The Supreme Court in Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1) [2017] VSC 499 )  reviewed and considered the operation of a charge, by virtue of a guarantee and indemnity, vis a vis other claims on assets.  In this case the claim of a chargee defeated a claim by a liquidator who mounted a vigorous attack on the validity of the charge.

FACTS

Amerind Pty Ltd (receivers and managers appointed) (in liquidation) (Amerind) acted as trustee of the Panel Veneer Processes Trading Trust, which manufactured and distributed decorative and architectural finishes [1]. On 11 March 2014, the sole director of Amerind, Mr Naja David (“David”) resolved to appoint administrators to Amerind.  As Amerind’s  facilities and accounts were secured with the Bendigo and Adelaide Bank Limited on 11 March 2014 it appointed receivers and managers. Amerind was hopelessly insolvent [2].

From May 2000 to February 2014, Carter Holt Harvey Woodproducts Australia Pty Ltd (CHH) supplied goods to Amerind under  a Terms of Sale and Security Agreement [5]. Under the  agreement, Amerind was obliged to pay CHH’s legal costs of recovering the indebtedness of Amerind to CHH.  At the time of Amerind’s liquidation, CHH was owed $4,927,452.19 [4].

On or about 20 June 2003, David gave CHH a written guarantee and indemnity in respect of the moneys owed by Amerind to CHH [6].

David was the registered proprietor of  properties at:

(1) 26–30 Darling Road, Sorrento;

(2) 17–19 Florence Street, Glen Waverley;

(3) 39 Martha Cove Waterway, Safety Beach;

(4) Unit 8, 11 Sharpley Avenue, Safety Beach; and

(5) 34 Hopetoun Road, Toorak.

Properties (1), (3), (4) and (5) had been sold as at the time of the decision.

CHH’s position was, at [7], that  by executing the written guarantee and indemnity David:

• gave a charge in favour of CHH over all of David’s interest in land and other assets, which he then held or later acquired, and
• agreed to execute an instrument of transfer for any such assets by way of security, upon request .

The validity of the charge was disputed in three proceedings.

• proceeding 270 of 2015 [11],the CHH debt recovery proceeding; CHH as plaintiff claimed, at [12], $6 million, the costs on an indemnity basis, orders for the sale of the Florence Street property and declarations that it is entitled to the proceeds of sale once St George Bank has been paid out and other costs have been met, and proceeds of sale of properties (1), (3) and (4). David was the first defendant and Australian Securities Limited was the second defendant, holding a first secured mortgage over properties (1), (3) and (4). The properties were sold and the proceeds  ($941,339.78) are held on trust.  St George Bank was the third defendant,holding a mortgage over property (2). Mrs Kathryn Elizabeth David, the fourth defendant and ex-wife of David, had an interest in the properties by way of a Family Court order. The Commissioner of Taxation was an intervener.
• proceeding 3108 of 2016, an unfair preference proceeding by the liquidator against CHH, [14]; CHH allegedly  received $10,048,637.19 in unsecured debts.  CHH claims to be a secured creditor,that s 588FA of the Corporations Act 2001 (Cth) (Corporations Act) does not apply and relies, inter alia, on the charge given by David under the guarantee and indemnity agreement [15].
• proceeding 418 of 2015; CHH sought orders that the receivers of Amerind pay the receivership surplus to CHH. CHH alleges rights of marshalling and subrogation to the Bendigo and Adelaide Bank’s first securities over the receivership surplus, as the bank sold (and took the proceeds of) property (5) in Toorak, to which CHH claims a (junior) charge, by virtue of the guarantee and indemnity. Not surprisingly the liquidator disputed that claim [17].

The preliminary question for determination was, at [19] & [20]:

is the charge referred to in clause 2.6A of the guarantee valid and enforceable?

CHH claimed that by executing the guarantee, in order to secure the amounts owing to CHH , David gave an equitable charge over all of his estates and interest in any land and any other assets in which he now had any legal or beneficial interest or in which he later acquires any such interest, with payment of all moneys owed by Amerind, and agreed upon request to execute a registrable instrument transferring to CHH his estate and interest in any such land and assets by way of security [23].

DIn his defence David stated:

• disputed the validity and enforceability and effect of the charge clause in the guarantee and indemnity [24].
• denies that by executing the guarantee, he thereby gave a charge, as alleged by CHH [50].
•  the guarantee purports to give a charge in the future, and does not state the date or circumstances upon which the future charge is to be given [51].
• insofar as the guarantee purports to create a charge in the future, it is unenforceable by reason of it being vague and uncertain in its terms [51].
• in the alternative the purported future charge is void and unenforceable by reason that it fails for want of consideration [51].
• the purported obligation to execute a registrable instrument is unenforceable by reason of it being vague and uncertain in its terms [52].
• regarding CHH’s claims over the Florence Street property he held this property on bare trust for his son [53].

The Relevant portions of the deed of guarantee and indemnity are

• under the heading ‘background’ [36]:

1. From time to time CHH or various CHH Group Members supply the Customer with goods or services on credit.

2. The Guarantor is a director of the Company and has agreed to guarantee payment of the:

Guaranteed Money by the Customer to CHH; and

Relevant Guaranteed Money by the Customer to the Relevant

CHH Group Member,

pursuant to this Deed.

• Clause 1.1 included the defined terms [37]:

“Guaranteed money” means all money and damages:(a) which now or in the future are owing (actually or contingently) by the Customer to any CHH Group Member;

(b) which having now or in the future become owing (actually or contingently) by the Customer to any CHH Group Member, cease to be owing under any law and remain unpaid by the Customer and unreleased by the Relevant CHH Group Member; or

(c) that now or in the future there is a prospect may become owing (actually or contingently) by the Customer to any CHH Group Member;

…

“Relevant Guaranteed Money” means that part of the Guaranteed Money that is owed by the Customer to the Relevant CHH Group Member.

 

• Clause 2.1, the Guarantee clause, [38]:

(a) The Guarantor unconditionally and irrevocably guarantees to CHH the punctual payment to it by the Customer of the Guaranteed Money.(b) The Guarantor unconditionally and irrevocably guarantees to the Relevant CHH Group Member, the punctual payment to it by the Customer of the Relevant Guaranteed Money.

 

• The charging clause, clause 2.6A  states:

The Guarantor will charge in favor of CHH all estates and interest in any land and any other assets whether tangible in [sic] intangible in which they now have any legal or beneficial interest or in which they later acquire any such interest, with payment of all monies owed by the customer and agree upon request, to execute a registrable instrument transferring to CHH the Guarantors estate and interest by way of security.

DECISION

The Court stated the relevant principles as;

• an equitable charge:
  • is ‘an example of a “pure hypothecation.” [40]
  • does not require any specific wording. It is sufficient if the grantor of the charge manifests an immediate intention to create a charge by using words that create a present intention to charge land specified as security [40]
  • over land where there is the presence of writing and where consideration is necessary, it must be valuable, executed consideration [41]
  • where there is an intention that property be used as security with the assistance of the Court [42]
  • does not require certain formalities to be present in equity if the Court can ascertain an intention  that the relevant property should constitute security [43]
  • may apply to after-acquired property so long as the property was identifiable at the time of enforcement of the charge [44].
• the property specified need not be in existence at the time the charge was granted but must be so when the charge is sought to be enforced
• the intention to create a charge does not require relevant property over which the charge is to be created to be owned by the chargor. The temporal requirement indicated by the word ‘present’ is of the ‘intention’ to create a charge not to the ‘hypothecation’ of the property subject to the charge [40] .
• where consideration is necessary  it must be executed consideration, that is the money must have been actually advanced [45] & a promise to enter into a transaction could not itself constitute valuable consideration [46]

While the liquidator, at [55], took no position as to the validity of the guarantee he:

• disputed the validity and enforceability of the charging clause on the grounds that:

(a) it does not create a present charge; it appears to be an agreement to create a charge by way of executing further documents, or by future act; and that therefore consideration should be present; and

(b) the wording of the charging clause is so uncertain and ambiguous in its terms it ought to be rendered void and unenforceable.

• submitted that an intention to create an immediate charge is not created with the word ‘will’, as that is an agreement to do something in the future (in this case, obligation to charge the relevant assets) and that an agreement to do something in the future does not create a present charge and does not evidence a clear intention to create a charge [56].

CCH responded by stating:

• that the ratio in Re Roberts; Ex parte Australian Telecom Employees Credit Cooperative v Taylor applies where use of ‘shall’ was sufficient to create a charge and both ‘shall’ and ‘will’  are terms of compulsion and are expressions of intention and obligation [57]
•  ‘will’ imposes a present and future obligation [57].

The court found that:

•  ‘will charge’ conveys the manifestation  by David of an immediate intention to charge and does not involve a promise to charge in the future.
• the fact the charge may not be enlivened until credit was extended does not mean that David did not manifest the present intention to create a charge [59].

Regarding Clause 2.6A, giving CHH a right to request a registrable instrument from David:

• the liquidator submitted, at [60], that  ‘will charge’ should be read as a reference to the promise to ‘execute a registrable interest’, ‘upon request’, which creates an agreement to enter into future documents or further security at an undefined later date.  It is inconsistent with a present intention to create a charge [60].
• CCH stated, at [61], that:
  • the charge created by clause 2.6A is not contingent upon David actually providing a registrable instrument, because the words ‘will charge’ create a present and unconditional obligation.
  • the charge is dependent/comes into effect when the request for a registrable instrument is made with the request enlivening the charge),
  • CHH had two rights:
    1. an equitable charge, and
    2. a specifically enforceable right to call for a legal mortgage, a species of equitable mortgage .
• CHH requested that David execute a registrable instrument in 2014 & the fact that he didn’t is immaterial as CHH could and was seeking an order for specific performance of  David’s obligation to execute a registrable instrument [63].

The court found that the promise to execute a registrable instrument of transfer is a separate and distinct promise made under the clause from David’s creating a charge [63]

The Liquidator submitted that:

• as the agreement contemplated a future act, even if the requisite intention is found, it should fail for lack of valuable consideration [64].
• supply agreement contained a retention of title clause; as the title does not pass to Amerind, the supply of goods could not be valuable consideration [67].

CCH submittted that:

• as the guarantee and indemnity was by deed consideration was not needed [65].
• there is consideration if goods are supplied on credit  before or at the time of signing the agreement [65].
• it is valuable consideration for CHH to provide goods on credit to Amerind, a company then owned and controlled by David, at his request [66].
• the retention of title provides another way of securing repayment and that CHH having multiple rights cannot mean any of them is necessarily impugned [68].

The Court accepted CCH’s submissions [69].

CHH then submitted that the charge at clause 2.6A was:

• an equitable charge and mortgage over all of David’s real property ,
• intended to cover future property and existing property at the moment an interest, [73], including the relevant proceeds of sale [70].

The liquidator questioned the certainty of the clause, arguing that was undefined, and unascertainable at the point of executing the supply agreement [71].

The court found that:

• it was not disputed that three of the relevant properties were acquired after the guarantee was executed [72]
• a valid charge may be engaged by the acquisition of property in the future [74].
• the deed had immediate operation to charge property that David then held, and/or any property that he subsequently acquired [75].

The liquidator claimed the charging clause was so uncertain and that clause 2.6A is vague because, at [76] :

(a) (it) says the guarantor ‘will charge in favour of CHH …’, thereby making it a future obligation, but does not state when or in what circumstances that is to occur;

(b) it is not clear what the charge is securing; it is unclear whether the charge related to moneys owed but not yet payable, or to moneys owed and due and payable, or to moneys not then owed but became owed in the future;

(c) it is not clear in what circumstances and for what purposes Naja David is ‘to execute a registrable instrument …’, other than ‘upon request’;

(d) it is not clear what system of registration is being referred to by ‘registrable interest’;

(e) the registrable instrument is sought to transfer ‘to CHH the Guarantors estate and interest’ which goes beyond a mere charge;

(f) the second use of the term ‘estate and interest’ is vague and inconsistent with the broad reference to assets earlier in clause 2.6A;

(g) the transferring of Naja David’s estate and interest is purported to be by way of security, without stating what it is securing.

As a result of the above the liquidator, at [77],  submitted that:

• the uncertainty cannot be cured by any rectification. He says that the Court is unable to give meaning to the words of clause 2.6A as to make it effectual [77];
• a court can find a clause void for uncertainty where the language is so obscure and so incapable of any definite or precise meaning that the Court is unable to attribute to the parties any particular contractual intention [77]
• the terms of the charging clause are ambiguous, and as they are contained in a guarantee, should have no effect  [78]
• ambiguous contractual provisions should be construed in favour of the surety [78]
• the contract or term is uncertain if a court is unable to ascertain the meaning the parties intended, or it is capable of more than one meaning, but it is impossible to determine which of those interpretations represents the intention of the parties [78]

CCH submitted that

• the charge is clear and valid and that clause 2.6A has the effect of creating both an equitable charge and an equitable mortgage over all of  David’s present and future property [79]
• the obligations that the charge secures are the guarantor’s obligations under the guarantee [80]
• it is securing Amerind’s obligation to pay whatever the guarantee covers, being anything owed by Amerind [80] with the proper construction being that if goods are supplied in the future, they will be covered by the charge. Goods were supplied on credit from 2000 onwards, there was always money owing to CHH & CHH was only suing regarding goods supplied from November 2013 to February 2014, because they were the for which no payment was received [81].
• the registrable instrument will have to be registrable according to whatever system of registration is applicable, at the relevant time to the relevant asset [86]
• a registrable instrument, if provided, would create a legal mortgage because at common law the mortgage transfers from the mortgagor to the mortgagee the mortgagor’s legal estate which can be used to realise and satisfy the debt subject to an equity of redemption [87]
• the guarantor’s obligation to execute a registrable instrument upon request is specifically enforceable and because the charge also contains an obligation to execute a legal mortgage instrument when called upon it is an equitable mortgage as well as an equitable charge [88]

In finding, at [93], that as the charging clause was valid and enforceable the Court’s power was enlivened to make appropriate orders in the realisation of the security the Court stated that:

• a contract or term is uncertain if:
  • a court is unable to ascertain the meaning the parties intended, or
  • it is capable of more than one meaning, but it is impossible to determine which of those interpretations represents the intention of the parties [75]
• ‘any moneys owed’ is not limited to sums that ought to have been paid but extends to all moneys owed whether payable or not [83]
• an equitable charge does not give the holder an automatic remedy & the chargee must seek a court order [84]
• the system or registration depends on the interest sought to be registered [85]. So far as Torrens registered land is concerned, the registrable instrument must be a legal mortgage
• regarding the terms ‘estate and interest’ the first is a reference to the interest that is subject to the charge; the second reference is to the hypothecation constituted by the charge. The reference in the two instances is a reference to different concepts. [90]
• reference to ‘by way of security’ clarifies that the ‘registrable instrument transferring’ is one transferring security and no more [91] and the clause stated a clear intention to create a charge, defined the ascertainable property including future property over which it is contemplated the charge will exist, and provides valuable consideration for the covenant [91].

CCH submitted that David admitted signing the guarantee and it is not seriously disputed that Amerind is indebted to CHH in sums exceeding $4.9 million [94]  and has priority creditors other than the prior registered mortgagees [96] .

The court found that:

• CHH’s claim, as an equitable chargee and mortgagee, are proprietary in nature.
• CHH’s equitable interest was created by its charge and mortgage in 2003, prior to the events alleged to give rise to the Florence Street Trust in 2008 to 2010, as alleged in Mr David’s defence [99].
• citing  Latec Investments Ltd v Hotel Terrigal Pty Ltd (in liq)   that if the merits are equal, priority in time of creation is considered to give the better equity [100]
• the onus rests on the holder of the later equitable interest to demonstrate why the ordinary rule should be displaced and why that interest should prevail over the earlier one [101]

The found that the charge in the guarantee and indemnity is a valid and enforceable charge [106].

ISSUE

This decision is a very useful consideration of the law relating to the operation of Equitable charges and guarantees. In this case CCH was able to rely on a well drafted guarantee. The case also shows the flexibility of obtaining a charge through a guarantee and indemnity particularly as a defence against a claim by a liquidator in the future.