The Dispute

Six Bruce Pty Ltd (Six Bruce) and its director, Mr Crow, were involved in the business of property development. This included a development of seven apartments at 6 Bruce Street, Toorak in Victoria (Property).  In December 2017, Jadig Finance Pty Ltd (Jadig) refinanced the first mortgage debt over the Property for a principal sum of $4,800,000.  Unfortunately, by August 2018, Six Bruce had defaulted on its payments to Jadig, and Jadig proceeded to take possession and list the Property for auction at 11:00am on Saturday, 8 September 2018.

Late in the evening of Friday, 7 September 2018, the eve of the auction, Six Bruce applied to the Supreme Court of Victoria for an urgent injunction restraining Jadig from selling the Property at auction, alleging it had secured an “unconditional finance approval” to refinance Jadig’s debt.  At 9:30am on the morning of the auction, the Supreme Court granted the injunction.

The “Unconditional” Approval

By letter, “Huge Assets Hong Kong SAR China” (Huge Assets) confirmed its “unconditional finance approval” to Six Bruce for finance totalling $36.5 million to be allocated across Mr Crow’s various business endeavours, including approximately $8.5 million specifically allocated to the development of the Property.

Notwithstanding that Six Bruce, and indeed Huge Asset’s letter itself, suggested the finance offer was unconditional, the letter further stated that:

1. Settlement of the Huge Assets funding would occur within 30 days;
2. Funds had been accumulated and were ready to be drawn down, subject to “the usual regulatory processes” being completed;
3. That settlement of the loan was subject to the execution of the associated loan agreement and security documents.

The Law on Interlocutory Injunctions

An applicant seeking an interlocutory injunction must satisfy the Court of three matters, being:

1. That the applicant for the interlocutory injunction can demonstrate a prima facie case (that is, there is a serious question to be tried);
2. That the balance of convenience favours the granting of the injunction;
3. That damages would not prove an otherwise adequate remedy.

In the circumstances, the third of the elements was not pressed by Jadiq.

The Decision

Firstly, the Court held that there was a serious question to be tried as to whether Jadiq was acting unconscionably in exercising its power of sale.  The Court determined that Six Bruce had an equitable right of redemption (in essence, a right to pay out Jadig’s mortgage), and that by auctioning the Property, Jadiq was denying Six Bruce the opportunity to redeem the mortgage, particularly where Jadig had an unconditional finance approval.

Further, the Court considered that the balance of convenience favoured the granting of the injunction, particularly as Six Bruce had an arguable case for its equitable right of redemption, notwithstanding that Six Bruce had been unable to pay into Court the amount secured by the Jadig’s mortgage, which was historically an important point of law (see Inglis v Commonwealth Trading Bank of Australia (1972) 126 CLR 161; Inglis).

The Rule in Inglis

The decision of the High Court of Australia in Inglis v Commonwealth Trading Bank of Australia is widely regarded throughout Australia and the South Pacific for its commentary on interlocutory injunctions preventing an exercise of a mortgagee’s power of sale.

In Inglis, the defendant mortgagee held a registered mortgage over the plaintiff mortgagor’s property and sought to exercise its rights under the mortgage to deal with the property.  The mortgagor claimed an assortment of remedies against the mortgagee, including damages for breach of contract, defamation and fraud, and alleged that the total it claimed offset any amount owed to the mortgagee.  Accordingly, the mortgagor sought to have the mortgagee enjoined from dealing with the property until its claim had been dealt with by the Court.

However, it became apparent that the mortgagor did not dispute that it had received money from the mortgagee that was secured by the mortgage, nor did the mortgagor dispute that it had failed to repay the monies advanced under the mortgage. 

In making orders in favour of the defendant, the Court held that the defendant’s proprietary right to deal with the property as mortgagee prevailed over the proprietary interests of the plaintiff.  Indeed, in the judgment, the Court stated that:

“nothing short of actual payment is regarded as sufficient to extinguish a mortgage debt.  If the debt has not been actually paid, the Court will not, at any rate as a general rule, interfere to deprive the mortgagee of the benefit of his security, except upon terms that an equivalent safeguard is provided to him, by means of the plaintiff bringing in an amount sufficient to meet what is claimed by the mortgagee to be due.” [emphasis added]

Commentary on Six Bruce Pty Ltd v Jadig Finance Pty Ltd

So how do we reconcile the decision in Six Bruce Pty Ltd v Jadig Finance Pty Ltd with the rule in Inglis?  Does it fall within the general rule, or does it create a new exception; a new avenue for mortgagors to prevent mortgagees from enforcing their rights at the eleventh hour?

An “equivalent safeguard”?

The general rule in Inglis confirms that a Court should not interfere with the mortgagee’s realisation of its security, except upon actual payment of the debt, or provision of an “equivalent safeguard”.  An “equivalent safeguard” is widely recognised as the payment of the amount due into Court.  Austin J in Harvey v Perpetual Nominees Ltd [2013] VSC 228 (Harvey), in obiter dicta commentary, added a further addendum, noting that “an absolute and unconditional offer to provide immediate refinance” might be sufficient to fall within the general rule.

It is not necessary to determine whether the circumstances set out in Austin J’s obiter comments do in fact fall within general rule or not.  With respect to the Court’s decision in Six Bruce Pty Ltd v Jadig Finance Pty Ltd, it is very difficult to understand how the Court came to determine that the Huge Assets offer was absolute and unconditional, or how it provided for an “immediate refinance” within the scope of Harvey.

As will be apparent from the preceding summary, the Huge Assets offer was certainly, in form, unconditional.  However, where the offer is expressly “subject to” “the usual regulatory processes being completed” and the execution of the loan documentation, the Court’s reasoning for finding that the Huge Assets offer was unconditional in substance becomes a black box.  What are “the usual regulatory processes”?  Why doesn’t the plaintiff bear the burden of proof in establishing with certainty that the “usual regulatory processes” aren’t a condition?  What if the borrower opted not to execute the loan documentation?  In the finance industry, it is a commonplace occurrence that even the best-intentioned borrowers do not always proceed to execute loan documentation. 

Unconscionable conduct by lender?

As the Court in Six Bruce Pty Ltd v Jadig Finance Pty Ltd rightfully pointed out, interlocutory injunctions of the kind sought by Six Bruce have their foundations in preventing unconscionable conduct by a lender.  The question then must be, what is unconscionable about Jadig exercising its power of sale?  Six Bruce had no defence to Jadig’s possession claim.  It did not immediately have the funds required to pay the amount secured by Jadig’s mortgage.  At best, it had a conditional finance approval that was not due to settle for 30 days. On this basis, it is difficult to see how Jadig acted unconscionably, when it merely sought to exercise its proprietary rights against the Property.

The Court’s decision suffers similar difficulty in formulating itself as an exception to the general rule in Inglis.  Is it now the case that any letter of finance expressed to be unconditional in form only is sufficient to grant the debtor relief?  Even that statement flies directly in the face of the Court’s decision in Inglis. 

We look forward to future decisions to tell whether the decision in Six Bruce Pty Ltd v Jadig Finance Pty Ltd becomes the new standard for redemption cases, or whether this will fade as an anomalous decision.

The post “Unconditional” Finance Blocks Mortgagee Sale on Auction Day appeared first on Elliott May.

Background

Assta Labels Pty Ltd, Dashing Print Pty Ltd and PMP Print Pty Ltd (together, the Grantors), granted purchase money security interests (PMSIs) to the plaintiff, HP Financial Services (Australia) Pty Ltd (HPFS). Staff at HPFS subsequently registered security interests on the PPSR against the Grantors’ ABNs rather than the ACNs. Unfortunately for HPFS this was in contravention of s 153 of the PPSA (and the relevant regulations), which specifically requires security interests lodged in relation to a company to be registered against a company’s ACN. The registrations were therefore defective under the PPSA.

When HPFS discovered its registration error, the 15 business day period for registering PMSIs under s 62(3)(b) of the PPSA had lapsed. HPFS sought orders to extend the registration period.

Does the PPSA allow for extension of PPSR registrations?  

If a court is satisfied that it is ‘just and equitable to do so’, it may make an order to extend the number of business days required for registration of a PMSI. In deciding the matter, a court must consider the following as set out in s 293(3) of the PPSA:

(a) whether the need to extend the period arises as a result of an accident, inadvertence or some other sufficient cause

The Court found that the incorrect registrations occurred against the Grantor’s ABNs and not the ACNs due to an error within HPFS’s organisation. Relevant staff members did not understand that a registration was deemed invalid if registered against the ABN and not the company’s ACN. The Court accepted that the need to extend the period arose due to inadvertence. At paragraph 12, Justice Kunc stated:

This is certainly not a case where HPFS did not appreciate the importance of having to register its interest or in some other way deliberately disregarded what had to be done to take advantage of the scheme offered by the PPSA. After the error was discovered, compliant registrations (using the ACNs) were made on 4 October 2016 in relation to each Grantor.

(b)  whether extending the period would prejudice the position of any other secured parties or other creditors;

Guidance on this question was provided by the earlier decision of the NSW Supreme Court In the matter of Accolade Wines Australia Limited and other companies [2016] NSWSC 1023. The issue of prejudice under s 293(3) of the PPSA hinges on:

not to the impact on other secured parties or creditors of the delay in registration, but to the impact of making an order extending the period; to evaluate prejudice for that purpose, one compares the position of creditors if an extension is granted, with their position if no extension is granted, and usually there will be a difference because priorities will be disturbed

The Court concluded that extending the period in this case would not prejudice the position of any other secured parties or creditors.

(c)  whether any person has acted, or not acted, in reliance on the period having ended.

Prejudice will be of significance chiefly where it is coupled with reliance (i.e. the type of “reliance” contemplated here is where a third party has taken a security interest over property that includes the PMSI in the belief that there was no perfected PMSI that would trump its interest).

The Court found that where a search of the register would have shown HPFS’s interest in the case of each Grantor, no act or failure to act had occurred in reliance of the period having ended.

Message

Despite HPFS being successful in extending the period for registration of its security interests, the error was easy to avoid and likely caused significant delays and costs. Extra care should be taken to register security interests against grantors in accordance with the PPSA and its regulations at the first instance.

Related articles:

Personal Property Securities Register: Perfecting Registration

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Lenders Warned: Make Sure PPSR Registrations are Correct appeared first on Elliott May.

Despite this, there is a worrying trend developing between certain lenders and their solicitors who, in apparent haste to fund, are relying on the solicitors for the mortgagor to act as agent for the lender in the misguided belief that this discharges the legislated requirement to take ‘reasonable steps’ to verify the identity of the mortgagee.

It is our view that this approach is fraught with danger and that a lender who relies on a conflicted solicitor to identify their mortgagee may be exposing themselves to a finding by the Court that ‘reasonable steps’ were not taken in such circumstances to identify the mortgagee. Of course, the ramifications for a lender if such a finding is made, especially if there is fraud involved, can be catastrophic.

Mortgage fraud in Australia remains commonplace despite efforts to improve the integrity and security of government identification documents and strengthening verification of identity procedures. Recent advancements in technology have enabled fraudsters to more easily create authentic-appearing copies of identification documents for the purpose of defrauding innocent parties. Whilst not common place, there have unfortunately also been situations where fraud has occurred where the solicitor for the borrower has been complicit in and/or enabled the fraud to occur by not fully discharging their professional and ethical obligations.

To mitigate rising instances of fraud, strengthened verification of identity (VOI) requirements have been introduced Australia-wide. Most lenders will be familiar with the VOI changes, but may not fully understand exactly what is required of them. Nor how the changes can impact the validity of mortgage transactions should they be impacted by fraud.

Indefeasibility of Title

Broadly speaking, indefeasibility of title provides that title to land passes on the registration of an instrument notwithstanding any invalidity or defect in the instrument itself (see, for example, s 184 of the Land Title Act 1994). In relation to mortgages, even where there is fraud, a mortgagee can enjoy indefeasibility of title provided they had no knowledge of the fraud and they complied with the requirements to properly identify the mortgagor. Knowledge of any fraud, and/or a failure to take “reasonable steps” to identify the mortgagor, are the primary examples of exceptions to indefeasibility, although there are others.

Indefeasibility of Title requirements and standards change from jurisdiction to jurisdiction. Should you require specific advice on a particular jurisdiction, please contact us.  

Identification: what are “reasonable steps”?

Mortgagees are required to take reasonable steps to verify the identity of mortgagors. The Land Titles requirements utilising the standards set out in the VOI provisions are in the most part standard across Australia (although there are certain nuances which some lenders fail to appreciate – for example, the timing of the steps required by NSW as compared to VIC).

Using Queensland as an example, s 11A(2) of the Land Title Act states:

“before an instrument of mortgage or amendment of mortgage is lodged for registration, the mortgagee under the instrument must take reasonable steps to ensure the person who is the mortgagor under the instrument is identical with the person who is, or who is about to become, the registered proprietor of the lot or the interest in a lot”

“Reasonable steps” means the taking of such steps as an ordinarily prudent mortgagee would have taken in the circumstances and in the ordinary course of his or her business. Whether reasonable steps were taken will be a question of fact depending on the circumstances of the individual case. And ultimately it will be determined by a Court on an objective basis. Fortunately for lenders, guidance is provided by the VOI Standard, and generally speaking, most jurisdictions state that it will be deemed that “reasonable steps” have been taken if the VOI Standard is followed before the mortgage is executed (although there are nuanced variations between jurisdictions).

The VOI standard necessitates:

1. A face-to-face interview with the person being identified by the mortgagee; and
2. Examination of original identity documents produced by the person to be identified. Note, the original documents must fit within specific categories outlined in the VOI Standard.

You can read more about the VOI Standard in our previous article: Verification of Identity: Reasonable Steps in the VOI Standard.

What does this mean for mortgagees and what are the benefits of a “Second Identification Meeting”?

In practice, by following the VOI requirements a mortgagee is provided with a “safe harbour” from accusations from other parties that it did not take steps to verify the mortgagor’s identity. If a mortgagee is not a party to the fraud, and was without notice of the fraud, the mortgagee will most likely enjoy an indefeasible interest as registered mortgagee over the property.

The VOI Standard requires the mortgagor to meet with the mortgagee in person, even if they have met with their own lawyer and been identified. As cumbersome and inconvenient as this may seem to those with a vested interest in funding loans quickly, this is what is required to comply with the “safe harbour” principles. This “Second Identification Meeting” may seem like overkill by many parties from a commercial perspective, but should mortgagees decide to “skip” this process, their mortgage may not enjoy indefeasibility and be void and unenforceable, typically because of fraud, any in presonam exemption, and other exceptions to the rules of indefeasibility.  

By way of example, if there is fraud and a mortgagee has not taken the required steps to identify the mortgagor, the mortgage will be set aside, even if they had no knowledge of the fraud.

Elliott May encourages its clients to take these requirements seriously, as the consequences of non-compliance can be severe. The process may seem cumbersome. This is especially so for those with a vested interest in settling a transaction quickly, i.e. brokers and borrowers, and increasingly solicitors acting for lenders who are under pressure from their clients and referral sources to find ways to short circuit the process.

However, these procedures are vital in deterring fraud and ensuring mortgages are not set aside if fraud is involved.

In closing, and to reiterate our opening comments, we strongly advise all mortgagees to resist the pressures to fund in haste by relying on the solicitors for the mortgagor to purportedly verify the identity of their own client on behalf of the mortgagee.  This is by no means a comprehensive advice as to the measures required by mortgagees to obtain an indefeasible mortgage (in particular because of the nuances and varying requirements between jurisdictions), other than to set out our strongly held view about the imprudence of mortgagees relying on the solicitor for the mortgagor alone for identification purposes.

Related articles

Don’t Let Mortgage Fraud Blindside You

Lender’s Mortgage Insurance: Who Does it Protect?

Verification of Identity: Reasonable Steps in the VOI Standard

Mortgage Fraud: Dangers Inherent in “All Monies” Clause

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Mortgage Fraud: Should Solicitor for Mortgagor Verify ID for Mortgagee? appeared first on Elliott May.

The Facts

Thompson DK Properties Pty Ltd as trustee (Thompson) is the owner and developer of a property in Daisy Hill, Queensland. Mr Brown was engaged to construct a number of duplexes and a triplex on the property. On 29 August 2017 Brown lodged a caveat (the Caveat) claiming a charge over the property pursuant to a charging clause in the construction contract.

Thompson applied to the Supreme Court to remove the caveat on the following basis, that:

• pursuant to s 126(5) of the Land Title Act 1994 (the Act), the Caveat had lapsed;
• due to licensing issues, there were no monies payable under the contract to support the charge;
• there were no monies that are payable or may become payable to Brown by virtue of the contract;
• the balance of convenience favoured the removal of the Caveat.

When does a caveat lapse?

Section 126(4) of the Act dictates that if a caveator does not want its caveat to lapse, it must start proceedings in a Court of competent jurisdiction to establish the interest claimed under the caveat within three months after the lodgement of the caveat (in these circumstances, 29 November 2017). The Act places the onus on the caveator to start those proceedings.

Brown delivered a draft statement of claim to Thompson on 13 October 2017, but it was not filed. On 24 November 2017, Brown lodged a General Request form to the Registrar of Titles stating that proceedings had been started to establish the interest claimed under the Caveat. However, attached to the General Request was a copy of the originating application filed by Thompson seeking the removal of the Caveat.

Justice Brown stated:

“[W]ithout a statement of claim being filed, or the originating application being amended, there would have been a real question as to whether [Brown] had started a proceeding “to establish the interest claimed under the caveat”. Given that neither occurred, the originating application of itself could not be treated as a proceeding for the purposes of s 126(4) since it sought to set the Caveat aside. The fact is that there was no proceeding started to establish the interest claimed in the Caveat as contemplated by s 126(4) of the Act.”

Brown as caveator took no steps to make good the interest he claimed by starting proceedings by which his interest may have been defined. In circumstances such as these, s 126(5) of the Act operates automatically to cause the caveat to lapse and there is no occasion for the exercise of any discretion.

Balance of convenience favoured the removal of caveat

Because the Caveat had automatically lapsed the Court was not required to consider the other grounds of Thompson’s application. Nevertheless, Justice Brown found that even on the assumption that monies were owing which could be the subject of a charge, the balance of convenience favoured the removal of the Caveat. Her Honour pointed to the following reasons:

• Thompson had a number of contracts of sale with third parties which would have been jeopardised without the registration of the survey plan;
• Thompson would suffer a significant cost if the contracts did not settle, or were terminated;
• Thompson was incurring interest at approximately $650 per day.

Conclusion

The Court ordered the removal of the Caveat. Further, the Court ordered Brown to cover Thompson’s costs for the removal of caveat application incurred after 29 November 2017.

Related articles

What Principles Apply to the Extension of Caveats?

Removal of Caveats: Application Dismissed

Caveat Dispute: Mortgagee Unable to Transfer Land

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Removal of Caveat Application by Property Developer Succeeds appeared first on Elliott May.

Background

The borrowers under the relevant loan agreement with Secure Loan Solutions Pty Ltd (“SLS”) were Independent Civil Contractors Pty Ltd (“ICC”) and Independent Plant Hire Pty Ltd (“IPH”). Mr Smith was the sole director of ICC and wife, Vanessa, was the sole director of IPH. In November 2013 four agreements were executed whereby SLS loaned $300,000 to ICC and IPH. Mr Smith provided a personal guarantee and secured his obligations by way of a mortgage over his property in Hallam, Victoria (“the property”). Further, ICC and IPH gave a general charge over their assets. This included a specific charge over 12 items of earth moving equipment, valued for sale at $500,000.

Following default, SLS appointed receivers to ICC and IPH. In late 2015, NAB (the first mortgagee) sold the property as mortgagee in possession. NAB paid approximately $40,000 into Court (“surplus funds”), which represented the surplus from a mortgagee sale of the property.

Both SLS and Mr Smith claimed an entitlement to the surplus funds.

Lower Court Decisions

SLS argued that the loan remained outstanding and that it was entitled to the surplus funds on that basis. Mr Smith contended that the debt had been discharged because Secure Loan Solutions had taken possession of the equipment under the specific charge and had sold these items to discharge the debt. Associate Judge Ierodiaconou held that Mr Smith was entitled to the money as SLS had not proved the debt.

On appeal, Justice Bell held that SLS had proved the loan, a ‘shortfall’ of $121,500 in repayment of the principal, and the guarantee, and as such was entitled to be paid the surplus funds unless Mr Smith could establish that the shortfall of the principal debt had been repaid in full. However, his Honour inferred from the evidence that SLS had sold the equipment and that the debt had therefore been satisfied. Of great importance to the factual enquiry was the evidence was totally by affidavit. Also there was no cross-examination of any deponent. As a result, this left the court to make a lot of inferences as to what actually transpired.

Court of Appeal Decision

The issue was whether Justice Bell was correct in concluding that Mr Smith had established the loan had been repaid through SLS taking possession of and selling items of earth moving equipment. SLS sought to overturn the finding that it had taken or received possession of the equipment, valued at $500,000, which his Honour inferred had been sold. Both SLS and Mr Smith focussed on the affidavit material. One was from Mr Smith and the other from Mr Graer, the director of SLS.

The following allegations were made in the Smith affidavit:

• Approximately $150,000 of plant and equipment owned by Independent Civil Construction Group Pty Ltd (“ICCG”) not ICC, was removed from his yard on a weekend and after hours.
• David Graer was involved in the theft of the plant and equipment
• As of April 2014 Mr Smith had no plant and equipment under his control. And David Graer had some $650,000 worth of equipment in his possession.

In his affidavit, Mr Graer deposed that the allegations concerning theft were “untrue, baseless and misconceived”. Notably, Mr Graer did not deny that he had the relevant equipment in his possession. The core basis of SLS’ application for leave to appeal the decision was the contention that SLS had denied Mr Smith’s evidence that the 12 items of plant and equipment were in the possession of Mr Graer, and that the judge erred in finding to the contrary.

Conclusion

However, the Court of Appeal rejected SLS’ arguments, finding that the judge was right to find that no denial had been made by SLS:

“[Mr Graer] denied only that he was involved in the theft of the miscellaneous plant and equipment which was not the subject of the specific charge.”

As mentioned above, the parties did not cross-examine, and “the judge was justified in taking the course he did, and resolving the conflicts in the evidentiary chaos created by the parties as best he could”. Also, SLS’ failure to call evidence from the receivers was significant. The receivers would have been in a position to give an independent account of what had happened to the secured assets. In the circumstances the judge was left to draw inferences from the incomplete documentary record.

In conclusion, the application for leave to appeal was refused.

Related articles

Priority Dispute: Mortgagee Lodging a Proof of Debt

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Lender’s Claim to Surplus Funds Paid into Court Fails appeared first on Elliott May.

Background

By a chamber summons Conroys Smallgoods Pty Ltd (‘Conroys’) sought to extend the operation of two caveats lodged by them over two parcels of land belonging to the first defendant, Tomlinson, until further order of the court. The application by chamber summons was required as Tomlinson would not agree to the extension of the two caveats pending a substantive determination of the proceedings.

Conroys said:

• Tomlinson granted Conroys an equitable charge over two parcels of land pursuant to a Guarantee & Indemnity dated 9 June 2016;
• Tomlinson entered into the Guarantee & Indemnity at the same time as Conroys and Royal Park Quality Foods Pty Ltd (‘Royal Park’) entered into the Credit Agreement. Under the Credit Agreement, Conroys agreed to provide smallgoods to Royal Park on credit. Tomlinson was a director of Royal Park at the time;
• Conroys provided smallgoods to Royal Park and rendered invoices to Royal Park which totalled $112,565.85 (the ‘Debt’). Royal Park failed to pay the Debt to Conroys;
• Conroys lodged caveats over two parcels of land owned by Tomlinson. In the caveat, the estate or interest claimed is described as being pursuant to cl 6 of the Guarantee & Indemnity.
• Conroys received two notices issued under s 138B of the Transfer of Land Act 1893 (WA) (‘the Act’) in relation to the two caveats. This required Conroys to seek a court order to extend its caveats.

Tomlinson opposed the extension of the two caveats.

Legal principles applicable to the extension of caveats

There are well established principles relating to the extension of caveats under s138C of the Act. When the Supreme Court assesses whether to grant the extension of a caveat, there are two general issues:

• Whether the caveator’s claim in respect of the estate or interest in the land ‘has or may have substance’
• Whether the balance of convenience favours the retaining of the caveat and the appropriate orders to be made

The Court’s decision

In these applications the onus is on the plaintiff to demonstrate that the caveatable interest it claims has or may have substance. Conroys referred to clause 6 of the Guarantee & Indemnity, which provided as follows:

“The Guarantor(s) hereby charge in favour of the Creditor any estate and interest in any land and in any other asset(s), whether tangible or intangible, in which they now have any legal or beneficial interest or in which they will later acquire any such interest, with payment of all monies owed to the Creditor.”

Conroys argued:

• Tomlinson entered into the Guarantee & Indemnity at the same time as Royal Park entered into the Credit Agreement with Conroys
• The Credit Agreement and the Guarantee & Indemnity were contained within one document. Tomlinson placed his signature on the second page and the signature was witnessed by his accountant
• The language of clause 6 made it clear that the guarantor was intending to grant a charge over land.

Tomlinson argued:

• The estate or interest was not adequately specified in the caveats. Counsel noted that the caveat did not disclose the quantum of Conroy’s claim to a third party inspecting the register
• The conditions for the guarantee obligation were not fulfilled
• The land was not charged in favour of the plaintiff. That is, there was no formal charging by the plaintiff of an interest in the two properties. And therefore no foundation for the caveats).

Does the claim have substance?

The Court examined the caveats and found that they met the requirements as to form. The case authorities state that the description of the estate being claimed can be supported in certain cases by reference to the deed or instrument mentioned in the caveat from which the estate or interest is said to arise. The Court also found that default had been established and the guarantee was enforceable. Also, the fact that the Guarantee & Indemnity did not give Conroys the express right to lodge caveats over certain property did not prevent the caveats from being effectively lodged.

Tomlinson suggested that the deletion of the words ‘and consent to the lodging by the creditor of a caveat or caveats which note the creditor’s interest in the real property’ from clause 6 precluded the lodgement of the caveats. The Court found that there is no requirement in the Act for the caveator to have secured permission to lodge a caveat. Also, Conroys was also not bound to a promise not to lodge caveats in the Guarantee & Indemnity.

The Court was satisfied that Conroys had discharged its onus to demonstrate that the caveatable interest it claimed had substance. Also, Conroys showed the Court that there was a sufficient likelihood of success in its claim of an equitable charge to justify the continuation of the caveat.

Balance of Convenience

The Court then turned to the question of the balance of convenience. When considering the balance of convenience, the apparent strength or weakness of the plaintiff’s case can be taken into account. As outlined above, the Court found that the plaintiff’s case was arguable. In circumstances such as these, the interlocutory removal of a caveat where an arguable case as to the existence of the caveat had been demonstrated would be unusual.

The Court ordered that the caveats be extended until further order of the court.

Related articles

Removal of Caveats: Application Dismissed

Competing Interests in Security Property

Caveat Dispute: Mortgagee Unable to Transfer Land

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post What Principles Apply to the Extension of Caveats? appeared first on Elliott May.

Notifiable Data Breach scheme

On 22 February 2018, the Notifiable Data Breach (NDB) scheme came into effect in Australia. As a result, all Australian organisations subject to the Privacy Act 1988 are required to report serious data breaches.

In the first six weeks of the NDB scheme 63 data breach notifications occurred. This is a significant increase, as only 114 notifications happened in the previous 12 month period. 50% of these breaches were due to human error.

Does the NDB scheme affect my organisation?

You must comply with the NDB scheme if your organisation:

• Is a credit provider
• Keeps tax file numbers (TFN), linking a specific TFN with a particular individual
• Is a credit reporting body
• Is subject to the Australian Privacy Principles in the Privacy Act 1988
• Provides any health services
• Trades in personal information

Follow this link for more details on entities covered by the NDB scheme.

Costs of non-compliance

Under the NDB scheme organisations must report data breaches involving personal information that could result in serious harm to an individual. Click here for details of these ‘eligible data breaches’. If your organisation does not notify individuals of possible breaches, the following consequences can result:

• Regulatory action
• Investigation by the Privacy Commissioner
• Penalties of up to $2.1million

Have a data breach response plan in place

If your organisation believes an ‘eligible data breach’ has occurred, you are required to promptly notify individuals at likely risk of serious harm. Also, the Privacy Commissioner should be notified.

The notification should include the following information:

• The contact details and identity of the organisation
• A description of the data breach
• The type of information concerned
• Recommended steps individuals should take due to the data breach

Notifiable Data Breach forms are available at this link.

A Privacy Compliance Checklist

When developing a privacy compliance programme, be sure that all the following blocks are checked:

• A data breach response plan
• All supplier contracts reviewed to reflect the new privacy regulations
• A legally compliant privacy policy
• The organisation led by the Board and senior management
• Regular Privacy Law training provided to the staff
• Regular reviews and updates occur
• Detailed procedures and security policies in place
• A system of destroying ‘old’ personal information (PI)
• Template clauses when using service providers who need access to PI
• A designated Privacy Officer
• Compliance audits
• You are fully aware of how PI is handled, where it is kept and the risks associated with that information

Related articles

Verification of Identity: Reasonable Steps in the VOI Standard

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

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In Australian Competition and Consumer Commission v JJ Richards & Sons Pty Ltd [2017] FCA 1224 the ACCC contended that a number of terms in a standard form contract were “unfair” with regards s 24 of the ACL.

The Provisions

To be classed ‘unfair’ under the Australian Consumer Law (ACL), a term must:

• cause a significant imbalance in the parties’ rights and obligations;
• not be reasonably necessary to protect the legitimate interests of the party advantaged by the term; and
• cause financial or other detriment (such as delay) to a small business if it were relied on.

The amendments to the ACL extended the unfair contract provisions to small business contracts. A small business contract occurs when:

• the contract is for a supply of goods or services, or a sale or grant of an interest in land; and
• at the time of the contract is entered into, at least one party to the contract is a business that employs fewer than 20 persons; and
• either of the following applies:
  1. the upfront price payable under the contract does not exceed $300,000;
  2. the contract has a duration of more than 12 months and the upfront price payable under the contract does not exceed $1,000,000.

If a court or tribunal finds that a term is ‘unfair’, the term will be void. The balance of the contract will continue to bind the parties to the extent it is capable of operating without the unfair term.

Background

JJ Richards and Sons Pty Ltd (JJ Richards) is in the business of providing waste management services. Since the introduction of the small business protections in November 2016, JJ Richards has renewed or entered into more than 26,000 standard form contracts, including with small businesses as defined in the ACL.

The unfair contract terms under dispute

The ACCC claimed that 8 of the clauses in JJ Richards’ standard form contract were unfair contract terms for small businesses.

1. Automatic renewal clause: This clause bound JJ Richards’ customers to an automatic contract renewal, unless cancelled within 30 days of the expiring initial or subsequent contract. Customers could inadvertently miss the termination date, resulting in lengthy unwanted contract periods. Further, the clause did not require JJ Richards to notify clients of contracts nearing their end and the possibility of automatic renewal.
2. Price variation clause: This clause allowed JJ Richards to increase prices during the term of the agreement by giving 30 days’ notice of the increase. It provided the customers with no opportunity to negotiate or terminate the contract due to higher costs.
3. Agreed times clause: According to this clause JJ Richards “will use all reasonable endeavours to perform the collections at the agreed times”. The company accepted no liability in the event that service did not occur, regardless of the cause. In other words, if hindrance was due to outside factors, the customer bore the risk with no corresponding benefits.
4. No credit without notification clause: This clause allowed JJ Richards to charge clients for services not provided. Even if the reason for no rendered services was beyond the customer’s control, JJ Richards could still charge its fee. Further, the clause made it the customer’s responsibility to make a credit request.
5. Exclusivity clause: This clause granted JJ Richards exclusive rights for removal of all waste and recyclables from the customer’s premises. As a result, clients could not seek alternative options of waste removal, even where JJ Richards did not provide the service required. Also, this inhibited the rights of the clients to seek better or more affordable services.
6. Credit terms clause: This clause required customers to pay their accounts within 7 days. In the event that payment did not occur within this period, JJ Richards could suspend services and continue charging the client during the suspension period. The clause did not give customers equivalent rights, such as withholding payment for failure to provide services.
7. Indemnity clause: This clause gave JJ Richards unlimited indemnity. The indemnity applied even in cases where the loss incurred was not the fault of the client.
8. Termination clause: This clause provided that customers could not terminate the contract unless their account was paid in full. Further, JJ Richards would not remove the equipment and could continue to charge rental while not providing any services.

Outcomes and Court orders

The Court concluded that each of the above Terms was “unfair” within the meaning of s24 of the ACL. Therefore, where these terms were contained in small business contracts, they were void for being unfair.

The Court ordered that JJ Richards take the following remedial action:

1. JJ Richards could not rely on any of the unfair contract terms;
2. For a period of five years, JJ Richards may not enter into a standard form contract containing any of the above mentioned unfair contract terms;
3. Within 14 days, JJ Richards must publish a corrective notice in a prominent place on the home page of its website, on its customer portal and other URLs it may use.
4. JJ Richards must give a copy of the Court’s to every small business party that entered into or renewed a standard form contract with JJ Richards after 12 November 2016.
5. For a period of three years, JJ Richards must establish and maintain an ACL Compliance Program. This is to ensure the training of all employees in the correct application of the unfair contract terms law.

Conclusion

Based on the ACCC’s clampdown on standard form contracts, it is imperative that care is taken when issuing a standard form contract to a small business. Although businesses may be reluctant to move away from standard terms they have used for long periods, inaction may prove costly.

Related articles

Standard Terms: How Binding are They?

Unfair Contract Terms Protections to Cover Small Businesses

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Unfair Contract Terms for Small Businesses Tested in Court appeared first on Elliott May.

Background

Mr and Mrs Mabilia were the owners of a property situated in rural Victoria (the property). In May 2013, Ms Di Blasi lodged a caveat over the property based upon a charge contained in a loan agreement between herself and the Mabilias (the first caveat). In July 2013, the first caveat was withdrawn. Ms Di Blasi asserted that the withdrawal of the first caveat was perpetrated by a forgery of her signature.

In August 2013, Lee Nyong Pty Ltd and Pagliaro Superfund Pty Ltd (the Plaintiffs and second mortgagees) registered a mortgage over the property. At some point after the registration of the second mortgage Ms Di Blasi became aware of the withdrawl of the first caveat and lodged a further caveat on 5 September 2013 (the second caveat). On the same day the Registrar lodged on the title a ‘Notice of Action’ due to the allegation of fraudulent activity.

Settlement hindered by encumbrances

In April 2016, the second mortgagees took possession of the property and placed it on the market. The title had the following encumbrances:

1. First registered mortgage by Commonwealth Bank;
2. Second registered mortgage;
3. Second caveat;
4. The Notice of Action.

Settlement did not proceed due to the presence of the caveat and perhaps the Notice of Action on the title of the property, and the settlement date was extended.

Attempts made by the second mortgagees to have Ms Di Blasi remove the second caveat failed and court proceedings were initiated. On 21 September 2017, it was agreed that Ms Di Blasi would remove the second caveat and that settlement would proceed with the CBA and the agent expenses being paid out. The Registrar also removed its Notice of Action.

The second mortgagees were paid out from monies paid into court. The remaining issue was whether Ms Di Blasi or the Registrar were liable for the costs (whether on a standard or indemnity basis) of the second mortgagee’s proceedings to have the second caveat removed.

Who is liable for the costs of the proceedings?

Section 24(1) of the Supreme Court Act 1986 states that the question of costs is to be determined in the Court’s discretion, with the Court having “full power to determine by whom and to what extent the costs are to be paid”. The Court also has the power to award costs on an indemnity basis in exceptional circumstances, such as where a losing party has engaged in unmeritorious or other improper conduct.

Two issues required consideration:

• Is Ms Di Blasi to pay costs, and if so, should it be on an indemnity or on a standard basis?
• Is the Registrar liable to pay a part of the costs?

Was Ms Di Blasi liable for indemnity costs?

The Court made it clear that Ms Di Blasi’s situation was unfortunate. However, the Court found that the charge secured by her second caveat could never trump the rights of the first and second mortgagees (due to principles regarding indefeasibility, priority and bona fide purchasers). It was clear the second mortgagees had a stronger claim than Ms Di Blasi. If the first caveat was removed in fraudulent circumstances, then the appropriate action for Ms Di Blasi was to notify the police and lodge a claim for compensation against the Assurance Fund.

Ms Di Blasi did not consent to remove the caveat until she received orders to do so. This was despite having an indisputably weaker claim over the property. The Court stated:

A responsible and reasonable response to the Plaintiffs’ letter would have been to remove the caveat immediately, provided the balance of any settlement monies were quarantined pending any litigation between the registered proprietors and Ms Di Blasi. But this was not done.

By refusing to withdraw the second caveat, Ms Di Blasi effectively forced the second mortgagees to lodge an application with the Court, despite there being no chance of her successfully advancing her position at a hearing. Justice Forrest ordered Ms Di Blasi to pay costs on an indemnity basis.

Should the Registrar pay any part of the costs?

In determining the order of costs, the Court found Ms Di Blasi’s failure to remove the caveat when asked to do so was the sole cause of the proceedings. Therefore it was inappropriate to make the Registrar pay any part of the costs.

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This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Improper Conduct Results in Court Awarding Indemnity Costs appeared first on Elliott May.

The decision serves as an important reminder for businesses who supply goods or services on credit to be aware of the factors courts take into account in determining priorities between equitable interests should the debtor’s assets be insufficient to cover the debts of all creditors.

Background to the competing equities dispute

Both Bunnings Pty Ltd (Bunnings) and Hanson Construction Materials Pty Ltd (Hanson) supplied building materials to Capital Works Construction Pty Ltd (Capital Works) under terms outlined in separate credit applications made by Capital Works.

Although a date for Hanson’s acceptance of the credit application did not appear on the document, the Court found that acceptance took place sometime before 10 July 2010.

By contrast, the Bunnings application was accepted on 30 August 2010.

The respective credit agreements with Capital Works included charging clauses with respect to any property owned or subsequently owned by Capital Works as security for the repayment of monies owing for the supply of building materials.

The Caveats

After Capital Works failed to meet repayment deadlines, Bunnings lodged a caveat over three properties owned by Capital Works on 23 April 2014. Before lodging the caveat, Bunnings conducted title searches which showed that no other supply company had lodged caveats against the above properties. On 2 April 2015, Hanson also lodged a caveat over the same three properties owned by Capital Works. Each caveat was supported by the charge granted by Capital Works under the credit applications. At the time, the three properties were mortgaged to National Australia Bank (NAB).

Capital Works went into liquidation on 12 June 2015 and the three properties were sold by the liquidator. The proceeds of the sale discharged NAB’s debt and the liquidator’s expenses. However there was an insufficient surplus to cover the debts owed to Bunnings and Hanson. Faced with this dilemma, the liquidator proposed to give priority by reference to the order in which the caveats were lodged.

Bunnings went to the court seeking a declaration that the equitable charge protected by its caveat constituted an equitable interest in the properties in priority to Hanson.

The Priority Issue

The Court was required to consider whether the priority of the competing equitable charges turned on:

• The date of the creation of the equitable interest; or
• The date of registration of a caveat in respect of the charge.

Bunnings registered its caveat first, while the Hanson charge had the earlier date of creation.

Decision

His Honour referred to the general rule that if the equities are in all other respects equal, the time of creation of the equitable interest determines priority. This is the case regardless of whether, or when, a caveat is lodged to protect that interest. As a result, Bunnings needed to point to some postponing conduct on the part of Hanson which would have the effect of defeating this general rule.

Justice Chaney could not find evidence of any postponing conduct on the part of Hanson. To support this finding, his Honour referred to the following:

• The lodgement of a caveat was not necessary to create or enhance Hanson’s interest in the properties;
• There was nothing to suggest that Bunnings made any inquiry of Capital Works as to the existence of other credit arrangements or other charges granted by Capital Works over existing or future land holdings;
• Hanson’s conduct had not induced Bunnings into acquiring its equitable interest in the properties.

Therefore, on this basis the Court found that Hanson had priority over Bunnings.

Lessons

Merely lodging a caveat over property does not guarantee that you will be paid in priority to other creditors. As this decision highlights, caveats provide notice to the world of an interest in property, but do not serve to enhance an equitable interest in property if a charge over the same property has already been granted.

Related articles

Removal of Caveats: Application Dismissed

Lender Seeks to Enforce Equitable Charges and Wins

Equitable Charge Prevails But Needless Costs Deducted

Equitable Interest in Land

Competing Interests in Security Property

This publication is for your general information and interest only. It is therefore not intended to be comprehensive, and does not constitute and must not be relied on as legal advice. You must seek advice tailored to your specific circumstances. 

The post Competing Equities Dispute: What Determines Priority? appeared first on Elliott May.