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A Charge may be rectified after the debtor has been placed in liquidation or administration


In Saraceni v Mentha [No.2] [2012] WASC 336 a director sought to challenge the appointment of receivers to Westgem Investments Pty Ltd ("Westgem") under a fixed and floating charge ("the Charge").  In 2008 Westgem entered into a Facility Agreement with financiers and executed the Charge, which charged the "secured property".

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Rob Mills,
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The plaintiff contended that:

  • because there was no definition of "the secured property" in the Charge, the definition given to that term in the Facility Agreement ought to be imported into the Charge, and
  • therefore the Charge did not secure anything, because the definition in the Facility Agreement referred to assets mortgaged, charged, or otherwise secured at the time the arrangements were entered into and at that time none of Westgem's assets had been so secured.

On this basis it was said that the receiver's appointment was invalid and ineffective as the Charge did not operate as security over any of Westgem's assets or undertakings. 

The financiers argued against this and: 

  • contended that on its proper construction the Charge secured all of the assets and undertaking of Westgem; 
  • in the alternative, sought rectification of the charge to reflect that interpretation. 

In reliance upon JJ Leonard Properties Pty Ltd v Leonard (WA) Pty Ltd (In Liquidation) the director argued, among other things, that because Westgem was in administration, rectification would advance the position of the financiers at the expense of the other creditors and should not therefore be allowed.

Corby J found that on a proper construction the Charge operated over all of Westgem's assets and undertaking but proceeded to consider whether, if the court was wrong in that respect, the Charge could be rectified. 

Corby J summarised the JJ Leonard decision as follows: 

"In JJ Leonard Properties a deed purported to create a fixed charge but failed to include a charging clause or a definition of the expression 'property hereby charged' that was used throughout the document.  Kennedy J had no doubt that the deed did not reflect the common intention of the parties to charge certain items of property as security for a loan.  However, he noted that, 'the accepted rule is that rectification will not be decreed if to do so would prejudice any bona fide purchaser for value who has acquired an interest in the property dealt with in the instrument sought to be rectified'. He thought that an analogous situation arose where the party seeking rectification had been placed in liquidation as he considered that the unsecured creditors of the company acquired an interest in the property of the company at the commencement of a winding up.  Consequently:  

"In the present case, the unsecured creditors acquired an interest in the assets of the company, upon which it now sought to impose a charge by means of rectification of the deed.  If rectification were granted on the evidence before me, the probable entitlement in distribution would reduce from just in excess of 40 cents in the dollar to zero.  I am not persuaded that it would be right to assist the plaintiff to improve its position as against those creditors by granting the relief claimed"
  

The judgment was affirmed on appeal. Burt CJ noted that rectifying the deed would have the effect of defeating such rights as the unsecured creditors had obtained in the property of the company upon it going into liquidation and so would offend against the clearly rooted principle of company law that "when liquidation is commenced, one creditor should not be assisted by the court to improve its position vis a vis other creditors". 

In Saraceni Corby J concluded, having considered an array of issues and authorities, that rectification should be allowed and in doing so observed that: 

  • liquidation or administration did not of itself represent a barrier to rectification but the impact upon creditors was one of the considerations to be taken into account in the court's exercise of its discretion;
  • the position of creditors in an administration, and the weight to be given to their interests, is somewhat different to creditors in a liquidation because it is relevant to consider 'whether reconstruction of the company was capable of being achieved or whether reconstruction was unlikely and insolvency loomed'. 
  • although rectification would have an effect on the administration it was also relevant that any creditors who inspected the register were likely to have concluded that all of Westgem's assets had been secured in favour of the financiers.

The Court also rejected the administrator's argument that upon his appointment the creditors 'acquired legal or equitable rights that had priority over any right of' the financiers and said that this overstated the interest acquired by unsecured creditors upon the appointment of a liquidator or administrator.

Contact:

Rob Mills, Partner, Adelaide +61 8 8414 3302 rmills@hunthunt.com.au
Charles Bavin, Parnter, Sydney +61 2 9391 3010 cbavin@hunthunt.com.au
Mary Nemeth, Partner, Melbourne +61 3 8602 9258 mnemeth@hunthunt.com.au
           

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