Blog 86. Where a director’s spouse has given a charge, is lodgment of a caveat by the chargee prohibited during a company administration?

Langdon v Tradelink Pty Ltd [2024] VSC 113, Gray J.

The facts were –

• The plaintiff was married to Shane Langdon.  Langdon Building Pty Ltd was incorporated in 2005.  He became its sole director in 2007.  It was a home builder.
• In 2012 the third defendant (now known as Tradelink) agreed with the company to supply building materials on terms of credit by Tradelink as ‘Supplier’ to the company as ‘Customer’.  The application for a credit account and agreement included a ‘Guarantee and Indemnity and Charge’ (Guarantee) signed by the plaintiff.   This included her agreement: ‘To pay the Supplier … all monies which are now or may … be owing or remain unpaid by the Customer to the Supplier …’; that she as guarantor ‘To better secure the payment of all monies which the Guarantor may become liable to pay to the Supplier hereunder … charges all of its interest in real property both present and future … with the amount of the Guarantor’s indebtedness to the Supplier’; that she appointed the Supplier as her attorney in substance so that it could caveat over her real property – this clause also provided that ‘Each Guarantor undertakes to not … take any steps to remove any such caveat’.
• In January 2024 voluntary administrators were appointed to the company.  Next day Tradelink lodged a caveat over a property of which the plaintiff was sole registered proprietor based on its interest as chargee.
• On 4 March 2024 the company’s creditors resolved to accept a deed of company arrangement (DOCA) proposed by Shane.  The DOCA proposal included an initial and deferred cash contribution.  A formal DOCA was not yet executed.
• The plaintiff applied under the Transfer of Land Act s. 90(3) for removal of the caveat.  She deposed that it was adversely impacting her ability to access a bank line of credit, secured by a mortgage, needed for funds required for the DOCA proposal.

Section 440J of the Corporations Act 2001 (Cth) provided –

‘440J  Administration not to trigger liability of director or relative under guarantee of company’s liability

• (1)   During the administration of a company:
  • (a)    a guarantee of the liability of the company cannot be enforced as against
    • (i)     a director of the company who is a natural person; or
    • (ii)   a spouse … of such director; and
  • (b)   without limiting paragraph (a), a proceeding in relation to such a gua­ran­tee cannot be begun against such a director …;

except with the leave of the Court …’

Gray J dismissed the application, holding –

1. A caveat lodged under the Transfer of Land Act s. 89 was a statutory injunction, in the sense of preventing registration of new dealings with the title on the Register pending an application under s. 90 or administrative action under s 89A. [41]
2. In determining whether lodgment of a caveat was prohibited by s. 440J(1)(a) the principles of statutory interpretation were to be applied.  These included: the statutory interpretation process must begin and end with the text used; where the words of a provision were clear, unambiguous, and could be intelligibly applied to the subject matter, the provision must be given its ordinary and grammatical meaning; the text must be interpreted in its context, and context should be considered at first instance, rather than at a later stage when ambiguity might arise; the context included the purpose Parliament intended to achieve, as discerned from the legislation itself, and relevant extrinsic material; the legislative context included the statute as a whole, with an assumption that Parliament intended interrelated provisions to operate coherently, giving effect to ‘harmonious goals’. [25]
3. By reason of s. 13 of the Acts Interpretation Act 1901 (Cth) section headings were part of the Act. [27]
4. The principal purpose of s. 440J was to remove any inhibition on directors commencing a voluntary administration. [35]-[36]
5. Lodgment or extension of a caveat relating to a charge or guarantee did not amount to enforcement, but to prioritisation, of security interests.  The policy underlying s. 440J did not include that a secured creditor could not maintain this priority, even if that were thought necessary or desirable to facilitate a deed of company arrangement. [39]
6. There was at least a prima facie case that the caveator had an interest in the property as chargee.  Accordingly lodgment of the caveat was permissible from the time the agreement and charge first applied to the property, well before any suggestion of the Guarantee being enforced.  The subsequent commencement of company administration could not alter the fundamental character of the caveat’s lodgment as a step in protecting the chargee’s security interest from a loss of priority but not a step in enforcement of the Guarantee.  Accordingly the lodgment of the caveat did not breach s. 440J(1). [20], [42]-[45]
7. This case was distinguishable from Waco Kwikform Ltd v Jabbour [2010] NSWSC 1379, being an application under s. 74K of the Real Property Act 1900 (NSW), in response to a lapsing notice, to extend the operation of a caveat lodged before the commencement of a company administration, which decided that s. 440J(1)(a) did not prohibit that application but that it was prohibited by s. 440J(1)(b) so as to require the grant of retrospective leave for extension. [30]-[34]
8. The balance of convenience favoured maintenance of the caveat.  On the one hand, it was unclear whether the bank would not consent to, or allow the funds needed for, the DOCA.  On the other hand the caveator had established a real risk of prejudice if its caveat was removed, in that it appeared likely that equity in the property may be diminished and there was a real risk that priority might be lost.  The mere fact that removal of the caveat might help bring the DOCA proposal closer to operation did not outweigh this entitlement to priority.  Further, because the DOCA was subject to other conditions precedent there was force in the caveator’s submission that the court could not be satisfied that even if the caveat was removed the DOCA would necessarily proceed – it weighed heavily against the plaintiff that if the caveat was removed the caveator could lose its priority yet the DOCA still not proceed. [49]-[53]

Philip H. Barton

Owen Dixon Chambers West

Friday, November 8, 2024