Aug 2005 - Pattisons Business Advisors and Insolvency Specialists

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					                     Insolvency Communique
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                                                                                          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.
    petitioning creditor;
   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.
                                                         2

PATTISONS


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
                                                                 bankrupt.
   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.
                                                        3

PATTISONS

                                                            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
                                                            agreement.
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
struck out.
                                                            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.
services.‟
                                                            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.
staff.
                                                            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.
                                                       4

PATTISONS

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
                                                               overdraft.
   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
                                                               customer.
    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.‟
    the licence.
                                                               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
                                                               payments.
provided with evidence of a similar cash-on-
delivery arrangement maintained for several
                                                           Important Notice.
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

				
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