Understanding which unregistered interest has priority under a credit agreement in the event of default or liquidation

It is common practice for suppliers to include a clause in their agreements granting an equitable charge over a customer’s property as security for payment in the event of default. However, as customers can have supply agreements with multiple suppliers, it is important for businesses to be aware of the circumstances in which courts will determine which competing unregistered interests have priority should the customer’s assets be unable to cover the debts to all creditors.

The recent Western Australian Supreme Court case of Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Anor [2017] WASC 132 examined the factors used to determine which competing interest has priority when two different suppliers each hold an equitable charge over the same property.

Relevant facts

Bunnings Group Ltd (Bunnings) and Hanson Construction Materials Pty Ltd (Hanson) each supplied building materials to Capital Works Constructions Pty Ltd (Capital Works) pursuant to credit agreements. Both credit agreements contained clauses granting each supplier a charge over any land held by Capital Works to secure payment of monies owed.

Capital Works applied to Hanson for a credit application before also applying to Bunnings. However, Capital Works defaulted on payment to Bunnings and that company lodged caveats over Capital Works’ property first.

When Capital Works entered into liquidation there were insufficient funds to repay the whole of Capital Works’ liabilities to either Bunnings or Hanson.

The court was therefore required to decide which interest took greater priority and whether a party’s equity (i.e. the right to have the property available to satisfy debts) arose on:

  • The date the charge was created (date the credit application was executed); or
  • The date of registration of the caveat in relation to the charge.

Decision

The Court held that in circumstances where there are competing unregistered equitable interests in land, the general rule is that priority in time is the crucial factor where the equities are in all other respects equal.

As Hanson had signed the credit application and created an interest prior to Bunnings, its interest was determined to be in priority even though their caveats were registered approximately 12 months after the Bunnings caveat.

The rationale behind the decision was that any subsequent grant of the same right to property must logically be subject to any prior grant as the debtor cannot pass an interest greater than that which they possess at the time.

The Court clarified its position by stating that if the equitable interests were not equal and the conduct of the party with the earlier interest had induced the second party to acquire their interest, then the second party’s interest may take priority.

Summary

When supplying goods or services on credit, it is important to ask the customer whether they have signed any other credit applications with other suppliers. If the customer has signed previous credit applications there is no guarantee that a caveat over property will protect your business should the customer enter into liquidation.

A caveat gives notice to the world of your interest in a relevant property but does not create or enhance the equitable interest in the property if a prior charge over the same property has already been granted.

If you are a supplier or are considering entering a credit agreement with a customer, contact DSS Law’s commercial team for tailored commercial advice to protect your equitable interest.

Robert Carter Robert Carter & Kaye Griffiths Kaye Griffiths 18/07/2017

Disclaimer

DSS Law insight articles are intended to provide commentary and general information. They should not be relied upon as formal legal advice. If you would like specific advice relating to this topic, please contact DSS Law on epost@dsslaw.com.au or 1300 DSS LAW.