Australian Credit Law Bulletin - Vol 7, No 3, March 2006
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:
- Don’t believe everything a lawyer tells you
Some of them are not as smart as you might expect - Business or consumer loan?
Another decision on one of the problem areas of the Consumer Credit Code. - When can a debtor be listed on the credit file?
A credit provider gets it wrong! - An incorrectly filled out statutory demand can prove costly
Statutory demands are filled out by some creditors without legal advice, but get them right! - A bankrupt fails to provide information to the trustee of her estate
And suffers the consequences, despite 3 appeals - Group debt restructuring makes one company insolvent?
Does this mean it was an uncommercial transaction?
1. Don’t believe everything a lawyer tells you
Here are a few excerpts from a book called ' Disorder in the American Courts'. These are things people actually said in court, word for word, taken down and now published by court reporters.
ATTORNEY: Were you present when your picture was taken?
WITNESS: Would you repeat the question?
ATTORNEY: The youngest son, the twenty-year-old, how old is he?
WITNESS: Uh, he's twenty-one.
ATTORNEY: Now doctor, isn't it true that when a person dies in his sleep, he doesn't know about it until the next morning?
WITNESS: Did you actually pass the bar exam?
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2. Business or consumer loan?
Rous v Australian Finance Direct Ltd (Commercial) [2006] NSWCTTT 2 (10 January 2006)
Ms Rous and her husband set up a company called RC Property Group Pty Ltd.
They were the sole directors and shareholders of the company. The company was involved in the furnishing and then reselling of properties.
They took out a loan from Australian Finance Direct to finance the cost of a business related course run by the National Investment Institute Pty Ltd. The course cost them $55,000. In order to partly finance the cost of the course, Ms Rous filled out an application for a loan from AFD of $20,345. The loan was approved by AFD on 11 November 2002.
When they filled in the enrolment forms they wrote that they wanted the invoice for the course to go to RC Property Group Pty Ltd. Loan repayments for the course were made from their business cheque account of the same name.
After establishing the business and entering into the credit contract with AFD Ms Rous left her job as a teacher. While she took the course, the company entered into various property transactions.
On 25 November 2003 NII, the training provider, was placed into administration and was subsequently wound up.
Ms Rous then sought to be relieved of any liabilities she had under the credit contract with Australian Finance Direct Ltd (AFD). She made this claim in reliance on the Consumer Credit Code.
The Code allows in certain situations that a credit provider be made liable if the debtor suffers loss or damage as a result of a misrepresentation in relation to a contract with a supplier. Under the code, proceedings should be brought against the supplier and the credit provider. (Here, due to their liquidation, it was not possible to bring an action against NII.)
The Code doesn’t apply to all types of credit. It only applies if the credit is provided for personal/domestic/household purposes. If the credit is provided for a business purpose then the tribunal looking at the application has no jurisdiction to decide on the matter.
The judge said that the “knowledge gained by Ms Rous through the NII course was to be used by the company … with a view to making profits… I am satisfied that the overall purpose was predominantly a business one.” As the credit was related to a business purpose then the tribunal lacked jurisdiction to deal with the matter and so the application was dismissed.
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3. When can a debtor be listed on the credit file?
S v Credit Provider [2005] PrivCmrA 18
S obtained credit from a credit provider. The debt wasn’t paid in full but a repayment arrangement was agreed. The credit provider agreed not to list a payment default on the complainant’s consumer credit information file.
Despite the arrangement the credit provider listed his name on the credit file and also added the arrangement on the complainant’s credit file as an enquiry.
When S repaid the amount owing the credit provider argued that there were late fees and other additional charges. S then proved the debt was paid to the credit reporting agency and his file was updated.
S alleged that the amount listed as an enquiry on their credit file was greater than the amount of the arrangement. He also said that the amount owed was less than 60 days overdue and therefore could not be listed as a payment default on his credit file.
The Privacy Commissioner carried out an investigation into the matter. The credit provider claimed that it had received advice from a credit reporting agency that a default listing could be placed on an individual’s consumer credit information file, if that individual had acted as a personal guarantor for a commercial loan. The credit provider also believed that in order to place a default on a credit file, there needed to be a corresponding application for credit (an enquiry).
The Commissioner asked the credit reporting agency about this. The agency said that the credit provider had interpreted the act incorrectly. The Commissioner found that there had been a breach by the credit provider. S’s name should not have been placed on the credit file as the loan in question did not satisfy the definition of “credit” under section 6 of the Privacy Act.
Ultimately both the payment default and enquiry were removed from the credit file. The credit provider was made to provide written evidence that its staff had training on the guidelines of the credit reporting agency. A written apology was also made to S.
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4. An incorrectly filled out statutory demand can prove costly
Condor Asset Management Ltd v Excelsior Eastern Ltd [2005] NSWSC 1139
Condor Asset Management Ltd was the “assignee of the GDK Financial Solutions Trust” and the responsible entity of the Peridon Village Trust. The company owed $15,768.50 to Excelsior Eastern Ltd. Excelsior made a statutory demand on Condor.
Condor opposed the statutory demand on four grounds. Of the four grounds only one was accepted by the judge. Condor argued that there was a defect in the demand as it refers to debts but didn’t outline these individually, rather a total was given.
The judge looked closely at the prescribed form a demand must be in. The statute clearly said that each individual debt must be noted as well as a total at the bottom of the demand. Condor told the judge that there were in fact several debts owed to them by Excelsior, however only a total had been recorded on the demand.
The judge also referred to previous case law on the matter and said that “Clearly, a statutory demand relating to two or more debts must give a ‘description’ of the individual debts and state their amounts as well as state the total of those amounts.”
The judge said that the non-compliance with the statute was equal to a defect. The judge went on to consider whether the defect was then equal to a substantial injustice so as to make the demand ineffective.
The judge said that the most common and fruitful way of opposing a demand is to argue that there is a genuine dispute about “the existence or amount of a debt to which the demand relates”. The judge said that due to the demand not making it clear as to what the debt relates to this would make it very difficult for Condor to make an arguable case. “Failure to provide the means of such identification means that the company is denied the ability even to begin to consider whether… [the Act]…provides a ground for challenge.” The demand was therefore defective and was set aside.
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5. A bankrupt fails to provide information to the trustee of her estate
Combe v Inspector General in Bankruptcy [2005] FCA 1101
On 15 October 2002 Ms Combe was made bankrupt. Mr Pascoe was made the trustee of her bankrupt estate.
Combe was due to be discharged from bankruptcy on 14 November 2005. However in October 2003 Pascoe filed three objections to the discharge so as to extend Combe’s bankruptcy till 14 November 2010.
Pascoe argued that Combe had failed to provide information to him under to the Bankruptcy Act. On December 2003 Combe applied to the Inspector General for a review of the trustee’s claim. The inspector dismissed two of the objections but confirmed the objection that Combe had failed to provide information.
On 22 March 2004 Combe applied to the Administrative Appeals Tribunal for a review of the decision, however, the Inspector General’s decision was affirmed.
On 11 August 2005 Combe appealed the Tribunal’s decision to the Federal Court. The judge noted that the trustee had relied on one of the special grounds under the Act, that being a failure to provide information when requested. “Special grounds” are directed at deliberate actions by the bankrupt to defeat creditors or to hinder the trustee’s administration. The judge said the Inspector General’s decision could only be cancelled if there was insufficient evidence to support the special ground or if Combe could establish that she had a reasonable excuse.
The judge reviewed the facts that the tribunal looked at and found that almost a year had passed between the request for the documents and receiving them. The tribunal saw this as a failure to comply with the request and found that on her written submission there was no reasonable excuse for the delay.
The judge noted that in an appeal such as Combe’s, the court could only look at questions of law. Combe raised 10 matters before the court. These all contained numerous factual issues and contentions that were not previously raised and which had no proven factual basis. This meant that they were not able to be looked at by the judge and so the appeal was dismissed and Combe remained a bankrupt till 14 November 2010.
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6. Group debt restructuring makes one company insolvent?
Lewis (as liquidator of Doran Constructions Pty Ltd (in liq) & Anor v Doran & Ors [2005] NSWCA 243
The Doran family had been involved in the construction industry from the 1950’s. Mr Doran began the business and his four sons all became directors when they left school. By the 1990’s the Doran group of companies comprised of 14 companies and was engaged in a wide range of activities from property development and machinery hire to running two large shopping malls and two private hospitals.
In the early 1990’s the groups’ accountants and solicitors, organized a restructuring of the group. Doran Constructions Australia (DCA) was to become the holding company of those companies that carried out construction-related activities. Doran Holdings Pty Ltd would become the holding company of the rest.
The loans made were repayable on demand and “interest free reviewable every 3 years”. It was decided in 1994 that there was to be a review of the debts of the various companies as there was no arrangement for repayment and there was a need to give a better view of the assets and liabilities of the companies to Financiers.
There was a directors meeting held where 2 sets of minutes were taken, one for Doran Holdings and another set for Doran Constructions. The transfer would ultimately require DCA to repay Holdings, Holdings to then repay Constructions and Constructions to loan the money to DCA in order for DCA to repay Holdings.
After the restructuring of debt Constructions was involved in a number of legal battles over construction contracts. These proved costly for the company and when Holdings ceased to provide funds to help pay legal fees Constructions was wound up and a liquidator appointed.
The liquidator argued that the restructuring of debt in 1994 made Constructions insolvent. The liquidator also alleged that as DCA owned all the shares in Constructions it was in breach of its statutory and fiduciary duties by making it loan money to DCA. In doing so they had not acted in the interests of Constructions and its creditors, and thus it was an un-commercial transaction.
The liquidator also alleged that Holdings was under accessory liability because it was involved in the directors’ breaches of duty. For these reasons the liquidator claimed the transaction was voidable.
The judge held that the debt restructuring was not an un-commercial transaction and that the transaction which provided a direct benefit for one company in a group of companies might provide an indirect benefit for another. He also noted that as the directors had asked the group’s auditor and solicitor about the transaction. Neither had said it was wrong to do so, so the transaction was not in breach of their duties.
The liquidator appealed the decision but it was ultimately dismissed.
