Hanson Construction Materials v Vimwise Civil Engineering [2005] NSWSC 880 | Case summary

3794/05 HANSON CONSTRUCTION MATERIALS PTY LTD v VIMWISE CIVIL ENGINEERING PTY LTD JUDGMENT - Ex Tempore; Revised 30 August 2005 (Re application for removal of two caveats) 1 HIS HONOUR: This is a matter which has been referred to me urgently by the duty judge. It is an application to remove two caveats. The proceedings are ones which were begun by the caveator, seeking a declaration that the plaintiff has an estate or interest in two parcels of land, and an order extending two caveats over those parcels of land. As a result of various interlocutory orders, the caveats have come to be extended until further order of the Court. Today the defendants brought an application that the caveats be withdrawn. 2 The first caveat is a caveat over the land contained in what I shall refer to as lot 22. The registered proprietor of lot 22 is the first defendant. The other caveat is on the land which I shall refer to as lot 322. The registered proprietor of lot 322 is the second defendant. Terms of the Caveats 3 The two caveats are identical in the actions they prohibit, and the interests they claim. The actions prohibited are "The recording in the Register of any dealing other than a plan affecting the estate or interest claimed by the caveator and set out in Schedule 1." The nature of the estate or interest in the land claimed by each is "Equitable interest". 4 The caveats differ in the instruments identified as those by virtue of which the interest claimed is said to arise. Concerning lot 22, the estate or interest is said to arise by virtue of an instrument identified as an Application for Commercial Credit dated 14 December 2004, between the plaintiff and the first defendant. Concerning the caveat over lot 322, the instrument identified is an Application for Commercial Credit dated 14 December 2004 between the plaintiff, the first defendant and the second defendant. No additional facts are relied on in the caveat over lot 22. However, facts are stated as supporting the estate or interest in lot 322, namely "Pursuant to the provisions of the Guarantee and Indemnity of the Application for Commercial Credit." 5 Each caveat was lodged on 12 May 2005, or perhaps shortly thereafter. Other Mortgages 6 At the time of lodgement of the caveat over lot 22, lot 22 was subject to two registered mortgages, one to Over 50's Mutual Friendly Society Limited, and another to Edcay Pty Ltd. At the time of lodgement of the caveat over lot 322, it was also subject to two registered mortgages, one to Westpac Banking Corporation, and another to Provident Trade Capital Limited. The Source of the Claimed Caveatable Interest 7 The Application for Commercial Credit, referred to in each caveat, was an application by the first defendant to the plaintiff for credit. The credit was stated to be in connection with the purchase of a product called "third grade gravel DGB-20", at an estimated monthly rate of purchase of $90,000. The application stated that the second defendant was a director. It identified the business of the first defendant as being "property developer", and said nothing else relevant about the purpose of the credit application. 8 The Application for Commercial Credit had a term in it that said: "As security for payment to Hanson of all moneys payable by the Customer, the Customer charges in favour of Hanson all of the Customer's interests in freehold and leasehold property both current and later acquired". 9 The second defendant executed a Guarantee and Indemnity which related to: "All moneys which are, will or may be at any time in the future, owing or payable to Hanson by the Customer for any reason whatsoever …" 10 It contained provision that: "As security for payment to Hanson of the Guaranteed Moneys and for its obligations generally under this Guarantee, the Guarantor charges in favour of Hanson the whole of the Guarantor's undertaking, property and assets (including, without limitations, all of the Guarantor's interests, both legal and beneficial, in freehold and leasehold land) both current and later acquired". The Business of the First Defendant 11 There is evidence from the second defendant that the first defendant is engaged in the business of civil engineering and property development. He gives evidence that lot 22 is subject to a major development which will result in a two-stage development of that land to create subdivided lots for industrial and commercial purposes. That development involves the clearing and grading of the land, and the establishment of roads, sewerage and power on it. Lot 22 was purchased on 23 July 2004, and the first stage of the development is now complete. I accept all that evidence. Reasons for Urgency in Today's Application 12 The matter came before the Court with great urgency today because the first defendant wishes to refinance the first and second mortgages over lot 22. There is presently an amount of the order of $9.1 million secured pursuant to the two mortgages over lot 22. The first defendant wishes to obtain re-financing which will enable it to borrow enough to repay the existing two mortgages, and also to borrow considerably more money to enable the development project to advance. Evidence, which was filed in Court only today, shows that the re-financing is due to occur tomorrow, and that, if it does not occur, the entire development project may collapse. 13 I interpolate that it is quite extraordinary that this application is made at this time, and that the obvious commercial urgency of the situation was not responded to, by the defendants, much earlier. It is sheer luck that there has been a judge available who can deal with the application this afternoon at all. The "Floating Charge" Challenge to the Caveats 14 The application for removal of the caveats challenges them on, broadly, two different bases. The first is an allegation that the charge created is in substance a floating charge, and (it is submitted) a floating charge over land does not create a caveatable interest. 15 It is clear enough that a floating charge is one which relates to property which is being used in a business, and that it enables the operator of that business to deal with the property in the ordinary course of business. There are differing statements in the case law about whether the floating charge should be regarded as attaching to the property at all until it has crystallised - the expression sometimes used is that it is "hovering over" the property until it crystallises - or whether it is attached to the property in a way which is defeasible prior to the crystallisation of the charge. What I mean by it being defeasible is that there is a kind of interest which equity recognises in the charged property, but that interest can cease, or be cut down in relation to a particular asset, if that asset is dealt with in the ordinary course of business. The judgment of Dixon J in Palette Shoes Pty Ltd v Krohn (1937) 58 CLR 1 at 27 suggests the latter view, while the statement of Lord Macnaghten in Illingworth v Houldsworth [1904] AC 355 at 358 suggests the former view. That difference in view bears upon whether a right under a floating charge is a caveatable interest. 16 Whether an equitable charge is created does not depend upon the use of any particular words, but rather "it is sufficient if the Court can fairly gather from the instrument an intention by the parties that the property therein referred to should constitute a security": per Romer J, see Craddock v Scottish Provident Institution (1893) 69 LT 380 at 382, quoted by Gillard J in Avco Financial Services Ltd v White [1977] VR 561 at 563. 17 Whether a charge is a fixed or a floating charge likewise depends upon the intention of the parties to the creation of it: United Builders Pty Ltd v Mutual Acceptance Limited (1979) 144 CLR 673 at 681, 686: Boambee Bay Pty Ltd (in liq) & Anor v Equus Financial Services Ltd (1991) 26 NSWLR 284 at 288. 18 In Boambee Bay Pty Ltd (in liq) v Equus Financial Services Ltd (1991) 26 NSWLR 284 the Court of Appeal considered a document similar in some respects to those which created the securities relied upon here. In that case, the company in question had given a charge which said: "the Guarantor hereby charges in favour of the Financier as security for its obligations hereunder all its right, title and interest in any property either held by the Guarantor at the date hereof or acquired by the Guarantor during the term of this Agreement". 19 As Mahoney JA said at 288, "The fact that the charge attaches not merely to property then held by the guarantors, but also to property 'acquired by the Guarantor during the term of this Agreement', does not I think lead to the conclusion that the clause does not impose an immediate charge upon property then held." 20 The same is true, in my view, of the words in the clauses of the Application for Commercial Credit, and of the Guarantee and Indemnity, which I have earlier quoted. 21 Notwithstanding that, Mahoney JA held in Boambee Bay Pty Ltd (in liq) v Equus Financial Services Ltd (1991) 26 NSWLR 284 that the charge created was a floating charge. There was evidence about the manner in which the chargor carried on its business, which was one of developer of a resort, and the selling of time-shares in that resort to members of the public. His Honour recognised that the business was one whereby, if the charge granted was an immediate and fixed charge on all of the assets, the carrying on of that business would, in the sense relevant to the ascertainment of the parties intentions in this regard, be difficult if not impossible. His Honour said at 290: "in my opinion, therefore, it was the contemplation of the parties that the charge should be a floating charge on its land or other assets." 22 The fundamental exercise which the Court is engaged in in deciding whether a charge is a fixed charge or a floating charge is a matter of the ascertainment of the intention of the parties. That intention can be ascertained both from the words which they used, and from surrounding circumstances known to both parties. In substance, what Mahoney JA decided in Boambee Bay Pty Ltd v Equus Financial Services Ltd (1991) 26 NSWLR 284 was that, even though the words creating the charge were ones which were well able to refer to a fixed charge, so far as concerned property already owned by the chargor at the date of grant, the surrounding circumstances were such that that could not have been what the parties intended. 23 The evidence of surrounding circumstances in the present case goes no further than I have already set out in this judgment. While the second defendant has given some sketchy evidence of what was involved in the development project, there is no evidence to the effect that that was known to the plaintiff. The only information which was known to the plaintiff concerning the business of the first defendant was that it was a property developer, and that it was desirous of purchasing gravel in particular quantities. I am not prepared, on the basis of that evidence of surrounding circumstances, to conclude that it was the intention of the parties that the charges created by the Application for Commercial Credit, and the Guarantee and Indemnity, were merely floating charges. On the basis of that evidence, I see no reason to depart from the ordinary wording of the charges, and to regard them as fixed charges concerning freehold property which was owned by the respective chargors at the date of the giving of the charge. 24 In those circumstances, it is not necessary to consider whether a floating charge over land creates a caveatable interest. The Drafting Challenge to the Caveats 25 The second type of attack which the defendants make upon the caveats relates to the drafting of them. There are two aspects of the attack - the action which is prohibited by the caveats, and the nature of the estate or interest which is claimed by them. I will deal with the latter first. 26 Section 74F(5) Real Property Act 1900 provides that: "A caveat lodged under this section must: … (b) specify … (v) the prescribed particulars of the legal or equitable estate or interest... to which the caveator claims to be entitled". 27 The "prescribed particulars" include (pursuant to Clause 7, and Schedule 3 of the Real Property Regulation 2003, and so far as is presently relevant): "1 Particulars of the nature of the estate or interest in land claimed by the caveator … 4 If the caveator claims as mortgagee, chargee … a statement of the amount (if readily ascertainable) of the debt or other sum of money charged on the land (or, if the amount is not readily ascertainable, the nature of the debt, annuity, rent-charge or other charge secured on the land). … 10 It is not necessary to specify: (a) whether the estate or interest claimed is legal or equitable, or (b) the quantum of the estate or interest claimed (except as provided in paragraphs 4 and 5), or …" 28 The requirement that the caveat "specify the prescribed particulars" of the nature of estate or interest claimed is not adequately met in the present case. Whether a caveat adequately describes the estate or interest claimed is to be decided form the point of view of "a person examining the caveat" - who need not necessarily be the registered proprietor: Leros Pty Ltd v Terara Pty Ltd (1992) 174 CLR 407 at 422-3. In this context "specify" is understood in the sense of "mention definitely or explicitly": ibid 29 A claim to be entitled to an "equitable interest" in land is a claim which could relate to a multiplicity of types of interest, from an equitable easement, to the benefit of an option to purchase, to a right to have an agreement for lease specifically performed to the benefit of a restrictive covenant under a common building scheme. As well, it could relate to an equitable mortgage or charge. 30 I would not regard the identification of the interest claimed by a caveator as being nothing more than an "equitable interest" as specifying the interest to which a caveator claims to be entitled. One of the functions of a caveat is to notify someone who searches the register of what interest the caveator claims. A claim to an "equitable interest" does not do that. 31 Lindsay, Caveats against Dealings in Australia and New Zealand 1995, page 149 says that "… it is insufficient to claim an interest pursuant to an agreement dated "X" without specifying the nature of the interest". The same author at page 157, refers to it being a "fundamental requirement" that a caveator "fully and properly describe its interest, which requires disclosure of both the nature of the claim and the grounds for making it". I agree with those statements of the law. 32 The estate or interest in the land which is claimed need not state in precise legal language the nature of the estate or interest which is claimed, if a reader is able, with legal advice, to work it out from what is stated in the caveat: Ultra Marine Pty Ltd v Misson [1981], ANZ ConvR 229. However, the reader of these caveats could not work anything out about the nature of the interest claimed. 33 Section 74L Real Property Act 1900 provides: "If in any legal proceedings a question arises as to the validity of a caveat lodged under a provision of this Part, the Court shall disregard any failure of the caveator to comply strictly with the requirements of this Part, and any regulations made for the purposes of this Part, with respect to the form of a caveat". 34 The dispensing power which is contained in section 74L is one which merely excuses defects of form. The failure to specify the nature of the interest, in as fundamental a way as has happened in the present case, is more than a defect of form. 35 In In the Marriage of Stevens (1991) 15 Fam LR 51 at 53 Cohen J expressed the view that: "... it is no longer the case that a caveat will be struck down for technical fault if the caveator has any caveatable interest. The Court has power to extend the operation of any caveat lodged, and this extension can be in relation to both time and substance." 36 If by that view, his Honour intended to hold that the existence of a caveatable interest which is not disclosed on the face of the document can support the validity of the caveat, that view is not one with which I agree. 37 In Multi-Span Constructions No 1 Pty Ltd v 14 Portland Street Pty Ltd [2001] NSWSC 696 at [130] Barrett J came to a similar view. His Honour went on to say: "It is true that, in proceedings for the extension of a caveat's operation, any defect in the form of the caveat will be disregarded under s 74L. But that does not mean that some wholly new substratum can be substituted by reference to some estate or interest simply not contemplated by the caveat, whatever its deficiency of form may be." 38 I respectfully agree with that view, and would add that I would not regard an expression of enormous generality, like "equitable interest" as one which "contemplates" some specific type of interest, such as an equitable charge, which is claimed. 39 Section 74MA(2)(b) Real Property Act enables the Court, on an application for withdrawal of a caveat, to "make such other or further orders as it thinks fit". That power has been held to confer on the Court power to make such other order as it thinks fit as an alternative to an order for withdrawal of the caveat, as well as in addition to it. That can encompass an order for amendment of the prohibitory provisions of a caveat, but not of the provisions defining the interest claimed: Depsun Pty Ltd & Anor v Tahore Holdings Pty Ltd (1990) 5 BPR [97352] at 11,320. 40 For these reasons, in my view the caveats are invalid, and must be removed. 41 I need not consider, in those circumstances, any questions relating to the balance of convenience which were pressed upon me by counsel for the defendants. 42 The defendants had, as an ultimate fallback provision on this application, a submission that, if I was against them on all else, it might be possible to order the withdrawal of the caveat, upon an undertaking not to oppose another caveat being lodged once the re-financing has occurred. It is not necessary for me to consider this, in light of the decision I have come to. However, it may be, in light of the apparent willingness of the defendants to enable a replacement caveat to be lodged, that they think it worthwhile to give consideration to whether they might consent to lodgement of such a caveat later, to avoid, possibly, the making of an application for leave to lodge the further caveat under section 74O(2). Any such caveat would need, of course, to be one which did not suffer from the fundamental defect that these caveats have. 43 I order that the caveats be withdrawn by 10 am tomorrow 26 August 2005. These orders may be entered forthwith. ********** 44 Application is made for the costs of the notice of motion heard today. I order the plaintiff to pay the defendants' costs of the notice of motion heard today. 45 The plaintiff makes application for other costs which relate to the proceedings as a whole. The proceedings as a whole are not yet disposed of. I decline at this stage to make any partial order relating to the costs of the proceedings to date. 46 I stand the proceedings over to the registrar's list at 9.30am on Thursday 15 September 2005. **********

Hanson Construction Materials v Vimwise Civil Engineering

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