The recent WA Supreme Court case of Bunnings v Hanson Construction [2017] considers a competing equities dispute between two suppliers.
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
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.