Caveats and Security Interests in Partnership and Controlled Property

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(No Transcript)
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Caveats and Security Interests in Partnership and
Controlled Property

• Peter Mills Partner
• Mark Wenn - Associate

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KEY DEFINITIONS

• ABC Pty Ltd ("ABC") - creditor of XYZ Pty Ltd
  (XYZ) (under a lease agreement) and its
  directors JS and MS (under guarantee).
• Greg Bro ("GB") - administrator of XYZ and
  subsequent liquidator of same under the
  provisions of the Corporations Act 2001 ("CA").
• Phil Lucky ("PL") - fourth partner in the Oz
  Partnership with XYZ, JS and MS.
• The land are the following lots
• Lots 1-4 on RP 12345 BELLARRA BRIBIE ISLAND
  12345678

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KEY DEFINITIONS

• John Smith ("JS") - director and shareholder of
  XYZ, partner in Oz Partnership and bankrupt under
  the Bankruptcy Act 1966.
• Mary Smith ("MS") - director and shareholder of
  XYZ, partner in Oz Partnership and bankrupt under
  the Bankruptcy Act 1966.
• Paul Green ("PG") trustee of the bankrupt
  estates of JS and MS.
• XYZ Pty Ltd ("XYZ") company incorporated under
  previous Companies Code, and partner in Oz
  partnership under the Partnership Act (1896)
  (Qld).

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KEY DATES

• 15 January 1995 - Original Oz Partnership
  Agreement executed.
• 11 May 2004 - change in Oz Partnership, and PL,
  XYZ, JS and MS become the sole registered
  proprietors of the land and sole partners in the
  Oz partnership.
• 1 February 2007 - GB appointed by the directors
  of XYZ as administrator of XYZ.
• 15 February 2007 - JS and MS file debtor summons.

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KEY DATES

• 14 March 2007 - caveat lodged by ABC over the
  registered interests of XYZ, JS and MS in the
  land.
• 1 April 2007 - resolved by its creditors to be
  wound up.
• 29 April 2007 - proceedings commenced by ABC
  against XYZ, JS and MS.
• 29 April 2007 - Notice of Action lodged with the
  Registrar of Titles by ABC.

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XYZ Pty Ltd

• XYZ was incorporated on 29 June 1989.
• JS, Director, currently holds 1 ordinary share in
  his own right - now property of PG
• MS, Director, currently holds 2 ordinary shares
  in her own right - now property of PG

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Loan Agreement

• Between PL and Prudential Assurance Company
  Limited ("PCL") on 1 January 1995 ("the PCL loan
  agreement") and provided, inter alia
• PCL loaned money to PL for the purpose of PL
  purchasing the land.
• PL agreed to grant a mortgage to PCL over the
  land to secure money owed under the PCL loan
  agreement.

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PCL Mortgage

• On 14 February 1995 PL became the registered
  owner of the land and a mortgage was registered
  over the land in favor of PCL ("the PCL
  mortgage").
• The purpose of the PCL mortgage was to secure the
  money owed by PL to PCL under the PCL loan
  agreement.

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The OZ Partnership

• By an agreement dated 15 January 1995 ("the
  partnership agreement") it was provided, inter
  alia
• That a partnership was entered into between
  various parties, including PL, XYZ, JS and MS
  ("the OZ partnership").
• The principal purpose of the partnership
  agreement was for the holding of the land in
  shares as tenants in common by the relevant
  parties proportionate to their interest in the OZ
  partnership.
• for dissolution of the OZ partnership from time
  to time and the reconstitution of new
  partnerships permits disposal of interests in
  partnership and the land.
• The OZ partnership recognized a loan provided by
  PL to the various members of the OZ partnership
  (as it may be constituted from time to time) to
  buy their interest in the land.

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The PL Loan Agreement

• By an agreement dated 15 January 1995 ("the PL
  loan agreement") it is provided, inter alia
• PL loaned to the various members of the OZ
  partnership funds to obtain their respective
  interest in the OZ partnership.
• The principle asset of the OZ partnership was the
  land and any other land which might be purchased
  from time to time.

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Other matters

• On 20 August 2003 the benefit of the mortgage was
  transferred from PCL to Prudential Corporation
  Australia Limited ("PCAL") by a dealing ("the
  mortgage transfer").
• On 11 May 2004 XYZ became the registered
  proprietor of a 2/25th's interest of the fee
  simple of the land ("the XYZ transfer")
• JS and MS also each became registered proprietors
  of a 2/25th's interest of the fee simple of the
  land
• All registered owners of interest in the land
  (being the partners of the OZ partnership from
  time to time) have executed
• Guarantees in favor of PCL and PCA as to the debt
  owed by PL under the PCL loan agreement.
• Mortgages over their registered interest in the
  land in favor of PCL/ PCA

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Caveat

• 14 March 2007 lodged by ABC
• 1. Caveator - ABC Pty Limited
• 3. Interest being claimed - As equitable
  mortgagee of the share in fee simple held by XYZ
  as trustee under nomination of trustees, JS and
  MS.
• 4. Grounds of claim - As equitable mortgage
  pursuant to clauses 10 and 11 of the Memorandum
  of Terms and Conditions referred to in clause 4
  of a Lease Agreement between ABC and XYZ dated 16
  April 2002 and guarantee dated 16 April 2002.
• 5. Registered Owner - XYZ as Trustee under
  Nomination of Trustees, JS, MS and PL
• 7. Request/ Execution - The Caveator claiming as
  per item 3 on the grounds detailed in item 4 and
  subject to the Land Title Act 1994 forbids the
  registration of any instrument affecting the land
  in item 2 until this caveat is withdrawn by the
  Caveator.

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Caveat law

• Interest of an equitable mortgagee under a valid
  binding and enforceable mortgage is capable of
  supporting a caveat
• Caveatable interests under a partnership less
  clear though it would appear that partners at
  least have a caveatable interest in partnership
  property (see Bush v. Hanlon 1998 NSWC 326 esp
  at pg 6 and Suncorp Insurance and Finance v.
  Commissioner of Stamp Duties (1997) 36 AT 514,
  which both expressly preferred the view of
  Connell v. Bond Corporation Pty Limited (1992) 8
  WAR) 352 at 363-373 (esp 373) and Bushs Case
  expressly decided that Chettle v. Brown 1993 2
  Qd R 604) should not be followed).
• Court will not remove caveat if there is a
  serious question to be tried (Heritage Properties
  (No 3))

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Caveat Law

• Liquidator or trustee has caveatable interest
  seeking to set aside voidable transaction (Kitay
  Martin Bruce)
• Caveats lodged by equitable mortgagees must
  comply with lapsing provisions under s90(1) TLA
• Onus lies on a caveator in application by
  caveatee for removal of caveat
• Claim to interest in land must raise serious
  question to be tried
• Balance of convenience must favour status quo
  rather than allowing sale of land to 3rd party

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Caveat Law

• The Court would
• remove a caveat if it no longer serves any useful
  purpose, such as where an equitable mortgagee
  would not receive any proceeds from the sale of
  the interest in land
• not remove a caveat even where interest claimed
  in caveat is inconsistent with claim in
  proceedings if an amendment to the proceedings
  would save the caveat
• No guidance on when Court would use discretion to
  order removal of caveat

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The Proceedings

• On 29 April 2007 proceedings were commenced
  against solely XYZ, JS and MS by ABC in the
  Queensland Supreme Court ("the proceedings").
• s440D s471B CA
• Cannot begin or continue proceedings against
• a company under administration save with leave of
  Court or the consent of the Administrator, s440D
  CA
• a company in liquidation save with leave of
  Court, including enforcement proceedings, s471B
  CA
• Must be a good reason for departure from usual
  course of lodging proof of debt (Ogilvie-Grant)

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The Proceedings

• s471B CA applies to creditors voluntary winding
  up (Awada)
• Proceeding without leave an abuse of process and
  liable to be struck out (Sherman)
• If security is unenforceable, proceedings against
  company in liquidation should be struck out
  (Ogilvie-Grant)
• Court not Registrar of Titles has power to grant
  leave

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The Proceedings

• s440J CA
• During the administration of a company a
  guarantee of liability of the company cannot be
  enforced as against a director of the company or
  a spouse, defacto spouse or relative of such
  director
• Purpose to preserve assets of directors and their
  spouses which might then be used in a DOCA
• A caveat however does not fall within this
  moratorium.

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The Statement of Claim

• The Statement of Claim pleaded
• Paragraph 2 - By lease agreement dated 16 April
  2002 ("the Lease") between ABC, XYZ as lessee
  and JS and MS as Guarantors, ABC leased to
  XYZ certain equipment comprising personal
  computer, a laptop computer and (3) paintings
  (the "Equipment") on terms and conditions set out
  therein.
• Paragraph 4 - XYZ has defaulted in performance
  under the Lease inter alia, in that it has parted
  with possession of the Equipment.
• Paragraph 5 - ABC terminated the Lease by
  notice dated 30 April 2007.

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The Statement of Claim

• Paragraph 9 - Further it was an express term of
  the Lease that the Defendants charged to the
  Plaintiff all of their assets and agreed to grant
  to ABC a mortgage in registrable form over
  their interest in any real property.
• Paragraph 10 - The Plaintiff claims under the
  terms of the lease an equitable interest in Lots
  1-4 over which it now has caveats

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The Statement of Claim

• Paragraph 11 - ABC claims as against JS, MS
  and XYZ
• Declaration that the First Second and Third
  Defendants i.e JS, MS and XYZ execute a
  mortgage in registrable form over their
  registered interest in the land
• Judgment for ABC in the sum of FIFTY THOUSAND
  AND TWENTY SIX DOLLARS AND NINETY ONE CENTS
  (50,026.91)
• Such further or other orders as this Honourable
  Court sees fit
• Costs and
• Interest pursuant to the Lease.

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Partnerships and interests of XYZ, JS and MS in
the land

• The partners share is a right to an equivalent
  proportion of the surplus after realization of
  assets and payments of debts and liabilities
  (Canny Gabriel Castle Jackson Advertising Pty
  Ltd)
• A partners interest in the partnership is a
  chose in action assignable in whole or in part
  (FCT)
• A charge of a partners interest in a partnership
  is a fixed charge
• Mortgage or charge over partners share or
  interest in a partnership does not confer an
  interest in specific assets confers entitlement
  to share on dissolution (United Builders Pty Ltd)
• Partner cannot charge partnership property with
  partnerships debts or personal debt except with
  authority of other partners

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Effects of Charge on Partnership Property

• Charge provided is not over partnership interest
  and therefore the caveat is not valid
• Credit granted charge over partnership assets has
  priority for full amount of claim over
  partnership property
• Charge over debtors interest in partnership is a
  fixed charge which must be registered under CA
  (Tricontinental Corporation)
• A partner has a caveatable interest over real
  property constituting the partnership property
• As there is no equity in the Oz Partnershp at any
  material time there is no basis for maintaining
  the caveat and Court would remove it

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Solution?

• Hurdles for ABC to maintain caveat
• No caveatable interest as a partner
• Cannot charge partnership property unless
  expressly authorised
• No consent/leave to bring proceedings/lodge
  caveat
• Therefore ABC should allow caveat to be cancelled
  by Registrar of Titles and transfer of XYZ, JS
  and MSs interests in the land to proceed

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Solution (cont.)

• ABC then prove in liquidation of XYZ
• If Registrar of Titles does not cancel caveat
  then Liquidator apply to Court within 14 days of
  filing conditional notice of intention to
  defend/appearance asking Court to
• set aside purported service of proceedings by ABC
• rule proceedings are stale and improperly
  commenced and/or served
• strike proceedings as an abuse of process
• order that caveat be removed to enable settlement
  to proceed

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Personal Property Securities Bill 2008

• Draft Bill released May 2008
• Draft Regulations released August 2008
• Operation May 2010

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PPS Scenario

• 14 February 1995 - PL became the registered owner
  of the land and a mortgage was registered over
  the land in favour of PCL ("the PCL mortgage").
• 11 May 2004 - change in Oz Partnership, and PL,
  XYZ, JS and MS become the sole registered
  proprietors of the land and sole partners in the
  Oz partnership.

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PPS Scenario

• Brick Sale 1 1 July 2006
• Bob the Bricky supplies 20,000 worth of
  bluestone bricks to the Oz Partnership
• Conditional sale agreement, 30 day payment terms
  and includes a retention of title clause in
  relation to the bricks.
• Purchaser specified as The Oz Partnership.
• Bob registers his security interest noting that
  the grantor is the Oz Partnership.

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PPS Scenario

• Brick Sale 2 1 August 2006
• XYZ Pty Ltd sells the Oz Partnership 20,000
  worth of bluestone bricks
• Asset sale agreement, 30 day payment terms.
• Purchasers specified in the asset sale agreement
  to be partners of the Oz Partnership
• XYZ Pty Ltd completes financing statements for
  each of the partners
• Registration of security interests of partners
  after Bobs interest registered.

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PPS Scenario

• 1 September 2006 all bricks are affixed to the
  land
• section 144 - security interests in collateral
  continue when goods are commingled even if
  individual identity of collateral is lost
• 1 February 2007 - GB appointed by the directors
  of XYZ Pty Ltd as administrator of XYZ Pty Ltd.
• 15 February 2007 Debtors petitions filed by JS
  and MS

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PPS Scenario

• What does the Administrator do?
• Section 130 - priority over the interests in land
• Can enforce PPS because purchasers/grantors are
  partners in their individual capacities
• Section 154 notice of removal of collateral that
  has been affixed to land

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PPS Scenario

• What does Bob do?
• Seeks advice from local solicitor
• Retention of title arrangement is a deemed
  security interest
• Commingling of bricks raises competing interests
  in the same collateral issue?
• First in time PMSI has the better priority?
• Section 174 notice demanding possession of the
  collateral for the purposes of enforcement

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PPS Scenario

• What does PCL do?
• Bob has problem cant enforce against
  partnership assets
• Administrator has problem - section 153(1)(a)
  cannot remove collateral from land because XYZ
  Pty Ltd also an interest in the land
• Both Administrator and Bob have equal priority to
  the proceeds of any sale of commingled goods -
  section 150

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PPS Scenario

• The PCL Solution
• A subordination agreement to be registered
  confirming
• PCLs right to sell the collateral and control
  the enforcement process
• each secured party, including PCL, take up to one
  third of original 40,000 market value of
  bluestone security
• Sale of bluestone as if it were land - section
  165 enabling PCL to pay out mortgage to the
  extent of any remaining funds after sale costs
  and PPS paid out.

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PPS Take Home Message

• When dealing with partnerships, ensure security
  arrangements allow for PPS over partners
  individual share
• Assuming no change to Bill - credit
  providers/unpaid sellers should register a PPS in
  addition to caveats to ensure priority over other
  interests in land
• Stay informed about PPS
• Get good advice now and in the future - consider
  a review of your security agreements to
  accommodate PPS changes