The decision of the Queensland Supreme Court in Sucrogen Australia Pty Ltd v Westpac Banking Corporation & Anor (2012) QConvR 540-776 sets out the circumstances in which lower-ranking secured creditors may obtain higher priority.
The Supreme Court of Queensland has recently ruled that a third ranking secured creditor has the right to request the transfer of the security interests of a first ranking secured creditor under section 94 of the Property Law Act 1974 (Qld).
On 3 June 2011, Sucrogen (Pioneer) Pty Ltd, a related company to Sucrogen Australia Pty Ltd (Sucrogen) entered into an Asset Sale Agreement with the Proserpine Co-operative Sugar Milling Association Ltd (Mortgagor).
Westpac Banking Corporation (Westpac) held first priority securities over the assets of the Mortgagor, namely a registered fixed and floating charge and several registered mortgages over the Mortgagor’s land in Queensland worth approximately $65m.
The Commonwealth Bank of Australia Ltd (CBA) held second ranking securities by way of a fixed and floating charge over the assets of the Mortgagor. CBA chose not to be heard in this application, nor did they attempt to acquire Westpac’s securities.
Sucrogen held third priority security by way of two registered fixed and floating charges to secure two commercial loan agreements worth approximately $16m.
Westpac consented to Sucrogen enforcing its fixed and floating charge under a Deed of Priority entered into by the secured creditors, if Sucrogen’s debt had not been repaid by 4 November 2011. This debt remained unpaid and Administrators were subsequently appointed to the Mortgagor shortly after. The Administrators consented to Sucrogen enforcing their fixed and floating charge on 7 November 2011.
Sucrogen sought to acquire the securities of Westpac so as to be able to vote with the amount of Westpac’s debt at a meeting of the creditors which was held on 9 December 2011, during which the Asset Sale Agreement was to be considered at that meeting, and if carried, the creditors of the mortgagors would have been paid out expeditiously.
Sucrogen brought an action for orders requiring Westpac to transfer its securities under section 94(1)-(2) of the Property Law Act 1974 (Qld):
- Section 94(1) specifies that “a mortgagor has a right, where they are entitled to redeem, to require the mortgagee to transfer the mortgage to any third person on the terms which the mortgagee would be bound to discharge.”
- Section 94(2) specifies that “the right of the mortgagor under section 94(1) shall be capable of enforcement by each encumbrancee, or by the mortgagor, despite any intermediate encumbrance, but a requisition of an encumbrancee shall prevail over a requisition of the mortgagor, and as between encumbrances a requisition of a prior encumbrance shall prevail over a requisition of a subsequent encumbrance.”
- “mortgagor” is defined as including “any person from time to time deriving title to the equity of redemption under the original mortgagor, or entitled to redeem a mortgage, according to the mortgagor’s estate, interest or right in the mortgaged property”
- “encumbrancee” is defined as including “every person entitled to the benefit of an encumbrance, or to require payment or satisfaction of an encumbrance”.
Sucrogen argued that it was entitled under section 94, to require Westpac to transfer its security interests upon the following bases:
- As a “mortgagor entitled to redeem” requiring the transfer to a “third person” under section 94(1)
- As an “encumbrancee” of the mortgagors assets under section 94(2)P
- ursuant to its securities, to exercise its power under section 94 (1) in the name of the company to require Westpac to transfer.
In response to Sucrogen’s arguments, Westpac relied on the High Court case of Ley v Scarff and the NSW Supreme Court case of Challenge Bank Ltd v Hodgekiss and contended that Sucrogen could not be the “third person” both taking the transfer in 94(1) and also submitting the request to Westpac to transfer its securities. Owing to this, section 94(2) was then argued to be inapplicable as it referred to the “right of the mortgagor” as deemed in 94(1).
Sucrogen then relied on the NSW case of First Chicago Australia Ltd v Loyebe Pty Ltd in which the “third person” [in the NSW equivalent to s94(1)] was identified as being “a person other than a party to the original mortgage”. It was further held in this case that the NSW equivalent to section 94(2) would operate independently from section 94(1) to confer a right on subsequent mortgagees, if they were not deemed to be the “mortgagor entitled to redeem” under section 94(1).
Justice Applegarth held that Westpac was to transfer its securities to Sucrogen upon tender of the sum required to discharge the securities upon the following reasoning:
- Westpac’s reliance on Ley v Scarff was rejected given the authority did not decide that a subsequent security holder cannot, under section 94(1), require a transfer of securities to itself and also that it did not consider any application of section 94(2).
- Challenge Bank Ltd v Hodgekiss was also rejected as it was noted to have considered a dissimilar request to that being made in the case at hand
- Justice Kearney’s interpretation in First Chicago Australia Ltd v Loyebe Pty Ltd was followed in that “any third person” in section 94(1) means anyone other than the party to the original mortgage. Through this construction, Justice Applegarth noted that section 94 rules out any disadvantage to a subsequent mortgagee from taking the transfer itself or requesting the transfer to a related entity
- Sucrogen was deemed to be an “encumbrancee” under section 94(2) and therefore could enforce the right of Westpac to transfer its securities to Sucrogen as a “third person” in relation to Westpac and its original mortgage. Sucrogen was therefore deemed to have the same right under section 94(2) as an “encumbrancee” as it had under s 94(1) to require the transfer to itself
- Section 94 was generally viewed by Justice Applegarth to aid the transfer of a mortgage from one creditor to another, without the requirement and expense of a discharge and grant of new mortgage.
The case may have well be made more complex if the second ranking creditor, CBA, had been involved and sought to enforce its security interests in front of Sucrogen. Further, had Westpac not given its initial consent to allow Sucrogen to enforce its security, the provisions of the Deed of Priority may well have been considered further.
In a practical sense, section 94 provides an avenue to allow secured creditors to transfer a mortgagor’s debt without the cost and legal implications of requiring a discharge and new mortgage. However, where security restructures occur, intermediate security holders should consider the potential implications.