This bulletin is not legal advice. Do not make decisions on legal matters based on a brief commentary. Instead, get professional legal advice.
1. Company survives loss of director
Mr Pace was convicted on 13 charges of fraud relating to grants received from the Department of Commerce and Trade before the relevant expenditure had been incurred. A person who has been convicted of an offence relating to the management of a company, or of a serious fraud, needs the Court’s permission to manage a company within five years of that conviction. “I provide the vision, life and soul and energy to maintain [the company] as a viable entity,” said Pace. He claimed that the company would have to go into liquidation with the loss of 60 jobs if he was not allowed to continue being a director.
The Judge was a little dubious, but he accepted that Pace’s management role was pivotal to the company’s success. He was concerned that Pace had knowingly continued as a director since his fraud, and that he was unaware that in committing his fraud he had been acting “in an inappropriate manner”. Despite this he considered there was little likelihood that Pace would offend again.
The Judge balanced the interests of the company’s shareholders, employees, and creditors, against the public interest and the general rule that those convicted of dishonesty offences should be barred from company management for five years. The application was supported by the company’s largest creditor.
The Judge noted that the law was not intended to be a further punishment but to protect the public from people who have fallen short of the required level of expertise and conduct. He decided that Pace could be general manager of the company but not a director. Interestingly, in the year since this decision, the company concerned has not gone into liquidation.
2. Credit management is fascinating
Credit management is an inherently interesting field, but it’s not always made interesting by those who write about it and teach it. If you like your credit made interesting we have three suggestions.
Firstly and most importantly, if you like the Bulletin, please email it to others who work in credit who might like it too.
Secondly, in November we will be offering our seminars (which are also fascinating) on law, psychology, negotiation, and financial analysis – all specifically for credit management. Full details are on The Debt Books website – www.thedebtbooks.com.au . Email email@example.com with queries or bookings. And thirdly, also on the website are sample chapters from our extremely readable book, Paid in Full: A Guide to Credit Management in Australia. (Paper copies are available for $40 + GST.) While the Bulletin focuses largely on the law, the book looks largely at the practice of credit management.
3. A triumph over “deliberate obfuscation”
JA Pty Limited & 1 Ors v Jonco Holdings P/L & 2 Ors  NSWSC 147 (10 March 2018)
“The circumstances of this deed of company arrangement illustrate how badly wrong that process can go when creditors are misled,” said the judge in this case.
Mr Coco was the sole director of Jonco Holdings Pty Ltd and Jonco was trustee of the Coco Family Trust. As trustee, Jonco entered into contracts on the trust’s behalf. Jonco got into difficulties and was put into voluntary administration.
Ordinarily, the assets of a trust (and the Coco Family Trust had substantial assets) must be used to indemnify the trustee when it does business for the trust. The administrator was told that this was not the case here.
Instead, Mr Coco proposed a deed of company arrangement by which he would provide $100,000 for distribution to creditors. The administrator was not happy. He favoured liquidation. He wanted to stop the creditors’ meeting and get court directions because of the inadequacy of the company’s reporting and accounting.
Despite this, the arrangement was accepted when four “in-house” creditors (who were all in some way associated with Mr Coco) claimed debts of about $275,000 and outvoted the plaintiff, JA Pty Ltd. JA was allowed to vote in respect of only $270,000 of the $460,000 it had claimed. JA applied to the Court to have the deed overturned.
The usual indemnity clause in the trust deed, which would have allowed Jonco’s creditors access to Coco Family Trust assets, had been mysteriously deleted. The Judge said it didn’t matter. The trustee would still be indemnified from the trust assets under the law. The creditors could get at the assets of the trust.
The Judge also found the Administrator had been misled and had been denied access to information. He therefore set aside the arrangement. What the judge referred to as “deliberate obfuscation on the part of the Coco interest” was not allowed to succeed. He stressed “for the guidance of future administrators” that when there is a serious risk of creditors being misled due to lack of company records, the administrator should seek directions from, and if necessary intervention by, the court.
4. Credit reports on the `net
Yet another benefit of the internet. The days of creditors needing special software to access Credit Advantage (previously CRAA) reports are over. Subscribers can now access all the usual services via their web browser and casual users can access various business reports and pay by credit card. Privacy considerations still prevent casual users from viewing consumer reports on-line.
5. More undue harassment of debtors
Following the McCaskey case, the ACCC has reported in a media release on 15 September another, but less extreme, case involving misrepresentations and possible harassment or coercion of debtors. Cairns real estate agency, The Professionals Edge Hill, sent letters to ex-tenants requesting payment of debts. The letters said their names would be placed on a world-wide tenants information database, which would affect their credit rating, and cause them difficulties with future tenancy applications. The database wasn’t worldwide, wouldn’t affect their credit rating, and wouldn’t necessarily impede their future tenancy applications. The case was resolved by the agency admitting misconduct, promising not to do it again, apologising to the tenants, and implementing a trade practices compliance program.
6. Wine industry – mostly good news but…
A report by insolvency practitioners Prentice Parbery Barilla on the wine industry says that the industry continues to go from strength to strength. This buoyancy has led to substantial increases in planting (and there will be more to follow). From a credit perspective, a major problem for some of the new investors into the industry is that not all of the new plantings have contracts with winemakers to take their product. This means they will be exposed to the prevailing market conditions at the time when the vines become productive. Under these circumstances PPB says that it is expected that grape and wine prices will face downward pressure in the next few years.
7. Credit insurers may help with defence costs
In an insolvency all the unsecured creditors are supposed to suffer equally, in proportion to their debt. If you’re an effective credit manager and get paid more than your share before a debtor company goes into liquidation, the liquidator will try to claw back that payment. Some readers will know from bitter experience that insolvency practitioners are now more likely to take legal action to force this, largely because they are now funded through litigation insurance.
Well, two can play at that game. According to Jim Manning, Joint Managing Director of National Credit Insurance (Brokers) Pty Limited, credit insurers are also willing to participate in legal defence costs or get involved in negotiations leading to out of court settlements. “It’s vital that insured clients take the potential exposure to preference actions into consideration,” he says.
8. It might be okay for Ally McBeal but…
R v Szabo  QCA 194 (26 May 2018)
Mr Szabo was convicted of a serious crime. While in prison he found out that his lawyer and the prosecutor had been in a de facto relationship before his trial. They had visited each other during the trial spending what was claimed to be a platonic night together in a motel room. They had since resumed their relationship.
As one of the Judges noted, “They were … much closer to each other than ordinary arms-length legal adversaries.” Did his lawyer “with fearless independence promote the client’s cause?” Why hadn’t he been told about the relationship? Ally McBeal might have got away with it but in Australia it was not acceptable. The possibility of a miscarriage of justice led to a retrial. Justice must not only be done, but be seen to be done. And the compelling question which shouts loud and clear from this case: do you know who your lawyer is sleeping with?
9. Why don’t they use juries in civil matters?
Commonwealth Bank of Australia v Heinrich  FCA 1255 (6 September 2017)
The drawn-out legal action against Heinrich started with a notice of default in 1993. Heinrich disputed the claim before judgment, and applied to set aside bankruptcy notices. His allegations included duress or undue influence, perjury, forgery and fraud by officers of the bank, and he counterclaimed for over $2m. He lost.
Now, in this final stage, the bank was attempting to bankrupt him. Heinrich argued for trial by jury saying he’d lost confidence in getting a fair trial. He argued that trial by jury was a constitutional right.
For civil matters generally, there is scope for the use of juries but the judge noted the decline in their use this century because of the time, cost, and inconvenience to the jury. “The use of juries in civil matters has steadily declined during this century and is now largely reserved for those areas where serious imputations are to be made against the character of a party,” he said.
Jury trial is at the court’s discretion under section 30(3) of the Bankruptcy Act. There would need to be special circumstances to justify it, which didn’t exist here. Heinrich also wanted the Court to go behind the judgment relied on in the bankruptcy notice. The Judge said that going behind a judgment is not done routinely. He said that one circumstance when it is, is when the judgment was tainted and affected by fraudulent conduct. In this case however, Heinrich had already taken the proper opportunity to make his arguments but had been unsuccessful. He was therefore made bankrupt.
10. Be careful what you say about business failures
Samsun Pty Ltd & Ors v Andrew Wily & Anor  NSWSC 281 (7 April 2018)
Soon after being appointed voluntary administrators of a travel agency franchisee, the defendants issued a press release. They blamed the company’s problems on the Asian crisis and a weak Aussie dollar.
Mr Wily also opined that with the tight margins in the travel industry there would be further fallout. Various newspapers picked up the release and published stories based on it. The other franchisees were concerned that readers would think they were also in trouble, and took action in defamation. The Judge’s view of the intelligence of newspaper readers was more generous than that of the franchisee plaintiffs. He thought that readers were quite capable of understanding that trouble for one franchisee need not affect any others. The administrator had been careful to make it clear that it was only the Sydney city franchisee that was affected. Even so, we suspect that next time he will be even more careful, possibly to the extent of not putting out a press release.