JULY - AUGUST 2005
Removal of liquidator
If there had been a large number of creditors
In re Bettertiles Projects Pty Ltd the directors of a and the liquidator was as close to the
company asked the New South Wales Supreme petitioning creditor as he appeared to be in the
Court to make an order removing a liquidator. present case, then he may have been removed.
The directors complained that the liquidator had: However, in light of the whole of the facts the
liquidation had not been compromised, and the
Accepted a large amount of funding from the liquidator should not be removed.
Been over-zealous in pursuing the directors Good faith and ordinary course of business
and too close to the petitioning creditor;
Charged exorbitant fees, paid by the The failure of the Wattle Investment scheme -
petitioning creditor; which offered returns of 50% per annum – has
Failed to take proper legal advice about the resulted in extensive litigation.
petitioning creditor‟s debt or seek directions
from Court where appropriate; and Clout v Sing dealt with the trustee‟s attempt to
Failed to give any information to the directors. recover $135,000 repaid to a couple of investors
less than a month prior to the debtor becoming a
The liquidation was the culmination of a bitter bankrupt.
dispute over the quality of work performed on a
large building project. The only creditors were the At trial, the only issues were whether or not the
dissatisfied head contractor and a company investors had acted in „good faith‟ when they
associated with the directors. demanded repayment of their loans; and whether
the repayment was „in the ordinary course of
The Supreme Court held that: business.‟
There was no doubt that the petitioning The investors became concerned after reading
creditor had „generously‟ funded the liquidator newspaper reports warning about so-called „get-
– in total it had expended $550,000 to pursue a rich‟ schemes.
claim of $867,000.
The husband contacted the journalist who wrote the
The liquidator had been „zealous‟ in pursuing story but was unable to get confirmation about
the directors - obtaining a warrant to obtain whether or not the Wattle scheme was one of the
documents that the directors would not hand schemes referred to in the story. He then
over, and conducting examinations for almost contacted a private investigator who told him that
seven days - but that was partly due to the stiff the principal of the scheme was a convicted
resistance he had met from the directors. fraudster and a former bankrupt. The investor‟s
next contact was the Health Insurance Commission,
It was reasonable for the liquidator to refuse to which explained that the factoring of fees due to
seek further legal advice about the validity of medical practices – the supposed foundation of the
the petitioning creditor‟s debt unless he was Wattle business – „could not occur.‟
funded to do so.
The husband next visited his investment adviser,
It was true that the liquidator had not provided arguing that the investment had been made due to a
the directors with information, but this misrepresentation by the advisor, and demanding
reflected his concerns that to do so might be to immediate reimbursement of the investment.
the detriment of the company. Around one week later the original investment was
repaid direct into their bank account.
The investors argued that they were never aware of With $300,000 in his trust account, the application
the debtor‟s financial position. They explained that was supported by the liquidator as well as the
it was learning of the debtor‟s convictions for fraud petitioning creditor. ASIC had been advised of the
and the lies told by their investment advisor that led application and had provided a letter to the Court
them to believe their funds might be at risk. confirming that it had no objection.
The Federal Court held that: Satisfied that the directors were otherwise
successful in carrying on the business of the
The trustee had to show that the investor knew company and that there was no lack of commercial
or suspected actual insolvency – to show that morality or any risk to the public interest, the Court
the investor had reason to suspect insolvency was prepared to terminate the winding up and
was insufficient. return the company to the control of the directors.
The investors were not alerted by the Trustee’s objections
newspaper article to the prospect that the
debtor might be insolvent. When the Inspector-General in Bankruptcy refused
to overturn a trustee‟s decision to object to a
The investment advisor‟s request that they debtor‟s discharge from bankruptcy, the bankrupt
„stay quiet‟ could not be held to convey appealed to the Administrative Appeals Tribunal.
anything about the scheme‟s solvency.
The trustee objected on five grounds, that the
There was no doubt that the investors had no bankrupt had:
actual knowledge that the scheme was
insolvent at the time they received payment. Managed a company whilst an undischarged
There were many reasons why a borrower may Engaged in misleading conduct in respect of
consider it in their interests to repay loans an amount of more than $3,000.
early within „the ordinary course of business.‟ Failed to provide information about his affairs
to the trustee.
In this case it could be inferred that repayment Failed to pay an assessed income contribution
was made to avoid further publicity. amount.
Failed to disclose his beneficial interest in a
The trustee‟s claim was unsuccessful. The property to the trustee.
investor‟s concerns about the character of the
principal of the scheme – apparently well founded In Trkulja & Anor and Inspector General in
– did not equate to actual knowledge that the Bankruptcy the AAT determined that:
scheme was insolvent.
In his evidence the debtor had actually
Termination of liquidation due to solvency conceded that he had managed the company in
question, and had also explained that
In re Short Pty Ltd (in liquidation), the Federal information provided on a credit card
Court of Australia was asked to terminate the application „was a deliberate lie to ensure
liquidation of a company on the grounds of actual success in his application.‟
solvency. Search warrants had located documents
previously requested and not provided by the
The directors of the company explained that they bankrupt.
had neglected the financial affairs of the company, The relevant income contribution assessment
and that their failure to pay the statutory notice was notices did not specify a payment date at least
due to laxness rather than insolvency. 14 days after the date of the assessment and so
were not valid. Accordingly that objection
After the winding up order had been made they could not be sustained.
cooperated with the liquidator, providing him with Separate legal proceedings conducted by the
information to assess the financial position of the trustee in the Federal Magistrates Court had
company. After receiving their report, the led to a judgement finding that the property
liquidator estimated that $300,000 was required to was correctly the property of the mother and
ensure that all known creditors and all professional sister of the debtor.
fees involved in the application would be paid.
agreement would not affect a debtor‟s „credit
Although the bankrupt was partly successful, the rating.‟
AAT upheld three grounds for the objection.
The service provider asked the Federal Court to
Credit Card dispute strike out parts of the statement of claim, which, it
said, disclosed no reasonable cause of action.
Westpac Banking Corporation v Murphy dealt with
a lender‟s attempt to recover credit card refunds The service provider argued that it was „literally
under a merchant agreement. and substantively correct to say that a debt
agreement… [was] „not bankruptcy.‟"
A solicitor applied to his bank for a merchant
facility so that he could charge professional fees to In relation to the impact on a debtor‟s credit rating,
his client‟s credit card. the service provider said it was factually incorrect
to argue that a debt agreement would always have
After some $68,000 had been charged to the credit an adverse affect on a person‟s credit rating. The
card, the client wrote to the bank disputing the service provider also argued that the examples
account. Following the normal procedure, the bank pleaded by the ACCC did not set out any examples
advised the solicitor of the dispute. of a customer‟s credit rating pre or post entry of an
The solicitor then asked the bank to cancel the
facility. The bank later charged the debt back to The Federal Court held that:
the merchant facility, and in due course
commenced proceedings against the solicitor. The „not bankruptcy‟ representation simply
meant that a person entering into a debt
The solicitor denied that he had any contractual agreement would not become a bankrupt –
arrangement with the bank, and asserted that all which was true.
charges had been properly authorised in writing.
Although other claimed representations „might
The solicitor argued that the Terms and Conditions sound a difficult proposition to prove‟ the
included an implied term that the Bank was ACCC was entitled to the opportunity to try.
authorised to charge back only if the Cardholder
“reasonably” disputed liability. Noting that the ACCC‟s claim could still proceed
in relation to individual agreements, the Court
The New South Wales Court of Appeal held that in struck out most of the representations objected to
the absence of a reason for implying such a term by the service provider, ordering costs against the
into the otherwise clear wording of the relevant ACCC.
conditions, there could be no reasonable prospect
of the claim succeeding, and the defence should be Sale of business & use of name
The vendor of a business provided vendor finance
“It’s not bankruptcy” to the purchaser, and also granted a three year lease
over the premises which it owned. The finance
Australian Competition and Consumer Commission agreement included a clause requiring the
v Fox Symes & Associates Pty Ltd dealt with a purchaser to operate the business under the same
preliminary skirmish in an action taken by the business name unless the vendor finance was
ACCC against a provider of „debt management repaid.
When the original lease expired the landlord
The ACCC said that the company had made granted a further four year lease, which contained a
numerous misrepresentations via advertisements, provision that the business name was owned by the
material on the company‟s website, and landlord, and that the tenant would forego the right
information provided by the company‟s call centre to use the name if they relocated.
That lease was followed by a further five year
The claimed misrepresentations included lease. When the final term expired, the tenant
statements that a debt agreement „was not relocated to nearby premises and continued to trade
bankruptcy,‟ and statements that entering a debt under the same business name.
In Premetis v 260 Oxford Street Pty Ltd & Ors the concern that the growing indebtedness would
New South Wales Court of Appeal held that: require the supplier to operate a business
On the original sale agreement, the business
name had been struck out. Having regard to past dealings, there were no
reasonable grounds for the supplier to suspect
In light of the purchaser‟s „somewhat that it would receive an advantage over other
contradictory evidence‟ this meant that the creditors as a consequence of the payments of
business name had clearly been deleted from its account.
the sale agreement.
This was because there was a well established
pattern that the company would pay the
The purchasers had been granted a licence to
supplier only when it had been paid by its
use the business name whilst the business was
subject to vendor finance. When the vendor
finance had been repaid, the licence was In assessing whether the supplier had reason to
extended to the period in which they occupied suspect that the company was insolvent, it was
the landlord‟s premises. important to look „not in hindsight but through
the contemporary eyes of the parties, at the
The purchaser‟s use of the business name at commercial circumstances then prevailing
nearby premises was a breach of the terms and between them.‟
In this case, the commercial reality was that
In light of the potential for confusion between two companies both accepted that payment on
the newly established business and other the invoices was not expected in terms of the
existing businesses operated by the landlord stipulation on the invoice, but rather when the
under the same business name, it was debtor received payment for the work done to
appropriate to restrain the purchaser from which the supply of goods related.
using the business name.
Although it was a factor to be considered, the
Unfair Preference recovery alteration to cash on delivery was not of itself
a decisive indicator of insolvency.
In Spectrum Joinery Pty Ltd (in liquidation) v
Turners Building Supplies Pty Ltd the Australian In all the circumstances it was clear that the
Capital Territory Supreme Court was asked to supplier did not deduce that the company was
consider a preference claim made by a liquidator. insolvent or have grounds to suspect
insolvency – except for the last payment.
The creditor and debtor companies had traded with
each other for almost 26 years. Evidence before This was because by the time of the last
the Court demonstrated a wide variance from the payment, there had been a significant reduction
supplier‟s standard 30 days terms, with payment in the company‟s purchases from the supplier,
ranging from as slow as 364 days to as prompt as which suggested a decreased capacity to pay.
17 days. In light of the other factors at the time, this
should have raised suspicions of insolvency at
The payments which the liquidator sought to that point.
recover were paid during a „credit freeze,‟ in which
The liquidator was successful – but only in
the supplier was prepared to supply only on cash-
recovering the last and smallest of the
on-delivery terms. However, the Court was also
provided with evidence of a similar cash-on-
delivery arrangement maintained for several
months, some four years before the company
passed into liquidation. The information contained in this newsletter is
by way of general comment only and is not
The Supreme Court held that: intended as a substitute for specific advice that
addresses your particular circumstances. You
The supplier‟s decision to move to place the should seek specific advice before acting.
company on cash-on-delivery terms did not
reflect concern that customer was in any
financial difficulty. Instead it reflected