In La Trobe v MDVest [2017], the borrowers disputed three prior judgments in favour of the lender. They contended that the lender was not entitled to judgment in each action. The borrowers presented a number of reasons for resisting judgment, including the issue of Assignment.

What is an Assignment of Mortgage?

A mortgage over a property provides the lender with security for loans made to a mortgagor. From time to time banks or lenders will buy or sell these mortgages. An Assignment is the legal process by which the debt and associated mortgage is transferred from one lender to another. This will often be formalised by way of a deed of assignment including a transfer of mortgage. 

A Notice of Assignment informs the debtor that a third party has taken over their debt and security.

Background

In August 2013 the credit provider, Permanent Mortgages, entered a loan agreement with the borrowers. A mortgage over a property in Dempster Road, Myrup provided security for the loan. Permanent Mortgages was the first registered mortgagee.

The initial loan had a 12 month repayment term. A further 2 year renewal resulted in the loan repayment expiring on 31 August 2016.

Assignment of mortgage, loan agreement and guarantee

In October 2015 Permanent Mortgages assigned its interest in the loan agreements, mortgage and guarantees to La Trobe Financial. In December the registration of the transfer of mortgage occurred. However, due to an oversight, no written assignment of the loan agreement and guarantee occurred in October.

Subsequently, the borrowers defaulted on the terms of the loans and the lender obtained judgments.

The borrowers, however, contested the right of La Trobe to the judgments.

Assignment of mortgage not effective

The borrowers contended that the assignment of mortgage, loan agreement and guarantee was not effective.

The first argument was that the Deed of Rectification was not admissible as it was not stamped for duty. According to the Duties Act 2008 (WA), duty is imposed on dutiable transactions. However, if the balance of the mortgage is equal to or greater than the market value of the security interest, then the assignment is not a dutiable transaction. The Court found this to be the case, concluding that no duty was payable.

Secondly, the borrowers argued that, on the balance of probabilities, the assignment did not occur. In this instance, the Court disagreed and found no reason to dismiss the evidence provided by La Trobe’s mortgage manager. The evidence, together with the recitals to a Deed of Rectification, satisfied the Court that the assignment indeed took place in October 2015. 

No notice of the assignment given

The borrowers further asserted that they received no written Notice of Assignment.

The Property Law Act 1969 (WA) states that in the assignment of debt, the debtor must receive notice in writing. However, evidence showed that on 2 occasions the lender provided written communication of the assignment to the borrowers.

Conclusion

Periodically the assignment of debt takes place between lenders. Therefore it is important that the arrangement is properly documented. And that both the debt and all relevant forms of security are transferred to the assignee. It is too often the case that a lender will assign the debt but neglect to assign or transfer the mortgage.  This results in a situation where the assignee holds the right to enforce the debt but no right to recourse against any security property as this remains with the original lender. When this happens, the assignee is in the unenviable position of being an unsecured creditor.

Proper notice of the assignment of the debt and security should also be provided to the debtors and mortgagors without delay.

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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 Assignment of Mortgage & Loan Agreement in Dispute appeared first on Elliott May.

The High Court’s verdict is a good outcome for liquidators. It is however a less welcome result for secured creditors.

The court reached this decision in Stewart v Atco Controls Pty Ltd (In Liquidation) [2014] HCA 15. While not a recent judgment it impacts secured creditors. It is therefore worth taking a closer look.

Background

Atco Controls Pty Ltd (Atco), a lighting manufacturer, was the sole shareholder and secured creditor of Newtronics Pty Ltd (Newtronics). Newtronics received financial support from Atco. As of December 2001 Newtronics owed Atco $19 million.

Atco appointed receivers and managers to Newtronics in January 2002. Thereafter, the receivers sold the business for $13 million. In February Newtronics went into liquidation.

The Liquidator, funded by Newtronics largest unsecured creditor Seeley International Pty Ltd, pursued a claim against Atco and its receivers. The claim failed against Atco. However, the receivers settled the claim against them by paying Newtronics $1.25 million.

Atco claimed the right to the settlement sum under the terms of its security. However, the court initially rejected Atco’s claim. Although, on appeal the court upheld the secured creditor’s claim. The Liquidator then appealed to the High Court, asserting an equitable lien over the funds in agreement with the Universal Distributing principle.

What is the Universal Distributing principle?

This principle dates back to Universal Distributing Co Ltd (in Liq) (1933) 48 CLR 171. It sets out that a liquidator’s costs and expenses take priority. The liquidator has an equitable lien over the assets recovered. Also, this takes priority to the interests of the secured creditor.

However, Atco argued the principle ought not to apply.

The High Court decision in favour of the Liquidator

The High Court reversed the decision of the Court of Appeal.

To reach its conclusion the High Court looked at the role of the liquidator. It stated:

• A liquidator’s duty is not to a single creditor but to all creditors. That is “to the body of creditors as a whole and to the court”.
• Part of the liquidator’s role is to try and increase the assets available for distribution.
• A liquidator has power to bring proceedings in order to realise these assets.
• It is also the duty of a liquidator to carefully examine charges over company property. And where fitting, to challenge those securities.

The High Court concluded that the liquidator acted correctly in bringing the proceedings. Therefore he was entitled to an equitable lien over the settlement sum. This took priority over the secured creditor’s charge.

Implications for secured creditors

The High Court’s judgment is of some concern for secured creditors. Usually a secured creditor’s fixed charge has priority over all other claims. However, the secured creditor needs to be aware that a liquidator’s lien can triumph over its security.

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This publication is for your general information and interest only. It is 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 Liquidator Prevails Against Secured Creditor appeared first on Elliott May.

The Supreme Court of NSW focussed on this issue In the matter of Bluenergy Group Limited (subject to a Deed of Company Arrangement) (administrator appointed) [2015] NSWSC 977. The judgment is of significant concern to secured creditors insofar as contingent or future debts, such as accruing interest and enforcement costs, are concerned. 

What is a DOCA and how does it effect a secured creditor?

A company under voluntary administration may enter into a DOCA. The DOCA is a binding arrangement between the company and its creditors. It is an alternative to liquidation. It also gives the company the chance for a ‘fresh start’. 

The DOCA binds all unsecured creditors. Even those who voted against it. The usual approach taken by secured creditors is not to vote for the proposal and to stand outside the DOCA process in the belief that this means they are not subject to its terms.

However, the ruling of the Supreme Court in Bluenergy made it clear that a DOCA can impact secured creditors even if they elect not to participate in the process or DOCA.

Background to the Bluenergy Case

Keybridge Capital Ltd (Keybridge) advanced $300,000 to Bluenergy Group Ltd (Bluenergy) in September 2013. As security, Keybridge took a charge over the company’s assets.

In 2014 Bluenergy entered into voluntary administration. Then in July 2014 the company’s creditors voted to adopt a DOCA proposal. As a secured creditor, Keybridge did not vote in favour of the deed. Instead it chose to abstain from the vote and DOCA process. It believed it stood outside the DOCA and that there was no way for the DOCA to impact its secured position.

It was mistaken.

In March 2015 Keybridge appointed an administrator under its security. At this time Bluenergy was still subject to the DOCA.

However,the deed administrators challenged the appointment of the Keybridge administrator. They argued that the DOCA extinguished all of Keybridge’s secured debt. Therefore, they asserted, Keybridge had no right to appoint its own administrator.

Keybridge submitted that the DOCA did not extinguish its secured debt. It argued it had not voted in favour of the DOCA, nor had it participated in the DOCA process.

What did the Court Decide?

In an unexpected decision the court decided:

• to terminate the administrator appointed by Keybridge
• that the secured creditor remained able to ‘realise’ or ‘otherwise deal’ with the secured property
• but, that the terms of the DOCA extinguished the secured creditor’s debt (even though it did not vote on the DOCA proposal)
• that the DOCA extinguished security over future property so as to give the company coming out of voluntary administration the best chance of a ‘fresh start’

What does this Mean for the Future of Secured Creditors and DOCAs?

It means significant change and possible exposure, especially for interest and enforcement costs accruing following entry into a DOCA of this nature. No longer can secured creditors take comfort from standing outside the DOCA process. Instead, certain aspects of secured debts are now subject to the same extinguishment principles applied to unsecured creditors.

Going forward secured creditors should carefully consider the implications of a DOCA proposal. Also, it is vital to scrutinise the deed terms to identify whether or not it proposes to extinguish some or all of the debts of the company.

Obtain urgent legal advice if the deed proposes to extinguish the debts of the company as this is likely to extend to all secured debts accruing following approval of such DOCA. Of most concern for secured creditors is the fact that, even if they participate in the DOCA process and vote against any proposal to extinguish the debts of the company, parts of their otherwise secured debt may be extinguished by a simple majority vote of all creditors, including unsecured creditors.

Related articles

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This publication is provided for your general information and interest only. It is 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 Secured Creditor Has Debt Extinguished by DOCA appeared first on Elliott May.