Last Friday, the New South Wales Court of Appeal in Roberts v Investwell Pty Ltd (In liq) [2012] NSWCA 134 considered the operation of equitable charges and mortgages in the context of unfair preferences.

FACTS

In June 2001 the Respondent (“Investwell”) purchased land in Marourabra to develop home units using its own funds, monies advanced from prospective purchasers and a loan from a credit union.  The Appellant (“Roberts”) was a director and shareholder of Investwell [3].  In April 2002 it became apparent that there was a shortfall in funding to complete the project. Roberts entered into an agreement whereby he agreed to use his best endeavours to provide further funds and security for the project [4].  On the sale of units the debt with the credit union was discharged leaving a balance of $164,306.83 which was paid to Roberts on the basis that he was a creditor ( not in issue) of the company in that amount.  It was not in issue that when the payment was made Investwell was insolvent  [6].

An order for the winding up of Investwell was made on 12 March 2007.  Investwell and the liquidator brought proceedings against Roberts claiming money he received was a voidable transaction [7].

The relevant provisions of the agreement are set out at  [9], the most relevant of which was clause 21 which provided:

The parties agree that if requested by Roberts at any time Investwell must at its own expense immediately grant to Roberts a mortgage over the Land, an equitable mortgage or charge over Investwell’s assets and undertakings, and/or such other security as Roberts may consider necessary. Any such securities must be in a form acceptable to Robert’s legal advisers.”

DECISION

The court has the power to make an order directing a person to pay to a company a sum equal to the amount paid by the company to that person as a consequence of voidable transaction provided:

• the transaction gave a preference;
• the company was insolvent at the time; and
• the transaction was entered into within four years ending on the relation back day by by the person who was a related entity of the company.

Roberts submitted that the debt was secured by the provisions of the agreement gave him a right to have the property made available as part of execution of the agreement [19].  He also submitted that the effect of clause 21 was that upon request by Roberts Investwell had to grant him a mortgage over the land. As such he had an equitable mortgage automatically but also an equitable mortgage or charge over the whole of the company’s assets and undertakings including the land [21]. Investwell submitted that an agreement to give a mortgage operates as a equitable mortgage only if it is capable of specific performance. Where the borrower has only agreed to give a mortgage if requested no security arises until the request has been made [22].

The court, per Bathurst CJ, stated at [25],

..a specifically enforceable agreement to grant a legal mortgage over property will constitute an equitable mortgage, the grantee acquiring an immediate proprietary interest in the property

and

..it is the specific enforceability which creates the equitable mortgage

His Honour summarised that was is required in an agreement in creating an equitable mortgage when he stated, at 25:

No particular form of words is required to create such an equitable mortgage as it is founded on a contract between the parties. The contract may be expressed or implied:.. . An equitable charge, by contrast, does not necessarily create an equitable mortgage. What, however, is necessary is that property of the chargor is appropriated to the chargee for payment of a debt and the chargee has a present right to have it made available for the payment of its debt. The availability of equitable remedies to enforce that right gives the chargee a proprietary interest by way of security in the property charged.

(emphasis added)

His Honour stated, at  [29], that for an equitable mortgage/charge to exist there has to be  an intention to create an immediate proprietary interest [29]. An agreement to create in favour of the creditor a mortgage or charge on request does not create a mortgage or equitable charge because there is no such immediate proprietary interest [30]. The issue is  the construction of the operative clause. His Honour stated, at [31]:

If the provision on its true construction confers an immediate equitable interest in particular property, or grants an immediate right of recourse to present or future property, then the grantee will be secured to the extent of his or her interest in, or right to, the property. If it does not, the creditor will be unsecured.

The operative clause, clause 21, did not confer an immediate right of recourse to the property. It was drafted in terms that the obligation to grant the mortgage had to be upon request. The clause also provided for a range of alternatives which Roberts may consider necessary. Even if the form of security was specified it had to be in a form acceptable to Robert’s legal advisers. His Honour found that these issues led to the conclusion that there was no intention to grant an immediate equitable interests in property [32].

ISSUE

The complicated and less than specific nature of the operative clause in the agreement defeated the creditor, Roberts. It did not create an immediate equitable charge or mortgage over the property. The process set out in Clause 21 which would have created an equitable mortgage required Roberts to first make a request, then undergo the process set out in the clause.  This case highlights the care that needs to be taken in drafting an agreement to give effect to what the creditor seeks, security and a preference.  Poor drafting and non compliance with the terms of the agreement before payment was made by Investwell defeated the creditor and enabled the liquidator to claw back the payment made.