First in time, first in line? Does the order of registration of caveats determine the priority of competing unregistered charges? - Insolvency/Bankruptcy

This week's TGIF considers Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132, where the Court considered whether the order of registration of caveats determined the priority of competing unregistered charges.

BACKGROUND

Bunnings and Hanson each supplied building materials to Capital Works prior to Capital Works' liquidation by means of a creditors' voluntary winding up.

CREATION OF THE CHARGES

The supply of goods by each of Bunnings and Hanson was made under terms set out in credit applications made by Capital Works.

The application to Hanson was dated 16 June 2010 and accepted by Hanson sometime prior to 10 July 2010.

The application to Bunnings was made on 30 August 2010 and accepted by Bunnings on the same day.

In each case, the credit applications contained a charge granted by Capital Works over any land then or subsequently held by Capital Works (to secure repayment of monies owing by Capital Works in respect of the supply of the building materials).

THE CAVEATS

On 23 April 2014, Bunnings lodged a caveat over three properties owned by Capital Works. Hanson also lodged a caveat over the same three properties on 2 April 2015. Each caveat was supported by the relevant charge granted by Capital Works.

Administrators were appointed to Capital Works on 7 May 2015, and the administrators were later appointed joint and several liquidators.

The eventual sale of the three properties by the liquidator of Capital Works realised (after payment of a first mortgage and the liquidator's expenses) an amount which was insufficient to meet the whole of Capital Works' liabilities to either Bunnings or Hanson. The liquidator proposed to confer priority by reference to the order in which caveats were lodged.

Bunnings sought a declaration that the equitable charge protected by its caveat constituted an interest in the properties in priority to the equitable charge protected by Hanson's caveat.

ISSUE

To determine whether Bunnings' or Hanson's interest in the proceeds should take priority, the Court had to consider whether priority of competing equitable charges turns on:

the date of creation of the charge; or
the date of registration of a caveat in respect of the charge.

DECISION

Justice Chaney dismissed Bunnings' claim, holding that the Bunnings charge did not take priority over the Hanson charge. In doing so, his Honour was guided by the following principles:

Where there is competition between unregistered equitable interests in land, the general rule is that, if the equities are in all other respects equal, priority in time of creation is considered to give the better equity.
However, where the merits of the equities are unequal (for example where the conduct on the part of the holder of the earlier interest has led the other to acquire their interest on the basis that the earlier interest did not exist) priority may be accorded to the later interest.

His Honour applied the general rule and stated that:

On the assumption that the equities are otherwise equal in this case, the interest created first in time will take priority ... regardless of whether, or when, a caveat is lodged to protect that interest (unless a delay in lodgement is relevant to the question of disentitling conduct by the prior equity holder).

ASSESSING THE RELATIVE MERITS OF THE COMPETING EQUITABLE INTERESTS

Justice Chaney referred to Rice v Rice (1854) 61 ER 646 where it was said that in examining the relative merits of two parties having adverse equitable interests, the court must consider the nature and condition of the respective equitable interests, the circumstances and manner of their acquisition, and the whole conduct of each party.

His Honour noted that 'what circumstances will be 'relevant' to the assessment of merits in equities will depend upon the particular facts of any case'. 'The critical question,' said his Honour, 'in order to resolve the dispute between the present parties, is whether there was any postponing conduct on the part of Hanson which would have the effect of defeating its temporal priority.' Justice Chaney held that there was not.

In particular, his Honour had regard to the following factors:

Lodgement of a caveat was not necessary to create or enhance Hanson's equitable interest in the properties. His Honour noted that '[i]t is well established that a failure to lodge a caveat does not, standing alone, necessarily defeat a prior equity, and that the holder of an equitable interest cannot improve his priority by lodging a caveat'.
There was no evidence that Bunnings made any inquiry of Capital Works as to the existence of other credit arrangements or other charges granted by Capital Works over existing or future land holdings.
Hanson did not in any way lead Bunnings to acquire its interest, which it did by accepting Capital Works' credit application in 2010.

COMMENT

When obtaining a charge from a customer, it is important that suppliers of goods or services make enquiries with the customer and satisfy themselves regarding any charges that the customer may have previously granted to other suppliers or creditors. Conducting a search for registered caveats, without further investigation, will not give a complete picture of the customer's position.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.