August 2019

A bankrupt can enter into an arrangement with creditors to bring the bankruptcy to an end…

However, the Court can overturn any such arrangement, if, for example, it is unreasonable or not calculated to benefit the creditors generally.

The Bankruptcy Act provides that a bankrupt may make a proposal to the Trustee in Bankruptcy for a composition or arrangement of the debts, and if that proposal is accepted by the creditors by a special resolution the bankruptcy is annulled.

Judge White of the Federal Court considered these provisions in Bendigo and Adelaide Bank Ltd v Clout and delivered judgment on 18 February 2016.

Bendigo Bank made an application to set aside the arrangement entered into by the bankrupts on the basis that the agreement was unreasonable or not calculated to benefit the creditors generally.

The bankrupts were Michel and Julie Mouglalis. Mr, Clout was appointed trustee of their separate and joint bankruptcy estates in May 2012.

The proposal put by the bankrupts was for $50,000 to be made available to creditors subject to certain reductions for Mr. Clout’s fees. The evidence was that a special resolution was passed.

Bendigo Bank gave evidence that it did not receive any of the relevant correspondence from Mr. Clout.

The Bank argued that the proposal was not calculated to benefit the creditors generally, and His Honour accepted this submission.

The benefit to a small number of creditors was trifling, and many of the creditors who had indicated in the voting that they did not wish to receive a dividend were voting for the benefit of Mr. and Mrs. Mouglalis, and not for their own interests, or the interests of the creditors generally.

His Honour ordered that a new trustee be appointed and that the arrangement that had been approved should be set aside.

Bank borrower required by the Court to sign a mortgage…

In early 2008, Mr Elali, on behalf of his company Saracen Holdings Pty Ltd, discussed with the Commonwealth Bank a re-arrangement of this finance. He requested that the bank discharge a mortgage that they held over a Helensburgh property in exchange for a mortgage that he was willing to grant over a property at Voyager Point.

The Commonwealth bank provided the discharge of the mortgage over the Helensburgh property to the National Australia Bank when a loan was refinanced. However, Saracen Holdings Pty Ltd failed to sign the new mortgage over the Voyager Point property.

The Commonwealth Bank took the matter to Court and sought an order that the company be required to sign the mortgage.

The company, through its director, Mr Elali, argued that there was no written document and no mortgage and therefore the bank had no interest in the land and could not require him to sign the mortgage.

Section 54A of the Conveyancing Act provides that no action or proceedings may be brought in respect of any interest in land unless the agreement is in writing.

His Honour found that there was an agreement between Mr Elali on behalf of his company, Saracen Holdings Pty Ltd and the Commonwealth Bank that the company would give a mortgage over the Voyager Point property on exchange for the discharge of the mortgage over the Helensburgh property. His Honour also pointed out that the bank had performed its part of the agreement and therefore the agreement was partly performed and that this was an exception to the principle set out in s 54A of the Conveyancing Act and ordered Saracen Holdings Pty Ltd to execute the new mortgage.

July 2019

A new Banking Code of Practice…

On 1 July 2019 the major Australian banks adopted a new Banking Code of Practice.

The new Banking Code of Practice, replaces the 2013 code and applies to the individual customers and small business clients of the banks.

The terms of the new Banking Code of Practice are incorporated as terms in the contract arrangements between the bank and the customer.

The new Banking Code of Practice sets out in clear and simple language the obligation of the banks to provide information about the ethical standards they set for themselves, the ways in which they will meet those standards and the services they provide. There is particular reference to vulnerable members of the community such as the elderly, the disabled and indigenous members of our society. The banks commit to provide information to customers that are most suited to the circumstances of the customer rather than most profitable to the bank.

In addition there is a commitment to train staff to understand and comply with the terms of the new Banking Code of Practice.

It is hoped that the new Banking Code of Practice will see fewer disputes between bankers and costumers and if there are disputes quicker and fairer resolution .

If any of our readers would like a copy of the new Banking Code of Practice please contact Peter Jackson at pjackson@jacksonassoc.com.au or Costin Stan at cstan@jacksonassoc.com.au.

Normal commercial practice sees a financier lose its priority in a caveat dispute…

In early 2017, Cashflow Finance Australia Pty Ltd entered into an agreement with Madebra Enterprises Pty Ltd to provide invoice finance. The agreement provided that the advances could be secured by a caveat over a property at Chipping Norton owned by the guarantors of money owing under the facility. Cashflow Finance did not lodge a caveat immediately because they considered that it would not be a “good selling point“. However, by November 2017, Cashflow Finance considered that Madebra was in default and lodged a caveat on the Chipping Norton property .

In early in 2017 a short term lender, LTDC Pty Ltd, advanced $150,000 to Madebra and lodged a caveat on the Chipping Norton property to secure the loan .

The argument before the Supreme Court of New South Wales was whether the later caveat of Cashflow Finance should take priority over the caveat of LTDC Pty Ltd.The starting position is that the first registered caveat has priority. To decide whether the order of priority should be changed, Justice Darke agreed with a submission put to him that all of the circumstances of the case should be looked at including what happened at the time of acquiring the equitable interest that could have been protected by the lodgment of a caveat.

Cashflow Finance regarded its right to lodge a caveat to secure its position as secondary security. The failure of Cashflow Finance to lodge a caveat is explained by their normal commercial practice which was the same across the industry. Cashflow Finance admitted that they were prepared to take the risk of not lodging a caveat and understood that another party might lodge a caveat that would have priority over their own.

Cashflow Finance criticized the due diligence conducted by LTDC and argued that if enquiries were made of Madebra the finance facility and the right to lodge a caveat of Cashflow Finance would have been discovered. His Honour rejected this criticism because of the nature of the loan advanced by LTDC.

In all the circumstances, His Honour found that the priority that LTDC enjoyed because they were first registered should not be disturbed. At the time of the hearing, the property had been sold and the balance of the sale price after payment of the first mortgage was held in a solicitor’s trust account. Because of the interest payable all of this money was ordered to be paid to LTDC and Cashflow Finance was ordered to pay the costs of LTDC in relation to the proceedings.

What appeared to be good commercial practice had disastrous consequences when it came to recovering the money owing.

June 2019

IF A MORTGAGE IS NOT EXECUTED CORRECTLY BUT STILL REGISTERED, DOES THAT MEAN IT CANNOT BE ENFORCED…

Between August and December 2017, Wayville Residential Investments Pty Ltd were loaned a total of $710,000 by Perebo Pty Ltd. Wayville defaulted and Perebo sued to recover the debt plus interest for the amount of more that $1,000,000.

Wayville argued that because the mortgage was not executed correctly, registration should never have been allowed and, therefore, the mortgage was not valid and effective to secure the debt.

Justice Stanley in the Supreme Court of South Australia held the problems with the mortgage rose no higher than demonstrating that the plaintiff’s solicitor failed to take due care in drafting and settling the mortgage document. The only way the registered mortgage could be set aside was if there was fraud and His Honour said that required actual dishonesty or moral turpitude.

The other principal argument raised by the borrower to set aside the mortgage and avoid payment of the debt was based on the interest charged. Wayville argued that an interest rate of 5% per month reducing to 3% per month of paid on time was unconscionable, under the general law or the ASIC Act, and therefore the mortgage was unenforceable. To establish this unconscionability there must be one of the following features:

Exploitation of vulnerability or weakness;
Abuse of position of trust or confidence;
Insistence upon rights in circumstances which make that harsh or oppressive;
Inequitable denial of legal obligations;

His Honour held that there was no evidence that that the borrower was at any special disadvantage or in a position of vulnerability. In addition, His Honour found that there was no obvious difference in bargaining power between the lender and the borrower.

His Honour ordered that the lender Perebo have possession of the mortgaged properties and a judgment for $1.1 million.

A PROMISE MADE IN FAMILY LAW PROCEEDINGS MIGHT LATER BE ENFORCED…

During Family Court proceedings Michael Fiertag promised to leave a property to his wife in his Will. She agreed to forego a payment of $50,000.00 from him provided he built a garage on the property. Orders were made by the Family Court and noted that the agreement was made.

Before his death, Mr Fiertag changed his Will and left his former wife, Mrs Susan Simpson Cook nothing. She sued the executor of the estate and the New South Wales Court of Appeal upheld her claim to the property and ordered that it be transferred to her.

It is important to remember that parties may be bound to promises made.

May 2019

The approach taken by the court to a breach of fiduciary duty owed by a director and the calculation of damages resulting from the breach…

In late 2012 Mr Schmidt entered to discussions with Mr Haim Bzezinski, Danny Ruschin and companies that they controlled about entering into a joint venture to export live cattle to Israel. Mr Schmidt became a director of AHRKalimpa Pty Ltd, the company that would conduct the export trade. It was part of the negotiation that if the agreement for Mr Schmidt to attend to the general management of the joint venture was terminated the parties and related entities of AHRKalimpa would not sell, trade or facilitate delivery of livestock for 2 years.

A number of export shipments were made but the first two of these were not profitable. In late 2013, Mr Schmidt and his company, Otway Livestock Pty Ltd, devised a plan to takeover the business. After the negotiations on the joint venture terms broke down, Mr Schmidt resigned as a director of AHRKalimpa and he took steps to continue the export trade to the exclusion of AHRKalimpa and the other joint venturers. In late 2013 To aid him in carrying on his new business, he broke into the offices of AHRKalimpa and stole information to facilitate the conduct the livestock export business that he wanted to continue.

The court found that Mr Schmidt took advantage of information which was confidential to the joint venture, in order to continue to conduct of the new livestock export business through his company, Otway Livestock. The court further found that Mr Schmidt breached his duties owed by him as a director of AHRKalimpa by planning to divert revenue, and ultimately profits, from AHRKalimpa to himself or his associated entities, using the confidential information he stole.

Because of Mr Schmidt’s conduct, Otway Livestock breached fiduciary duties it owed to AHRKalimpa. Otway Livestock was liable, as an accessory for Mr Schmidt’s breaches of his director’s duties. Mr Schmidt was also found liable, as an accessory for the breaches of fiduciary duties by Otway Livestock.

Judge Elliott of the Supreme Court of Victoria ordered that the defendant pay the plaintiffs more than $2.7 million dollars in damages.

Costin Stan

On Friday, 3 May 2019, Costin Stan was admitted to the roll of solicitors of the Supreme Court in New South Wales. Costin has accepted an offer to work as a solicitor at Jackson & Associates, Solicitors and will continue the work that he has been doing assisting clients of the firm.

April 2019

The Commonwealth bank refused summary judgement…

Cordovo Developments Pty Ltd sued the Commonwealth Bank trading as the Bank of Western Australia for damages for alleged misleading and deceptive conduct, negligent misstatement and unconscionable conduct. The bank applied to the Supreme Court of Western Australia to have the claim dismissed on the basis that it could not possibly succeed.

The bank made this claim because following the resolution of a complaint to the Financial Ombudsman Services (now the Australian Financial Complaints Authority) Cordovo had signed a release. Cordovo claimed that the release that the bank prepared for them to sign, was much wider than the release they signed with Financial Ombudsman Services (now the Australian Financial Complaints Authority) and covered more than the dispute dealt with by Financial Ombudsman Services (now the Australian Financial Complaints Authority). Cordovo claimed that it had been misled by the bank.

His Honour found that Cordovo should have the chance to present their case and refused the bank’s application for summary judgment.

A contract that is uncertain is void…

If the language of a contractual term is so obscure and so incapable of any definite or precise meaning that the court is unable to attribute to the parties any contractual intention then it is void for uncertainty.

The court will strive to adopt a construction which will preserve the validity of a contract. This is particularly the case in commercial arrangements.

The court will assume that he parties intended to achieve a commercial result.

These matters were before the Supreme Court of New South Wales in Abod Pty Ltd v Kingston Finance Pty Ltd. In this case one matter in the contract was left for one of the parties to deal with. Justice Pembroke decided that the determination of the applicable interest rate by the lender, if there was no agreement, was not so uncertain as to make the contract void for uncertainty.

March 2019

Judge finds that a claim by a family member that a guarantee would never be called on, even if the statement was made, did not make the guarantee unenforceable……

On 12 October 2012, Mr James Photios guaranteed a $8.4 million loan of his company First Debenture Project No 4 Pty Ltd from Hatziplis Holdings Pty Ltd. By April 2017 the debt was approximately $16 million. James was the son in law of one of the directors of the lender company.

In the court proceedings to recover the debt James gave evidence that there was a conversation at the time of the negotiation of the loan that the lender would never call on the guarantee. The directors of the lender company claimed that the conversation as reported by James never happened. Their version of the conversation, not surprisingly, supported their case.

His Honour Judge Stevenson, said that it was not necessary for him to decide which version he preferred; he looked at what James said and did to decide that the guarantee was enforceable.

His Honour pointed to what James said during cross examination, that he would have done whatever was needed to secure the loan, to show that he did not rely on what was said about never having to pay the guaranteed amount. His Honour pointed out that James had already agreed to give the guarantee at the time of the conversation about never have to pay the guaranteed amount.
Later conduct of James also showed that he was prepared to give the guarantee. In a letter shortly after the loan was drawn down James refers to the transaction but not the important issue of the agreement that he would never have to pay under the guarantee.

At the time the loan was repayable, after a demand had been made James wrote a long letter about his project and asked for more time. In this letter, he did not refer to any agreement that he would not be required to pay the debt under the guarantee.

In all of the circumstances, His Honour found that the guarantee was enforceable and the debt was payable by James.