Jul 14 2018
Securing Your Debt - Priority Of Competing Caveats To Secure Unregistered Charges
Suppliers of goods and/or services on credit will often seek security from customers in their credit terms and conditions with the inclusion of a charging clause. The charging clause will ordinarily provide the creditor the ability to register a charge over any property then or subsequently held by the customer to secure repayment of any monies owed. The charge may be registered over property by way of a mortgage or remain unregistered but supported by a caveat, commonly known as an unregistered charge.
Further, suppliers may have the power to pursue directors personally for any unpaid company debt under a personal guarantee. The personal guarantee may contain an equity charging clause that provides the supplier with an equitable interest in property the director owns personally. Issues may arise where there are competing interests in the property and insufficient monies to satisfy all these claims in full.
In order to determine the priority of competing unregistered charges supported by a caveat, it first must be determined whether the priority turns on the date of creation of the charge or the date of the registration of a caveat in respect of the charge. This may be particularly important when advising clients to register their security over a customer’s or a director’s property.
Assume a simplified scenario where there are no factors affecting priority other than:-
Justice Chaney determined in Bunnings Group Ltd v Hanson Construction Materials Pt Ltd & Anor (2017) that the general rule in dealing with competing equitable interests in land in this scenario is that, if the equities are in all other respects equal, priority in time of creation is considered to give the better equity. That is, in usual circumstances, the date that the credit application was executed. So in general, the earlier credit application has priority, however, this is only the case when the competing charges are deemed to be equitable.
A situation may arise where the competing charges are inequitable and that priority may be afforded to the later charge. Inequitable charges occur where the conduct on the part of the holder of the earlier charge, has led the other creditor to secure their charge on the basis that the earlier charge did not exist. This is often referred to as postponing conduct or disentitling conduct.
Postponing conduct may include the delay or failure to lodge a caveat, where the failure or delay to lodge contributed to the belief of the holder of the later claim that the prior claim did not exist. Such a situation may occur where a creditor does not register a caveat over the property and a subsequent creditor searches the land titles office records for any charges over the property. The subsequent creditor then proceeds to provide supply based upon there being no charges over the property. As the subsequent creditor has relied upon this information, they may argue that the prior creditor has engaged in postponing conduct and seek a priority for their charge.
Justice Debelle explained in Elderly Citizens Homes of SA v Balnaves (1998) that “it is necessary to have regard to all the facts and to determine whether the failure by the holder of the prior equity to lodge a caveat has, in all the circumstances, conduced or contributed to a belief on the part of the holder of the subsequent equity that the prior equity did not exist.”
In Bunnings Group Ltd (“Bunnings”) v Hanson Construction Materials Pt Ltd & Anor (2017), Bunnings was unable to provide any evidence that it made inquiries as to the existence of other credit arrangements or other charges granted by the customer. Given this, it was found that the delay in the lodgement of the caveat was not considered to be postponing conduct.
Often trade suppliers may delay or in some cases fail to register their caveatable interest over a customer’s property, which may result in a loss of priority when it comes to distributing the proceeds amongst competing creditors’ claims.
Consequently, it is important to ensure registration of any security to create the charge as soon as possible. It is equally important that suppliers of goods or services make enquiries with their customers to satisfy themselves of any charges, particuarly those that are unregistered that the customer may have previously granted and to document the enquiries made.
Estate Planning - Survivorship V Bankruptcy
Assets may be owned individually or ownership may be shared. Owners often assume that such assets may be dealt with as they wish. However, this is not the case in all circumstances
The right of survivorship applies to a particular type of joint ownership, and generally means that the surviving owner/s automatically acquire the deceased’s share of the asset. In order for this to occur, there must be joint tenancy. That means that all owners have the same rights and responsibilities in relation to the asset.
Commonly, real estate, bank accounts, shares, death benefits from pension funds and proceeds of life insurance policies are assets that are subject to joint tenancy. In most instances, the joint tenancy is between spouses or business partners.
In circumstances of death, ownership of any assets subject to joint tenancy passes directly to the surviving owner/s. There is no requirement to identify the asset in the deceased’s will. Whilst legal ownership passes to the surviving owner/s, there are generally steps to be taken to confirm the change in ownership. In the case of real estate for example, the Certificate of Title must be altered.
Joint tenancy is different to tenancy in common. In the latter case, each owner has an interest or a share in the asset and can pass on their interest to the person/s they choose. Consequently, assets that are subject to tenancy in common, must be identified in a person’s will.
One very specific exception to the right of survivorship is bankruptcy. If, prior to their death, any one or more of the joint tenants are made bankrupt, the joint tenancy is severed. In these circumstances, ownership of the asset will automatically change from joint tenancy to tenancy in common. The Trustee in bankruptcy will then look to realise the bankrupt’s interest in the property.
It is not uncommon for spouses to own assets, usually the family home, as joint tenants. Where one of them is bankrupt, the joint tenancy is severed and each will subsequently own a 50% share of the home, subject to any mortgage.
Ordinarily, the Trustee will approach the surviving spouse to ascertain whether they are interested in purchasing the bankrupt’s interest in the property. If not, the Trustee will look to realise the property, ideally, with the cooperation of the surviving spouse. If cooperation is not forthcoming, the Trustee will need to make application to the Court for the sale of the property. The Court will then make Orders as to how the sale process will be conducted, including payment of the mortgage, if any, and distribution of the surplus between the bankrupt estate and the surviving spouse.
If the bankrupt passes away during the bankruptcy, it should be noted that the joint tenancy has already been severed. Consequently, the surviving spouse or owner/s will not automatically acquire the bankrupt’s interest in the property.If the bankrupt passes away during the bankruptcy, it should be noted that the joint tenancy has already been severed. Consequently, the surviving spouse or owner/s will not automatically acquire the bankrupt’s interest in the property.
To find out more about the information covered in this newsletter or to discuss any issues pertaining to personal or corporate insolvency matters, telephone on 03 8636 3333 or email any of the following contacts:
Stephen Michell - Director smichell@pcipartners.com.au
Philip Newman - Director pnewman@pcipartners.com.au
David Quin - Director dquin@pcipartners.com.au
Sean Pulverman - Principal spulverman@pcipartners.com.au
Warren White - Principal wwhite@pcipartners.com.au
Kylie Wright - Principal kwright@pcipartners.com.au
Sophie Zapantis - Senior Manager szapantis@pcipartners.com.au
Peter Fraczek - Manager pfraczek@pcipartners.com.au
Frank Ntim - Manager fntim@pcipartners.com.au
Anna Odrzywolska - Manager aodrzywolska@pcipartners.com.au
All material contained in this newsletter is written by way of general comment. No material should be accepted as authoritative advice and any reader wishing to act upon the material should first contact our office for properly considered professional advice which will take into account your own specific conditions. No responsibility is accepted for any action taken without advice by readers of the material contained herein.
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