fryer, Tonkin and Perry (2000) ACLC 480 (14 April 2000)
This was a claim by a liquidator against directors of Noelex Yachts Australia Pty Ltd for $277,342. Under s588G of the Corporations Law directors are liable if they allow a company to incur debts while insolvent.
They are only liable if they had reasonable grounds to suspect that the company was insolvent. Here, they argued that they didn’t believe the company was insolvent because creditors of the business held off and didn’t press for payment.
The judge didn’t believe that creditors had agreed to hold off but said in any case this was irrelevent. According to the judge, solvency is decided by reference to the credit terms rather than “periods of grace which might have been obtained by creditors not insisting on payment strictly in accordance with agreed terms.”
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6. More on oppression in New Zealand
In 1995 Raptorial purchased a motel and camping ground complex, intending to develop restaurant and conference facilities and to subdivide the campground. After an earlier financing arrangement had soured, Elders Rural Finance Ltd were approached to become a joint venture funder. The deal involved three loans totalling over $4 million.
Within months Raptorial’s financial position had deteriorated to the point of facing numerous statutory demands. Elders appointed receivers of both Raptorial and Taipa under their debentures. Elders then applied for summary judgment against both companies in receivership and four guarantors.
In New Zealand, creditors can seek summary judgment before a statement of defence is lodged. The onus is on the plaintiff to show the court that there is no reasonable defence. In this case Elders obtained summary judgment in the High Court for $4,258,283.
Raptorial appealed on various grounds, arguing that they did have a reasonable defense which should have gone to a full hearing. The main issue was whether the loan terms were oppressive in terms of s9 of the Credit Contracts Act 1981. The terms were unremarkable except for an “exit fee” of $1.5 million that was due and payable at the maturity date, on early repayment, or when Elders made demand for repayment. In other words, whatever happened, Elders took a $1.5 million fee.
Under s9 of the Credit Contracts Act 1981 the term “oppressive” means oppressive, harsh, unjustly burdensome, unconscionable, or in contravention of reasonable standards of commercial practice.
To determine whether a contract or term is oppressive under the Act, it is necessary to have some basis of comparison. Essentially the question is: what would be expected or acceptable in terms of reasonable standards of commercial practice? This type of loan is outside the criteria of banks or bank-owned finance companies. It falls within a niche market and is sometimes described as “mezzanine financing”. Exit fees are not uncommon in this market.
Even so, the Court of Appeal considered that there was enough concern about the size of the exit fee and the desperation of the borrowers that Raptorial’s defence could not be rejected without a full hearing. The matter was sent back to the High Court to decide whether or not it was oppressive. Watch this space.
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7. Future debts covered by the deed of administration
NT Power Generation Pty Ltd v Trevor & Ors [2000] WASC 254 (19 September 2000)
General Gold Operations Pty Ltd (GGO) was the operator of a gold mine in the Northern Territory. The company experienced financial problems and on 5 July 2000 administrators were appointed. Before the administrators were appointed NT Power had entered into an agreement with GGO to supply electricity at the Mount Todd Gold Mine for three years from September 1999 with a minimum purchase of power each month. It was not disputed that the earliest date on which the agreement could be terminated was 30 September 2001. At the time of the administration NT Power were owed nearly $1.5m.
At the second meeting of creditors the chairman, one of the administrators, accepted a proof of debt filed by NT Power for this amount. But what about the money they would have been due under the remaining term of the contract? An additional $13.8 million claimed by NT Power and reflected in its proof of debt was rejected.
The judge said, “there is ample authority that claims covered by a proposed deed of arrangement includes claims for sums becoming due and payable after the day specified in the deed.” He therefore ordered that NT Power’s proof of debt should be admitted in full.
