Australian Credit Law Bulletin - Vol 7, No 7, September 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:
- Bankrupting the insane
Debtor thought the creditor did not exist therefore didn't owe it any money! - The perils of signing documents without reading them or getting legal advice
f you don't want to be liable for a business guarantee, don't sign it! - Does the losing side have to pay the fees if the winners' lawyer was struck off?
A case in a Victorian tribunal leads to a change in the rules - Hard to deny liability when you bounce a personal cheque
Especially if you wait till you're bankrupt
1. Bankrupting the insane
Owners - Strata Plan No. 23007 v Cross, in the matter of Cross [2006] FCA 900 (14 July 2006)
Ms Cross is 66 years old. She owns assets in excess of half a million dollars including a home unit worth $375,000, money on deposit with major banks of more than $130,000 and shares and securities in major listed companies worth approximately $90,000. In 2003 she owed the Owners of Strata Plan No. 23007 for unpaid contributions of $1,813.58 in relation to her unit so they started proceedings against her in the Local Court . Judgment was entered by default. The creditor then proceeded to bankrupt her.
The process servers and the lawyer for the creditor had some difficulty serving the various documents that needed to be served on Cross. This was in part because she was schizophrenic and refused to answer the door and in part because she was committed as a psychiatric patient at times during the process. The creditor's lawyers found out that she was under psychiatric care in Sutherland Hospital and the creditor's petition was served on her while she there. This, among other things, told her that the petition would be heard in court in four weeks. Her social worker, who was present when she was served, organised a meeting with Legal Aid. Unfortunately, this meeting was three days after the hearing. (Cross was discharged from hospital a few days later and it seems unlikely that she attended the meeting.)
While she was in hospital, an application was made to the Mental Health Review Tribunal for a Protected Estates Order. The order was not made because Cross would not disclose any details about her finances. On 11 April 2005, the Protective Commissioner was appointed as financial manager of Ms Cross' estate under the Protected Estates Act 1983 (NSW).
Cross didn't appear at the bankruptcy hearing, nor did any lawyer on her behalf. The registrar who made the order to bankrupt her was not aware that she was mentally disabled. The creditor's lawyer, Mr Bentley, couldn't recall whether he told the registrar or not.
A Deputy Protective Commissioner of New South Wales subsequently applied to have the sequestration order which made Ms Cross bankrupt set aside. The judge used strong language to describe the action (or lack of action) of the creditor's lawyer. He said, "Mr Bentley was blinded by an obsession to ensure that whatever else happened, Registrar Tesoriero made the sequestration order on that day. As an officer of the Court, he had an overriding duty to do more to draw to the Court's attention Ms Cross' circumstances and the circumstances under which she was purportedly served with the Creditor's petition."
Special rules apply to the service of people with mental disabilities and the judge concluded that she was not properly served. He said, "It is quite clear that Ms Cross should not have been bankrupted. She was solvent at the time. A creditor who issues a creditor's petition runs the risk that if the debtor is solvent, the likelihood is that the petition will be dismissed with costs. The evidence suggests that Ms Cross, due to her state of mind, may have thought that the body corporate of her home unit building did not exist and that she therefore did not owe it any money. Whether that be right or not, bankruptcy proceedings are not for debtors who won't pay debts. They are for debtors who can't pay debts."
He said, "I have come to the firm conclusion that it would be totally unfair, indeed a miscarriage of justice, for Ms Cross to be saddled with any of the relatively considerable costs of the administration of her estate." The trustee therefore missed out on payment for any of the work he had done.
However, the judge ordered that the creditor pay the full legal fees in the current court case for both Cross and the trustee.
Back to top
Information on our current seminars
2. The perils of signing documents without reading them or getting legal advice
CIT CREDIT PTY LTD v Blayn Norman KEABLE [2006] NSWCA 130 (25 May 2006)
Keable worked for Telstra. He was "a motorcycle enthusiast." He worked at Parry's Motorcycles Pty Limited on a voluntary basis in his spare time for some years. In 2000, Mr Zellner, a director of Parry's, talked him into coming to work at Parry's, with a view to acquiring a share of the business.
Keable started work as a salesman. Between 11 September 2000 and 2 February 2001, he paid Zellner $57,000 for shares. He did not sign any documents. A company search shows that on 3 October 2000 he became a director of the company. In February 2001, he stopped paying money because he had not been given any shares, although Mr Zellner had said that he would "get around to it".
Parry's gained the right to sell Yamaha motorcycles and entered into an agreement to finance its stock. He signed a guarantee to YMAF (later to become CIT Credit) when it was produced to him by Zellner.
Keable: What is a director's guarantee?
Zellner: It's a guarantee that exists only while you're a director of the company. If you resign then all your liability ends.
Keable: What's it for?
Zellner: If this isn't signed there will be no franchise with Yamaha to sell their motor cycles.
Keable then signed. Mr Zellner was a very emotional person who reacted poorly if obstructed. He did not read the documents before signing them. He didn't know that he was giving CIT a security over any real property (land) which he owned. He later said that if he had known, he would not have signed.
The guarantee included an acknowledgement that the guarantor had received independent legal advice, as evidenced by a certificate. It acknowledged that he fully understood the obligations created by the guarantee. CIT rarely obtained a certificate of independent legal advice from a dealer and no draft certificate was provided.
On 29 March 2002 Keable ceased to be a Director of the company but stayed on as a salesman. Based on what Zellner had said, he believed that ended his liability under the guarantee. This was not so.
There was no default on payments until the second half of 2002. A voluntary administrator was appointed to the business in October 2002. At that point it was discovered that motorcycles had suddenly gone missing.
Parry's failed to meet its obligations. CIT Credit called on the guarantee. The creditor's claim under the guarantor all relates to matters which occurred after Keable stopped being a director. Keable argued that he be excused from liability under the guarantee under either of the proscriptions of unconscionable conduct by s51AC of the Trade Practices Act 1974 (Cth) or under s7 of the Contracts Review Act 1980 (NSW).
In court he agreed that he knew that the guarantee meant that he could be called upon to pay business debts while he was a director. He agreed that he was so enthusiastic about the business that he would have signed whatever was put in front of him "within reason", but he said that he would not have signed the guarantee without knowing more about the business..
The judge in the court case decided that Zellner's conduct was unconscionable. She concluded that CIT should be held responsible for Zellner's conduct.
She held that he was acting "on behalf of" CIT. A manager of CIT had obtained Zellner's signature and left the documents for Zellner to get the other signatures. She also concluded that "[CIT]'s conduct of employing a complex and onerous form of guarantee and failing to adhere to the scheme requiring evidence of independent legal advice was unconscionable." Keable therefore didn't have to pay under the guarantee.
CIT appealed. On appeal, the court said, "the obtaining of guarantees from directors is a common transaction in Australian commercial practice. . The general nature of what a guarantee entails is part of the usual knowledge of the overwhelming majority of persons who become company directors... In the present case, this knowledge is reinforced by the plain English statement on the front page of the Guarantee, identifying the nature of the obligations assumed and the importance of reading and understanding the terms and conditions.
"There is nothing particularly complex about the guarantee. The document is set out in reasonably straightforward language. Its effect and purpose is clear. ... [n]either its terminology nor length are such as a person of normal literacy would be unable to comprehend.
"It may be that a lay person would not necessarily understand that the guarantee did not automatically terminate when the guarantor ceased to be a director. By the conversation he had with Mr Zellner, the Respondent was [made aware] of the relevance of that consideration. However, neither at that time nor subsequently, when he ceased to be a director, did he taken any steps to confirm the lay opinion he had received from Mr Zellner."
The Court of Appeal found that there was no evidence that Zellner was "pressurising the defendant to sign the document without reading it" as the trial judge had inferred.
The manager who dropped the documents off did so only because Parry's was on his way home. He didn't intend to explain the legalities of the guarantee, nor did he delegate that task to Zellner. Zellner was acting on behalf of Parry's not CIT when he asked Mr Keable to execute the documents.
The fact that the CIT did not know the misrepresentation had been made does not make it irrelevant. However, because it didn't know, Zellner's conduct is not entitled to significant weight. The fact that he was wrong in what he said does not make it unconscionable or unjust.
"Keable fully understood the significance of the act of signature. The creditor made that fact abundantly clear in the plain English instruction on the front page of the document... [and] bears no responsibility for [his] failure to read the document."
The fact that the creditor didn't adhere to the scheme for a certificate to prove that Keable had had legal advice didn't make the guarantee unjust or unconscionable.
The appeal was allowed. Judgment was entered against Keable for $424,498.41.
Back to top
Information on our current seminars
3. Does the losing side have to pay the fees if the winners' lawyer was struck off?
Linton v Creighton-Brown & Co Pty Ltd No. 2 [2006] VCAT 864 (18 May 2006)
Linton sued Creighton-Brown & Co for $1.8 million. At the start of the hearing, Mr James M Woods was given permission to appear as a professional advocate. He said that he had formerly been a legal practitioner but did not currently hold a practising certificate. He didn't say that he had been found guilty of misconduct and that his practising certificate had been cancelled.
The hearing took several days and the claim was dismissed. The Tribunal ordered that Linton should pay costs pay to be assessed by the Principal Registrar on County Court Scale D. Linton appealed the costs order.
At the time of the hearing, Woods was not entitled to engage in legal practice, nor to recover any amount in respect of anything done in carrying out legal practice. The President of the Tribunal said, "it follows that it would be incongruous if the respondent was reimbursed for the cost of work of this character."
He made this final comment: "it is important that persons who have been legal practitioners but are no longer permitted to engage in legal practice be prevented from circumventing any order made preventing them from engaging in legal practice. To that end, the Rules Committee of the Tribunal has recently resolved to make rules which would prevent such persons from being able to be recognised as a 'professional advocate' in tribunal proceedings."
Back to top
Information on our current seminars
4. Hard to deny liability when you bounce a personal cheque
Judd v Margaret River Wine Growers Pty Ltd [2006] FMCA 714 (19 May 2006)
Margaret River Wine Growers Pty Ltd provided Judd with $34,000 worth of wine. The invoices were all addressed to:
Paul Judd
ACA Pty Ltd
20-21 Rosemary Court
MULGRAVE VIC 3170
ACA Pty Ltd didn't exist. Judd later claimed in court that he had worked for (and ACA appeared to be an acronym for) Asia Connect Australia Pty Ltd.
However, when pushed for payment, Judd paid $1500 of his own money, then paid a personal cheque for $25,000 in full and final settlement of the debt. The cheque bounced. Margaret River sued him on the bounced cheque, got judgment, commenced bankruptcy proceedings and ultimately made him bankrupt. Judd applied to have the order making him bankrupt reviewed.
A series of Judd's email excuses and explanations to the creditor are reproduced in the decision and they paint an interesting picture of the debtor.
Email dated 25 September 2003
"Dear Doug,
Further to our recent conversations, we advise that settlement iof (sic) the above will be finalised on Wednesday, 8th October 2003."
Email dated 4 December 2003
"Dear Doug,
Paul Judd here again.
It's too early to ring Perth . I left my mobile in a toilet at my Mother's Nursing Home in Adelaide last Tuesday and couldn't talk to you. Have got the phone back now and have news for you.
Please call me after 6.00 pm Melbourne time today as I have meetings until then."
Email dated 22 April 2004
"Hi Doug,
Spoke to WESTPAC earlier this morning and then tried to call you.
Transfer was held over one day to clear funds.
I still have Bendigo Bank chq on hand after it was returned via mail late last week.
I am out all day today, as I was yesterday afternoon at a training thing - SORRY! I am on deck tomorrow."
Email dated 23 April 2004
"Hi Doug,
Re: MRW
Have just ducked out from training for lunch and have found that you are not at Bentleys MRI as yet.
I have no idea if money has arrived in Perth . If not, I am free again after 5.30 pm Melbourne time for an hour."
Email dated 5 May 2004
"Hi Doug,
I am off to Sydney tonight for the next two days. I have finally got in touch with my sister and she will call you at Bentleys MRI Perth number between the correct times in the next day or so. The t/f has happened and she is in control for now as it was done in Adelaide ."
Email dated 19 May 2004
"Hi Doug,
Have got the details you wanted - I am in APPLE training until 2.00 pm Melbourne time so can I please speak to you thereafter."
Email dated 17 May 2004
"Hi Doug,
Sorry, I haven't been available. I cracked 3 ribs in a silly accident last Thursday. Have come in this morning on way to doctors to clear my emails.
Will be back on deck tomorrow (Tuesday)."
Email dated 20 May 2004
"Dear Doug,
I know what has happened to that transfer - GRRRRR!! Pretty easy to fix.
I am in training again until 2.00 pm, so I will talk to you after that."
The judge said:
"Over a period of some three years the Debtor has not only failed to defend the claim against him in the local court but has failed to take any action to set aside that judgment, and indeed on his own evidence has made an initial payment of the debt of $1500 and then reached a compromise and tendered a cheque for $25,000 in payment of that compromise.
"I do not accept as credible the evidence of the Debtor when he denies indebtedness to the petitioning creditor. If the Debtor was genuinely purchasing wine on behalf of another person and/or company, then it is difficult to accept, and I certainly do not accept, that in the circumstances he would have paid $1500 of his own money in relation to the debt. Nor would he then reach a compromise to pay $25,000, leading to the tendering on at least one occasion of a cheque for that sum which was then dishonoured."
Even if it wasn't his debt, a creditor can, in any case, sue on a bounced cheque. The judge said, "he would not have, having regard to the authorities in relation to claims for dishonoured cheques, a defence to an action based on the dishonoured cheque. There is no basis upon which this court in my view can lawfully refuse to exercise its discretion to accept the creditor's judgment as proof of the debt relied upon as founding the creditor's petition."
He declined to review the decision to bankrupt Judd.
