Australian Credit Law Bulletin - Vol 7, No 6, August 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@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:
- Company sells goods seized for debt by Sheriff under "walking possession"
The Sheriff seized machines. Debtor company sold them. What now? - Lawyer punished for failing to disclose to the other side
An example of the paramount duty of a legal practitioner not to mislead the court - Disqualification of a director for having too many companies fail
- Using the Trade Practices Act to nail a director for insolvent trading
PA forbids misleading, deceptive, or unconscionable conduct - a fascinating case! - Using the Corporations Law to make a director liable for insolvent trading
The usual way to make directors personally liable once a company has failed.
1. Company sells goods seized for debt by Sheriff under "walking possession"
Guss v Magistrates' Court of Victoria at Dandenong & Anor [2005] VSC 153 (11 May 2005)
In November 1999, Ms Pamela Knott obtained a judgment for $18,582.50 against Casual Life Furniture Pty Ltd. Casual Life didn't pay, so in December 1999, Ms Knott's solicitors got a warrant authorising the Sheriff to seize and sell property of Casual Life to pay the debt.
In May 2000, the Sheriff's officer went to the Casual Life factory premises. He seized two large and extremely heavy presses by taking what is known as "walking possession" of them. Mr Varendran, an accountant at Casual Life, signed the seizure notice and an acknowledgment that he undertook to abide by certain "Conditions of Safekeeping (Seized Goods)".
On 30 January 2001, an officer of the Sheriff, Mr Jacotine, attempted to take the seized items from the premises to the Sheriff's store. However, Casual Life obtained an order for stay of execution in the Melbourne Magistrates Court.
On 28 February 2001, Casual Life agreed to sell its stock, plant and equipment to Casual Life Furniture International Pty Ltd, a new company that the directors of the first company had set up.
Afterwards, Casual Life International took over the Casual Life business which it carried on at the same premises. On 9 November 2001, Mr Jacotine came back to the Causal Life factory seeking payment of the judgment debt or the removal of the seized items. Mr Joseph Guss showed him a copy of the 28 February 2001 agreement between Casual Life and Casual Life International, and told him that the goods had been sold.
Mr Joseph Guss and his son, Mr Antony Guss, two directors of Casual Life Furniture Pty Ltd, were charged with an offence under s111(7B) of the Magistrates' Court Act 1989 of disposing of property seized by the Sheriff, without having obtained his written consent.
After a drawn out dispute over whether Joseph Guss, a lawyer, was properly served, a hearing in the Magistrates' Court resumed in July 2004. At this hearing, after the prosecution had finished presenting its case, the defence submitted that no charges had been out. The lawyer for the defendants argued that the warrant of execution was valid for only one year. As there was no evidence that the warrant had been extended (and after the prosecution had completed its case, no more evidence could be added) there was no case to answer. (The warrant had indeed been extended to 20 December 2002, according to the Magistrates' Court's lawyers, but the judge would not accept any more evidence.)
However, the Sheriff had taken walking possession within the year, therefore the extension beyond 12 months was not necessary. He had tried to take the goods away after the year was up, but walking possession was execution. The judge said, "I adopt the generally accepted view of the meaning [of execution] as being the act by the Sheriff of attending premises and seizing the goods, either by actually removing them or by applying to them the status of 'Walking Possession'.
The hearing was adjourned so that the Guss's could appeal to the Supreme Court. In general, the courts are reluctant to interrupt the normal course of procedure in criminal matters. Appeal courts won't review a decision such as this, in relation to evidence or procedure, unless the circumstances are special or exceptional. In this case the Judge in the Supreme Court refused to change the original judge's decision on the validity of the warrant. He concluded that the proceeding before the magistrate should be allowed to run its course.
The final outcome of that case - the prosecution disposing of property seized by the Sheriff - is not reported.
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2. Lawyer punished for failing to disclose to the other side
Mr Guss, a solicitor, was acting for his wife, Sandra Guss, who was suing Geelong Building Society (in liq.). The building society had sold a property owned by Mr and Mrs Guss at a mortgagee sale. A matter relevant to this issue was whether the house on the property encroached across the boundary between two lots. If it did, then it was arguably better to sell the property as a whole, as the defendant had done.
Three weeks before the trial, Mr Guss engaged Muir (who was a licensed surveyor) to provide advice. Muir sent Guss a fax attaching what was described by Muir (in the cover sheet) as "a copy of the survey plan".
Guss, as solicitor for the plaintiff, did not make discovery of the plan. Discovery is the compulsory disclosure of pertinent facts or documents to the opposing party in a civil action before a trial. Discovery helps a party find out the other side's version of the facts, what witnesses know, and other evidence.
On the first day of the hearing, Sandra Guss's barrister opened the case, stating that there was no survey plan in existence. Mr Guss was present as instructing solicitor but took no step to correct what was in fact a false statement. Later on, it came out that this plan did exist.
The Full Tribunal of the Legal Profession Tribunal, after a hearing of eight days, found the Guss guilty of misconduct at common law. Misconduct in a professional capacity has been defined consistently as conduct which would be reasonably regarded as disgraceful or dishonourable by "fellow professionals" of good repute and competency. The Tribunal said, "It has truly been said that honesty as well as knowledge and ability are essential ingredients to be a member of and practise in an honourable profession. ... We consider it appropriate for the Full Tribunal to express its strong disapproval of the conduct of Guss. His conduct was intentional and deliberate… His attitude throughout the proceedings gave a clear indication of lack of remorse."
His practising certificate was cancelled for three years.
Guss appealed the decision and the sentence to the Supreme Court of Victoria. The Supreme Court dismissed the appeal. The president of the Court said:
"It is difficult to overstate the importance to the administration of justice of the paramount duty of a legal practitioner not to mislead the court. Where there is any conflict, or risk of conflict, between that duty and what the practitioner perceives to be his/her duty to the client, the duty to the court must always prevail. Nowhere is the risk of conflict more likely to arise than in relation to the obligation to make discovery. … For a practitioner to do what Guss has been found to have done - knowingly to withhold a relevant document and to stand silent while counsel engaged on behalf of his client made in open court what he (Guss) alone knew to be a false statement about the non-existence of such a document - is rightly to be viewed as very serious conduct."
Guss was 68 at the time of the Supreme Court hearing. At the time of the tribunal hearing he had been in practice for over 42 years. He argued that cancellation of his practising certificate for three years would be "the equivalent of a life sentence". His wife was, at the time of the Tribunal's decision, terminally ill with cancer. (She died on 15 September 2005).
The judge said that his long and otherwise blameless career was "a significant mitigating factor. At the same time, the more experienced a practitioner is, the more acutely aware he/she should be of the vital importance of strict compliance with discovery obligations. I am not persuaded that the penalty imposed was manifestly excessive. In my view, the penalty imposed was within the range open to the Tribunal in its exercise of discretion."
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3. Disqualification of a director for having too many companies fail
Guss and Australian Securities and Investments Commission [2006] AATA 401 (9 May 2006)
Under s 206F of the Corporations Act 2001 ASIC may disqualify a person from managing corporations for up to 5 years if the person has been an officer of 2 or more corporations which have been wound up and a liquidator lodged a report under subsection 533(1) about the corporation's inability to pay its debts.
Antony David Guss was an officer of six such failed companies:
Buckland Products Pty Ltd (Receiver and Manager Appointed) (In Liquidation) ACN 006 858 715;
Scandi (Qld) Pty Ltd (In Liquidation) (De-registered) ACN 006 738 021;
Burwood Retail Pty Ltd (In Liquidation) (De-registered) ACN 078 381 076;
Kencord Manufacturing Pty Ltd (In Liquidation) ACN 096 218 530;
Moolach Pty Ltd (In Liquidation) ACN 097 341 190;
Bongania Pty Ltd (In Liquidation) ACN 097 107 401.
A notice to Guss from ASIC raised the following concerns:
1. You may have failed to understand and/or adequately perform your role and duties as a director in the ... 6 companies ... that have been wound-up.
2. You may have failed to act with care and diligence by failing to remit obligations to the ATO being a total amount of $276,172.68 and by entering into transactions to avoid employee entitlements in a total amount of $158,146.38 for the ... 6 companies.
3. You may have used your position as a director to the prejudice of others by providing preferential treatment to related companies/parties and family members.
4. You may have been a sham director of Casualife Furniture International Pty Ltd ACN 095 402 743 which has also gone into liquidation.
5. You may have been a director of companies that transferred their assets to new entities to avoid their creditors.
6. You have been a director of other companies that have been wound-up outside the last seven years.
7. You have numerous continuing directorships and businesses that may be an ongoing risk to the community.
8. You appear to lack commercial morality in connection with the management of corporations and the conduct of their businesses.
After a hearing, he was prohibited from managing a corporation for five years. He appealed to the Administrative Appeals Tribunal.
The Tribunal found that the disqualification was justified. The President's decision said:
"The keeping of complete and accurate records of a company's affairs is a fundamental requirement to underpin sound management … It is all very well to claim, as the applicant did at the hearing … that he had computer software problems, but if this is so, it does not explain why proper records in some other form were not kept. The applicant's persistent failure to comply with the statutory requirements in relation to maintaining books of account justifies … a period of disqualification …
"The public has a very real interest in the competence and integrity of those who manage corporations. The limitation of liability … to business operators by virtue of the corporate structure is a feature which, whilst of considerable advantage to the business proprietor, is cold comfort to those who are unfortunate enough to be amongst unsecured creditors whose prospect of a dividend in the winding-up of the company is in the bracket 0-10c in the dollar as has occurred with each of the 6 companies under consideration. The applicant's past record … as a director and (in some cases) secretary of the 6 companies indicates that the public interest will be served if the applicant is disqualified from managing corporations. … The applicant's manifest failure in relation to those companies is more than sufficient to warrant disqualification for five years."
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4. Using the Trade Practices Act to nail a director for insolvent trading
Con-Pac Systems (Aust) Pty Ltd v Wijeyewardene [2006] FMCA 985 (1 August 2006)
Con-Pac Systems (Aust) Pty Ltd made conveyor and packing systems. Mr Wijeyewardene was a director and shareholder and the controlling officer of Nature's Own Brands Pty Ltd which supplied tea and cocoa to supermarkets for in-house brands. In 2003,Nature's Own was trading at a considerable loss. The company did not tender to supply Coles and Woolworths with tea for their in-house brands. Instead, a new company set up by Wijeyewardene, "Fresh to You" Food Services Pty Ltd, tendered for this business.
Despite the winding down of its business, Nature's Own asked Con-Pac for a quote for a conveyor system, for its tea packing process. Wijeyewardene told Con-Pac that he intended to acquire four further machines from Argentina to package teabags and another two at a later stage being a total of eight tea packing machines.
Con-Pac quoted for $180,000 exclusive of GST and the quote was accepted. Mr Filidis, a director of Con-Pac borrowed $65,000 on the security of his parents-in-law's house to buy the materials for the job.
The initial progress payment was made, but after that there were no further payments. Con-Pac ended up having manufactured and delivered a conveyor system using borrowed money. It was effectively worthless to anybody else. Mr Filidis determined that his best chance of being paid was to complete the installation and trust that Wijeyewardene would honour his promises of payment. The machine was delivered but Con-Pac was not paid.
In March 2004 Con-Pac sued Nature's Own. On 26 May 2004, Wijeyewardene, placed Nature's Own Brands Pty Ltd in administration.
"Fresh to You" Food Services, also controlled by Wijeyewardene, claimed to be a creditor of Nature's Own Brands Pty Ltd for $519,557.21. "Fresh to You" also acquired the National Australia Bank's security over the Nature's Own immediately before Nature's Own went into administration. Of the total amount of unsecured creditors disclosed by the director, $216,992 appeared to be in respect of related-party creditors. These creditors were successful in approving a deed of company arrangement. This deed required Wijeyewardene to pay $80,000 to the Deed administrator in three instalments. He resumed the control and management of Nature's Own Brands Pty Ltd. All of the debtors were transferred to "Fresh to You", and all of the assets including the equipment for which payment had not been made was purchased by "Fresh to You" Food Services Pty Ltd for a nominal amount of $100,000.
Usually, in this type of case, creditors pursue directors of failed companies for insolvent trading under the Corporation Act. However, in this case, Con-Pac sued under the Trade Practices Act s52 (misleading or deceptive conduct) and s51AC (unconscionable conduct in business transactions), and under similar provisions in the Victorian Fair Trading Act 1999.
The judge in the Federal Magistrates Court was "satisfied that Nature's Own Brands Pty Ltd at the time of entering into the Agreement in August 2003 did not have any intention that it would necessarily pay for the equipment it was ordering… It was quite prepared to take action as it subsequently did to avoid liability to the applicant. [Wijeyewardene] is the sole officer of each of the companies in his group and for the purposes of knowledge of any misleading nature of conduct and intention they and he are essentially the same…"
He said that Wijeyewardene put the company into administration and acquired its assets back "in order to avoid the applicant's just claim for payment… Having obtained … possession the respondent then took steps to acquire title without payment through the administration procedure. He admits this. He was placed in a position of special advantage over the applicant by virtue of the fact that he controlled a group of companies between which he could and did shuffle assets."
He said, "This exercise of legal rights in such manner by the respondent was unconscionable."
He ordered Wijeyewardene to pay to the applicant damages of $165,541.80 plus interest.
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5. Using the Corporations Law to make a director liable for insolvent trading
Condon & Anor v Commissioner of Taxation; Condon v Holliday-Smith [2006] NSWSC 745 (19 July 2006)
In September 2001 Justinprint Australia Pty Ltd was in dire financial straits. Its accountant, Mr Clancy, subsequently told the New South Wales Supreme Court that, had it ceased trading, it could not have paid its creditors. It had been able to trade up to then because two directors, Mr Keighery and Mr Millett, had made available more funds. When that money ran out, they resigned as directors, on 7 September 2001.
Mr Holliday-Smith was not formally appointed as a director. However, he told Clancy to report directly to him on the financial affairs of the company. All management decisions and policy decisions were made by Holliday-Smith. Holliday-Smith was a signatory to the cheques. He signed, purporting to be a director, documents relating to factoring agreements.
After the company was put into liquidation, the liquidator, Mr Condon, brought a claim against Holliday-Smith for insolvent trading. The judge found that the company was insolvent from the date the previous directors resigned. He said that Holliday-Smith "gave instructions to Mr Clancy, which, on their face, were clearly improper, to ensure that Justinprint Australia Pty Ltd was denuded of whatever funds it had by transferring them to another company in which he was interested." He concluded that Holliday-Smith was a director within the meaning of the Corporations Act and was liable for debt incurred while the company was insolvent of $415,880.98 plus interest, a total of $569,699.97 plus costs.
In a separate action, the liquidator also sued the Commissioner of Taxation to recover money paid to the Commissioner which he believed were unfair preferences, and the court ordered the Commissioner to repay $75,000 plus interest. As part of the current case, the Commissioner sued Holliday-Smith for the amount the Tax Office was required to repay. He was successful and, including the costs of the various court actions, Holliday-Smith was ordered to pay another $131,538.38.
