Chep loses Flynn Transport pallet debt recovery case

By: Rob McKay

Judge critical of power mismatch and larger company’s systems

Chep loses Flynn Transport pallet debt recovery case
A Chep truck with pallets


Pallet provider Chep Australia has lost a New South District Court case when seeking alleged pallet-hire damages and must pay legal costs.

Chep sought damages plus interest of $695,296.53 from Elizabeth Flynn, who with former husband Barry Flynn, was a directors of Flynn Transport (NSW) Pty Ltd – their former company now in liquidation – and a former trustee of the company through their now dissolved trust.

Chep (written as CHEP in the judgement) was seeking to enforce a guarantee entered into between it and Flynn Transport involving, eventually, 5,879 pallets.

With Barry Flynn now bankrupt, Chep brought proceeding against Elizabeth Flynn.

However, on their divorce in 2015, the trust was ended, though Chep was not informed, and the next year, after a Federal Court family law hearing, she resigned from the company and her company shareholding was transferred to him.

With Barry Flynn in control, the growing alleged Chep debt was being charged to the company and not the trust.

The judgement notes lost or missing pallets are deemed to be still in the possession of a company.

The system has been a source of controversy since the company instituted it after suffering financial embarrassment, due to failing keep track of its pallets, and seeking to put a cost on non-return of them to stem the losses.

Read how Flynn Transport came to be wound up, here

In evidence from Chep debt recovery officer Sandra Tadros, it emerged Chep did not have a monitoring system in place to monitor the cancellation or de-registration of its customers and though credit checks are carried out monthly, this did not happen in the Flynn case.

"It is beyond dispute that after the Trust had vested on 30 June 2015, it ceased to exist," judge Leonard Levy states in his finding.

"In my view, after that date, the Company could not have been incurring financial obligations on behalf of the Trust, even if it claimed to have been doing so.

"Due diligence by CHEP, as a creditor, ought to have established that fact."

The judge rejects the Chep argument that the fact the company was applying for commercial credit in its capacity as the trustee of the trust, and not in its own right, was irrelevant.

He notes that the fact was plain as trust’s name was on the contract, and this "could not be clearer".

Also clear from subsequent paper work was that, once the trust ended, Chep was charging the company.

"All of the invoices that CHEP has sued upon in these proceedings relate to 2016 and thereafter," the finding states.

The judge has critical words for Chep’s approach to penalties that led to the debt ballooning, saying "Counsel for CHEP acknowledged that it was staggering that nothing had been done by CHEP to bring the claimed accumulating liabilities to a head earlier, so that instead, CHEP’s claim had accumulated into a lost equipment charge of $626,773 without reasonable attempts at mitigation of that claimed loss".

"Whether or not a contractual provision amounts to a penalty is to be determined by a construction of the contract and the inherent circumstances, including whether the sum sought as compensation was extravagant, unconscionable or out of all proportion to the interests of the recipient and bears little relationship to the actual loss or damage suffered . . ." he adds.

"Mrs Flynn submits, correctly I find, that: the parties did not have equal bargaining capacity where CHEP, the subsidiary of a large corporation presented standard terms to a small family business; CHEP has not provided reliable evidence that it has formally declared that its equipment is lost as provided by clause 10(c) of the agreement; and the amount claimed is out of all proportion to the amount involved in replacing the equipment, being timber pallets of apparently simple construction using relatively inexpensive materials.

"I find that those matters attract the application of the test for assessing whether the charges involve a penalty component, as identified in the preceding paragraph.

"The invoices claimed an amount of $46,713.88. Interest was claimed at 8.71 per cent to 6 March 2019 in the sum of $7,058.19. The lost equipment charge for pallets that apparently no longer exist amounts to $155,312.50, and "ongoing hire charges" [judge’s emphasis] for that equipment no longer in existence amounts to $486,212.84."

Given the lack of evidence of pallet value and any to assert that the 4,375 pallets are lost, he finds the "compensatory component of damages is unproven".

Chep declined to comment on the case.


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