Priority under Fixed and Floating Charges A PAPER BY PAUL ANDERSON OCTOBER 2010
Priority under Fixed and Floating Charges
Summary A recent Queensland Supreme Court decision considers whether a purchaser from a Chargee exercising power of sale under a fixed and floating charge takes free of subsequent charges.
Who Does This Impact? Lenders and financiers.
What Action Should Be Taken? A second or subsequent Chargee should either enter a priority agreement with the first Chargee or stringently assess the borrower’s equity in assets offered as security before granting an advance.
Contents:
TURKSLEGAL
Facts
2
Decision
3
Conclusion
3
PAPER
Priority under Fixed and Floating Charges by Paul Anderson
In every Australian State, legislation provides that a buyer from the mortgagee of land exercising power of sale is entitled to be registered as owner of the land, free of all outstanding interests, including subsequent mortgages. Is the situation the same in relation to a fixed and floating charge? The recent Queensland Supreme Court case of St George Bank Limited v Perpetual Nominees Limited considered this proposition.
Facts On 27 June 2006, St George Bank lent SP Hotel Investments Pty Limited the sum of $78 million. Security for the loan included: •
A first registered mortgage over the land known as the Sheraton Mirage Resort and Spa at Main Beach on the Gold Coast; and
•
A first registered fixed and floating charge over the assets and undertaking of SP Hotel.
On 28 June 2006, Perpetual Nominees Limited (‘Perpetual’) agreed to lend SP Hotel $20 million. The security included: •
A second registered mortgage over the land; and
•
A second registered fixed and floating charge over the assets and undertaking of SP Hotel.
On 28 March 2007, SP Hotel granted LJK Nominees Pty Limited (‘LJK’): •
A third registered mortgage over the land; and
•
A third registered fixed and floating charge over the assets and undertaking of SP Hotel.
SP Hotel defaulted under the securities. St George proceeded to exercise its power of sale. However, Perpetual and LJK refused to hand over releases of their fixed and floating charges unless paid the full amount owing. The question for the Court was whether a buyer from St George would take the land and business free from the interests of Perpetual and LJK. The Court had little difficulty in so finding in respect of the land but the position in relation to the charges over the business was less clear. Section 263 and subsequent sections of the Corporations Act 2001 which deal with charges are silent on the point.
TURKSLEGAL
PAPER
2
Priority under Fixed and Floating Charges by Paul Anderson
Decision Wilson, J referred to Section 79 of the Land Titles Act 1994 (QLD) which makes it clear that upon a registered mortgagee exercising power of sale over land, the purchaser is entitled to the land free from the interests of the mortgagee and any subsequent encumbrances. There is no statutory provision applying to personal property. Her Honour then considered the position at common law, particularly the 1857 English case of South Eastern Railway Company v Jortin where the Lord Chancellor held: ‘Now when a mortgagee sells under a power, that sale defeats the rights of all subsequent incumbrances, whose remedy then is only against the money in the hands of the vendors…..’ The exercise of the power of sale defeated the subsequent mortgagee’s interests in the property (as distinct from prior interests) but at the same time gave them a beneficial interest in the surplus proceeds of sale. The mortgagee exercising power of sale over personal property holds the surplus proceeds in trust for subsequent mortgagees according to their priorities and ultimately for the mortgagor. Of course, if the sale proceeds are insufficient to pay out the first mortgagee, then all of the subsequent mortgagees (and the mortgagor) will receive nothing.
Conclusion The result of the case is not surprising. In fact, any other decision would have been commercially disastrous as the finance industry certainly operates on the basis outlined by her Honour. What is surprising is that there was no relevant legislation stating the position clearly. A subsequent Chargee who is unhappy with the result should always try to negotiate a priority agreement with the first Chargee prior to lending an advance to the borrower. It is worthy of note that the Personal Property Securities 2009 (Cth) which is due to commence in May 2011, specifically provides that upon disposal of a secured asset, the buyer will take free of the security interests of the selling chargee and any later ranking charges. The Act applies to security over all types of personal property including fixed and floating charges but not land.
TURKSLEGAL
PAPER
3
Priority under Fixed and Floating Charges by Paul Anderson
For more information, please contact: Paul Anderson Partner T: 02 8257 5742 paul.anderson@turkslegal.com.au
Sydney | Level 29, Angel Place, 123 Pitt Street, Sydney, NSW 2000 | T: 02 8257 5700 | F: 02 9239 0922 Melbourne | Level 10 (North Tower) 459 Collins Street , Melbourne, VIC 3000 | T: 03 8600 5000 | F: 03 8600 5099 Insurance & Financial Services | Commercial Disputes | Workers Compensation | Business & Property
www.turkslegal.com.au This Pap er is cur rent at i t s d ate o f p u b l i c at i o n . Wh i l e eve r y c a re h a s b e e n t a k e n i n t h e p re p a rat i o n o f t h i s Pa p e r i t d o es not constitute legal advice and should n o t b e re l i e d u p o n fo r t h i s p u r p o s e. Sp e c i f i c l e g a l a dv i ce s h o u l d b e s o u g ht o n p a r t i c u l a r m atters. Tur ksLegal do es not accept resp on s i b i l i t y fo r a ny e r ro r s i n o r o m i s s i o n s f ro m t h i s Pa p e r. Th i s Pa p e r i s co py r i g ht a n d n o p a r t m ay b e repro duced in any for m without th e p e r m i s s i o n o f Tu r k s Le g a l . Fo r a ny e n q u i r i e s, p l e a s e co nt a c t t h e a u t h o r o f t h i s Pa p e r. Š Tu r k s Le g a l 2 01 0