Australian Credit Law Bulletin - Vol 6, No 5, August 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:
- Trade creditor successfully fights liquidator's attempt to claw back payments
...Or at least is mostly successful. - Italian mother fights to keep her car
...And is entirely successful.
1. Trade creditor successfully fights liquidator's attempt to claw back payments
Spectrum Joinery Pty Ltd first started trading in 1979. Turners Building Supplies Pty Ltd was one of its first suppliers. It supplied on 30-day payment terms, however, in practice Spectrum often took a lot longer to pay the accounts. Often the accounts were paid when the customer for whom the work was done had paid.
Mr Willis, a director of Turners who monitored the debt situation, accepted this state of affairs. An analysis of the account from 1995 onwards showed payments ranging from 17 to 364 days after the account had been rendered.
Late in 2000, Willis became concerned that Spectrum’s growing indebtedness and the impact of newly introduced GST had placed him in a position whereby to continue to carry this debt he would have to work on a business overdraft. The judge in the subsequent court case noted that, “there was some discussion of an arrangement whereby there be suspension of earlier invoices and payment for the current ones on a more restricted credit payment basis as had taken place in 1996/97 but, in the end, it was determined that the plaintiff company should, in future, pay cash on delivery to stop the account from ‘growing’… Implicit in that arrangement … there was an acceptance that the previous invoices continue to be paid under the earlier regime of delayed payment and with no alteration to the credit arrangement for those invoices which, in practice, had been roughly 90 to 120 days.”
Payments for goods supplied on a cash-on-delivery basis commenced in October 2000. However, there weren’t many COD purchases. Over the next four months Turners was paid $29,806.36 for the June 2000 account, $21,408.77 as part payment of the July account of $42,781.40, and a further $10,500.00. Spectrum was placed into voluntary administration on 19 February 2001 and subsequently went into liquidation.
Section 588FE and the other sections in Part 5.7B of the Corporations Act try to ensure that all creditors suffer equivalently in an insolvency. It’s not generally fair, in the view of the lawmakers, that one unsecured creditor should get a greater percentage of its debt paid in the months before the business fails than other unsecured creditors. The law therefore allows the liquidator of a company to claw back “unfair preferences” such as the payments to Turners.
Turners claimed they shouldn’t have to repay the money. It was accepted that Spectrum was insolvent at the time of the payments. However, Turners argued that the defence in s 588FG(2) applied. They were a party to the transaction in good faith and at the time had no reasonable grounds for suspecting that the company was insolvent nor would a reasonable person in those circumstances have had such grounds for so suspecting. This was the issue the judge had to decide.
Spectrum’s history of payment of Turners’ accounts was an important piece of evidence. “Schedules of Payments for … July 1995 to May 1999 and June 1999 to July 2000… confirm that the accounts were always paid on a significantly delayed basis with the norm being accepted as perhaps roughly 150 to 190 days from the rendering of the account (although that did increase to about a year in respect of the invoices rendered in November and December 1996). The time for payments for the accounts rendered from April 1997 then varied generally between 50 and 90 days."
Accounts for 4 months in 1997 were "frozen". Those "frozen" invoices were paid in full by about November 1997.
In 1999/2000, Spectrum’s business expanded. Its purchases from Turners increased, as did the time taken to pay them.
The management of Spectrum gave Turners an optimistic view of the future. Asked in court whether he was aware of any outstanding debts that the company had to the tax office, Mr Willis said, “Well that is my whole argument. I am not aware of any debts to the tax, to the bank, to the superannuation, to the GST. That's all private information. Which unfortunately I'm not privy to.”
The judge accepted that Mr Willis did not suspect that the company was insolvent (he was mainly interested in ensuring late payment didn’t affect his own cashflow) nor did he have reasonable grounds for suspecting. But would a “reasonable person” have had such grounds?
He concluded that “save for the last payment received, I am satisfied that a reasonable person in Mr Willis' position would likewise not have had such grounds... "
The last payment was for $10,500. By this time, the judge said, a hypothetical 'reasonable person' could have had "a suspicion that the low incidence of cash on delivery supplies might, indeed, be referable to difficulty in paying past accounts. A further matter of suspicion could be the fact that a payment had been received the previous month of only about half the amount for the July 2000 invoice and the sum now being paid did not satisfy an invoice that had, by now, been outstanding for well over the 90 days that had generally been adhered to by the plaintiff company.
It follows that the transaction involving the payment of this sum is voidable.”
The case doesn’t say so but I assume that Spectrum also lost a large amount of money through the non-payment of invoices from August and September 2000, as well as the balance of the July invoice.
Your comments please! How do you deal with these sorts of problems? What would you have done here? It’s easy to say, “don’t let the debt go out so long,” but once it had, what would you have done. How would you have arranged things to avoid having payments clawed back?
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2. Italian mother fights to keep her car
Maisano v Car and Home Finance Pty Ltd (Credit) [2005] VCAT 1755
Rosa Maisano was born in Italy in 1943. She migrated to Australia in 1963. She worked as a machinist for 12 months but for the rest of her time in Australia has looked after her children or her sick husband. She has had no schooling. She can sign her name, can recognise numbers and at least some letters including those in her name, but cannot otherwise read or write either Italian or English. She speaks the Calabrese dialect and can speak broken English. She must get the help of others to read even her mail. She has no experience of business and little understanding of the nature of loans and mortgages.
She gave evidence to the Tribunal through an interpreter. She is a pensioner and in October 2002, the relevant time here, would have been 59 years old. In 2002 her son Dominic lived at her home with her for three days each week.
Her son, Dominic, wanted to borrow money from Car and Home Finance Pty Ltd. He offered his mother’s car as security. Rosa was signed up as co-borrower. Dominic never explained to his mother that she was to be a co-borrower of the loan or that her car was to be security for the loan. He told his mother that he was getting a loan and needed her support and signature.
The two of them went to the finance company. Mr Leeworthy from the finance company explained the contract. He asked Dominic and his mother if they understood what he explained and Dominic said “yes”.
The loan was granted. Dominic was to have made the payments. He failed to do so.
In March 2005 Car & Home Finance applied to VCAT for an order under s.92 of the Consumer Credit (Victoria) Code authorising it to enter residential premises to take possession of Rosa Maisano’s 2001 Nissan Pulsar sedan.
Ms Maisano applied to reopen the transaction. Under Section 70 of the Code the court has the power to reopen unjust transactions. Injustice in this context can either encompass injustice in the terms of the document itself or injustice in the party's conduct at the time the document was entered into, which in fact makes the terms of the contract, mortgage or guarantee unjust. “Unjust” in this context has a much broader meaning than unconscionable although it includes unconscionability.
The court found that Mr Leeworthy did not ask whether Dominic and Rosa Maisano needed an opportunity to seek independent or other independent expert advice or give them such an opportunity. Although Dominic understood the nature of the contract he signed, Rosa Maisano did not. She did not understand that she signed as co-borrower or that she mortgaged her car as security for the loan. The only words she said at the meeting were "yes" and "fine".
The judge says, “I find that Rosa Maisano could not read any of the documents which she signed, that all the provisions were not explained to her and even those that were explained were explained in English, a language of which she had only a rudimentary knowledge and spoke brokenly. I accept Mr Leeworthy's evidence that he did not know that Ms Maisano could not read or speak English. I am satisfied that by reasonable enquiry at the meeting he could easily have discovered this and that given her lack of response at the meeting, and the fact that he believed her to be of European origin and that she had little experience in business he ought to have made more enquiries to satisfy himself that she understood the documents and the conditions of the contract and ought to have explained those documents fully to her. I accept Rosa Maisano's evidence that, had she known that she was a borrower under the contract and that her car was to be security for the loan, she would not have signed the loan documentation.”
The contract and mortgage were set aside so far as they relate to Rosa Maisano.
Your comments please! How do you deal with these sorts of problems? What would you have done here?
