Litigation & Dispute Resolution

Case Note - Swinburne v Boase [2016] WASC 299 - Always Support the Caveat with a Charging Clause or Some Other Express Grant of a Proprietary Interest

It is not uncommon for loan and residential construction agreements (or similar) to include a clause noting the lender is entitled to lodge a caveat over land. Sometimes this happens where a borrower deletes the charging provision/s but retains the provision entitling the lender to lodge a caveat.

The question arises whether the lender actually has, in these circumstances, a ‘caveatable interest’ in land for the purposes of section 137 Transfer of Land Act 1893 (WA) (or equivalent provisions in other jurisdictions); perhaps more importantly whether the lender has an effective security interest in the land by reason of the contractual right to lodge a caveat.

Historically the answer to the question was “no”. In more modern times the courts have been willing, on a case by case basis, to imply the grant of a proprietary interest alongside the express contractual acknowledgment of a right to lodge a caveat.

Accordingly, there are three possible outcomes where a document permits the lodgement of a caveat over land without expressly granting a charge (and there is a subsequent challenge to the caveat):

• The best outcome for the lender is that it has an equitable charge – making it a secured creditor and giving it some albeit restricted enforcement rights.
• Alternatively, the lender may not have an equitable charge but nonetheless have an interest in and sufficient to support a caveat – for example a right to be repaid from proceeds of sale of the land if the borrower ever decides to sell (but without the lender having rights to apply to the court for possession of the land or to compel sale).
• Finally, the lender may have no interest in the land at all; the contractual acknowledgement of the right to lodge a caveat being nugatory.

In the recent decision of Swinburne v Bose [2016] WASC 299, the plaintiff sought to extend the operation of a caveat lodged over the defendants’ property. The caveat was lodged after the first defendant defaulted on payments owed to the plaintiff under two loan agreements.

The loan agreements had been drafted without the help of lawyers. The relevant clause in each agreement was:

“If there is any default in repayment for more than 2 months… (the lender) has the legal right to take caveat over… [the property]”.

The interest claimed in the caveat was an ‘equitable charge’.

Issue

The questions for the Court were, firstly, whether a provision in loan agreements for a caveat to be lodged upon default in payment granted a caveatable interest in land and, if so, whether the plaintiff’s application to extend the operation of the caveat should be accepted.

Reasoning

The Court noted:

• In the absence of express intent, it is for the court to determine whether an intention to create an equitable charge can be implied.
• Authorisation to lodge a caveat does not create by necessary implication, the conclusion the parties intended to create an equitable interest, of for any such interest to equate to a charge over the property.
• Whether or not the relevant intention to grant an interest in land can be implied will always depend upon the terms of the relevant contract in the particular circumstances to hand.

Ultimately the Court decided there was a sufficiently arguable case, the link in the loan agreements between the authority to caveat and the obligation to pay the plaintiff reflected an intention to create an equitable charge. The operation of the caveat was extended.

Main points to take away

• Clients with the benefit of the caveat clause, in the absence of an express charging clause, ought to be advised of the risk their position is not secure.
• A contractual right to lodge a caveat should put a caveator in a position where they have an arguable case to extend the operation of a caveat on an interim basis (subject to the balance of convenience). This will in turn give the caveator some bargaining power to negotiate a commercial outcome. Whether the caveat is sustainable on final analysis is another question.
• A right to lodge a caveat, on its own, does not automatically create an equitable interest in land.
• Whether a provision granting such a right also creates an equitable charge is a matter to be determined on construction of the provision itself and the surrounding circumstances.
• The court will try to determine whether, on the facts of the case, it was the parties’ intention to create an equitable charge or some other caveatable interest in land.
• The interest claimed in any caveat should be drafted in sufficiently wide terms to catch not only an equitable charge, but also a general right to be paid from any proceeds.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.

A general introduction to Safe Harbour

What is safe harbour?

A common fear for directors when a company is insolvent or nearing insolvency is their personal liability for debts incurred by the company, if the company continues to trade and then ultimately goes into liquidation.  This can lead to the pre-emptive appointment of a voluntary administrator or liquidator; or alternatively directors taking the ostrich approach believing there is little they can do; neither of which may be in the best interest of the company’s stakeholders.

Effective from 19 September 2017 a new section 588GA (and consequential provisions) was inserted into the Corporations Act 2001; colloquially referred to as ‘safe harbour’.  Safe harbour protects company directors from liability for insolvent trading in the event that the company goes into liquidation.

The purpose of safe harbour relates to, and the protection it affords depends on, directors taking prompt, concrete, reasonable steps to turnaround or restructure the company with the benefit of appropriate external advice.

Restricted entry to the harbour

>   There are very strict rules governing when the safe harbour protection is available to directors.

>   It is only available to directors who:

• developed or took a course of action that, at the time, was reasonably likely to lead to a better outcome for the company than immediate administration or liquidation (the course       of action that was developed must have been implemented within a reasonable period);
• ensured that the company complied with its obligation to pay its employees (including superannuation) and met its tax reporting obligations; and
• if the plan failed and the company entered external administration, met their statutory obligations to assist administrators, liquidators or controllers.

>   The safe harbour only extends to debts incurred directly or indirectly in connection with the course of action or its development.

>   Safe harbour commences at a particular time; being the moment the director suspects insolvency and decides to do something about it. It should be documented

The “reasonably likely to lead to a better outcome” test

>   Whether a course of action is reasonably likely to lead to a better outcome is assessed at the time the decision is made; not with the benefit of hindsight.

>   The threshold of ‘reasonably likely to lead’ is not as high as the words may suggest.  It is a possibility that is not ‘fanciful’ or ‘remote’; but ‘worth noting’.

>   There are some indicative factors to determine whether a course of action was reasonably likely to lead to a better outcome; namely whether the director has:

• kept themselves informed about the company’s financial position;
• taken steps to prevent misconduct by officers and employees of the company that could adversely affect the company’s ability to pay all its debts;
• taken appropriate steps to ensure the company maintained appropriate financial records;
• obtained advice from an appropriately qualified adviser; and
• been taking appropriate steps to develop or implement a plan to restructure the company to improve its financial position.

>   Directors seeking to claim the benefit of safe harbour bear the evidentiary burden of establishing:

• they developed a course of action that was reasonably likely to lead to a better outcome for the company; and
• the debt was incurred directly or in connection with the course of action.

>   The onus then shifts to the liquidator to prove, on the balance of probabilities, the course of action taken was not, at the time, reasonably likely to lead to a better outcome.

Meeting ongoing director obligations

• Directors should continue to comply with all of their other legal obligations and duties – safe harbour protection only extends to civil liability under the insolvent trading provisions.
• Continuous disclosure requirements (if applicable) continue to apply.
• If the restructuring plan fails and the company enters liquidation, safe harbour only protects directors from a liquidator’s insolvent trading claim if the directors have also complied with certain formal obligations during the liquidation, such as providing books and records and completing a ‘report as to affairs’.
• With some exceptions, failing to provide an administrator or liquidator access to books and records will prevent a director from being able to rely on those materials as evidence of having complied with the safe harbour requirements.

What to do?

If you suspect your company is insolvent or nearing insolvency, immediately contact us for advice so we can assist in navigating you into the safe harbour.

This article is general information only, at the date it is posted.  It is not, and should not be relied upon as, legal advice.  This article might not be updated over time and therefore may not reflect changes to the law.  Please feel free to contact us for legal advice that is specific to your situation.