Australian Credit Law Bulletin - Vol 2, No 4, July 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:
- Opposed to a DCA? "Don't sit on your hands!"
- Garnishee of the surplus from a mortgagee sale
- Making directors pay
- Overturning a Part X arrangement
- Whoops! Mistakes in the bankruptcy notice
- Proposed Australian bankruptcy reforms
- Getting co-guarantors to pay their share - NZ case
1. Opposed to a DCA? "Don't sit on your hands!"
A number of transactions before Event Management Specialist Pty Limited went into voluntary administration may have been preferences. In particular, Mr and Mrs Eaton, the principals of the company had been granted a floating charge which appeared likely to be voidable against a liquidator. However, the preferences would only be pursued if the company went into liquidation.
The creditors decided not to put the company into liquidation. They approved a deed of company arrangement. The largest unrelated creditor, Bathurst City Council, voted against the DCA which, it was predicted, would see the creditors receive 5.5 cents for every dollar owed, but a majority of creditors by both number and value (including Mr and Mrs Eaton of course) voted to approve.
The council then sued under section 445D of the Corporations Law, to try to set aside the deed. At the hearing, the Council offered to fund any preference action and to pay out the other unrelated creditors the 5.5 cents in the dollar.
The judge set aside the deed. He said: "There is inevitably a tension between foregoing potential claims such as for preferences, as against the relative certainty of what is proffered under a DCA. What can have a crucial bearing on how that choice is exercised is whether funding for such recovery litigation is likely to be forthcoming. The obvious source for such funding is the larger creditors. The present litigation before me has yielded such a funding proposal from the principal creditor, though only at the hearing, well after the last creditors' meeting ... That later factor, with the 5.5 cents offered in the dollar, forms the basis for my decision to terminate."
He also advised creditors in this situation to make the funding offer before the vote for the deed (even if only an offer in principle, subject to further investigation). He told "major creditors not to sit on their hands, especially if they are opposed to the DCA."
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2. Garnishee of the surplus from a mortgagee sale
Coshott v Learoyd [2001] FCA 88 (16 February 2001)
Mr and Mrs Coshott had lost a legal battle with the Woollahra Municipal Council and were ordered to pay $131.232 in legal fees. They failed to pay. The Council discovered that the Coshott's property at 5 Gilliver Ave, Vaucluse was being sold by mortgagee sale and that there was a contract for sale for $6,000,000. The Council believed that there would be a surplus after the mortgage had been paid.
Its solicitors (who also acted for Citibank, the mortgagee) applied for a garnishment notice a week before the sale was to be completed. A garnishment notice orders the debtors' debtor to pay money to the creditor. In this case, Citibank was ordered to pay $131,232 to the Court once the sale had been concluded and they had received the $6 million. The Court would then pay it to the Council.
The money was duly paid into court. The Coshotts then went back to court and raised various reasons as to why the money should not be passed on to the Council.
The most interesting argument was that there was no "debt due or accruing" at the time of the application by the Council's solicitors. The sale had not been completed so there was certainly no debt due - the bank would only owe the Coshotts money (the surplus after their mortgage had been satisfied) once the $6 million was paid.
When the application was made, the week before the sale, could the debt be said to be "accruing"? The judge thought not. He said that: "it is doubtful whether, in this context, the words `debt accruing' cover a contingent liability." It is noteworthy that he seems to suggest that garnishment orders should be issued "where it appeared that a debt was likely to become due or accruing." However, he admits that "such a change would enable enforcement of a judgment by garnishment in a greater range of circumstances."
He held that in this case he did not need to decide whether there actually was a debt accruing. The relevent rules say "...unless it appears to the Court that... there is a debt due or accruing to the judgment debtor from the garnishee." It was sufficient that it appeared to the Court that the indebtedness existed. He ordered that the money be paid to the Council and awarded yet more costs against the Colshotts.
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3. Making directors pay
Milner v Ali [2000] QDC 107 (29 February 2000)
Havencatch Pty Ltd went into liquidation. Milner, the liquidator of Havencatch, sued to recover over $70,000 from Ali and Ramswarup, the former directors of Havencatch. Under section 588G of the Corporations Law a director is liable for a debt incurred when the company is insolvent, or when there are reasonable grounds for suspecting that the company is insolvent.
There was little doubt that Havencatch was insolvent. The judge noted "this was not a case of a company which was temporarily short of liquidity but of a company with an endemic shortage of working capital." The GM, Mrs Smith, did her best to keep the business going and kept Ali regularly informed. She told him of her difficulties in paying creditors, and how she was having to withhold some payments. His reactions were non-committal. She was asked to "soldier on". Mrs Smith seldom saw Ramswarup.
The court had no difficulty in finding that Ali had actual knowledge of the insolvency. Ramswarup was also liable. While he had no actual knowledge of the insolvency, he neglected his duty to properly supervise the affairs of Havencatch. He simply turned a blind eye to the management and financial affairs of the company.
The judge quoted with approval from Tourprint International Pty Ltd (In Liq.) v. Bott (1999) 32 ACSR 201 at 215: "Directors cannot rely on a complete ignorance of or a neglect of duty....and cannot hide behind ignorance of the company's affairs which is of their own making or, if not entirely of their own making, has been contributed to by their own failure to make further necessary enquiries."
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4. Overturning a Part X arrangement
Spicer v Wily [2000] FCA 1200 (30 August 2000)
John French experienced financial problems as a result of unsuccessful litigation against Spicer and others. Spicer presented a creditors' petition. French appointed his solicitor, Knaggs, as his Controlling Trustee.
Knaggs sent notice of a meeting to consider a proposal from French for a Part X Composition. It proposed a payment to creditors of $20,000 (about two cents in the dollar.) The statement of affairs indicated few assets and only a pension as income. Knaggs stated that the offer was more than the creditors would receive if French were to become a bankrupt.
At the meeting a debt of $158,000 owing to French's wife, was recorded. This debt had previously been listed at $49,000 but was "corrected" by Knaggs. Knaggs himself was also a creditor. He rejected a suggestion of a conflict of interest in his multiple roles of legal adviser to French and his associates, creditor, and trustee. Wily presided at the meeting. Spicer sought an adjournment in order to determine the proof of debt but this was lost. The composition was approved.
Spicer sought a declaration that the composition was void on the basis of the debtor giving false or misleading information (section 222(4) Bankruptcy Act 1966). He further sought that it be set aside on the grounds that its terms were unreasonable or not calculated to benefit the creditors generally (section 239).
Under those provisions the Court must decide whether, in the interests of unsecured creditors, there should be further inquiry into the debtor's affairs and greater details provided by the debtor. There need only be an arguable case that creditors will be benefited. It is not necessary to establish that creditors are more likely to be advantaged by bankruptcy.
The Court found that Knaggs failed to carry out a satisfactory investigation into the large claim by French's wife or into claims by some of French's related companies. The composition was supported by "friendly" creditors and opposed by those at arm's length. The proposed payment of 2 cents in the dollar was described as "trivial".
For all of these reasons the composition was set aside and a sequestration order made against French's estate.
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5. Whoops! Mistakes in the bankruptcy notice
Wright v Australian & New Zealand Banking Group Ltd [2001] FCA 386 (5 April 2001)
The Bankruptcy Act (1966) provides that a bankruptcy notice must be in accordance with the prescribed form. What happens if a notice contains minor errors or omissions?
The bank issued a bankruptcy notice claiming a debt of $3.8 million. It contained a number of irregularities. Interest was claimed under the wrong statute, the name of the person applying for the notice was left blank, there was a failure to emphasise certain matters in the notice by the use of bold typeface and, in one sentence, the word "nor" rather than "or" was used in error.
The judge found that the claim for interest was no different than it would have been if claimed under the correct statute. As for the other irregularities, the judge adopted a common sense approach and declined to declare the notice invalid. (We note that the process is much easier if you do get the documentation right first time.)
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6. Proposed Australian bankruptcy reforms
On 7 June 2001, the Attorney-General, the Hon Daryl Williams introduced bankruptcy reform bills into Parliament If passed, the key changes to the Bankruptcy Act will be:
- A 30-day cooling-off period for debtors who try to make themselves bankrupt;
- New powers for the Official Receiver to reject the bankruptcy petitions of recidivists and debtors who "appear unwilling to pay";
- The early discharge process (ie. at six months);
- The income threshhold for "debt agreements", an alternative to bankruptcy will be increased to over $50,000;
- Extension of the bankruptcy for non-cooperative bankrupts becomes easier.
For a fuller summary see issue 4 of Vantage , the Data Advantage newsletter, or for a really detailed explanation see the Attorney-General's 34 page explanatory memorandum via the ITSA website.
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7. Getting co-guarantors to pay their share - NZ case
Martin Leo Coffey v Frederick Herbert Morris & Anor [2001] NZCA 98 (2 April 2001)
Coffey, Morris and Roberts had guaranteed a loan by DFC Finance to a business which subsequently failed. Judgment was entered against the three for around $6 million.
DFC was entitled to recover the $6 million from any of the guarantors. If one guarantor had paid the whole debt, he would have a claim for the other two to repay him $2 million each.
Ultimately DFC made separate settlements for $4.9 million from Coffey, $0.5 million from Morris, and $128,000 from Roberts. Coffey then sued Morris and Roberts, claiming that he had paid $2.9 million more than his fair share.
Sadly for Coffey, his payment to DFC was also settling two other actions by DFC against him personally (for around $2.5 million) and one for return of property by his wife. His settlement deed did not specify how much money was being allocated to each debt and the courts considered that the "overpayment" was explained by the settlement of the other claims. He failed at first instance and on appeal.
