Lisa Farrand, Dispute Resolution Senior Associate, reviews the decision of the Supreme Court of Queensland in St George Bank Ltd v Perpetual Nominees Limited & Anor.

This decision is a reminder that in the state of Queensland, the holder of a first registered fixed and floating charge can sell personal property the subject of the charge free of the interests of subsequently registered charge holders.

On 12 February 2010 the Supreme Court of Queensland ruled in favour of Westpac Banking Corporation’s (Westpac) application to sell the property and undertaking of the company which operated the Sheraton Mirage Resort and Spa at Main Beach on the Gold Coast, SP Hotel Investments Pty Ltd (Receivers and Managers Appointed) (SP Hotel).

The Court declared that the purchaser would take the property and undertaking of SP Hotel unencumbered by the interests of subsequent charge holders, Perpetual Nominees Limited (Perpetual) and LJK Nominees Pty Ltd (LJK).

The proceeding was originally commenced in the name of St George Bank Limited, however as a result of a transfer of the rights and obligations of St George to Westpac effective 1 March 2010, Westpac was later substituted for St George as the applicant in the proceeding.

Westpac, Perpetual and LJK, in the priority listed, each held securities over the land on which the Sheraton Mirage stands and the assets and undertaking of SP Hotel. The borrowers, Desmarest Pty Ltd (the previous owner of the Sheraton Mirage) and SP Hotel, defaulted under the Westpac facilities and securities resulting in a liability to Westpac in excess of $68 million.

On 19 March 2009 Westpac appointed Michael McCann and Graham Killer of Grant Thornton as Receivers and Managers of SP Hotel. On 23 November 2009 Westpac entered into contracts to sell the Sheraton Mirage (comprising the land, assets and undertaking of the hotel) to Pearls Australasia Mirage 1 Pty Ltd (Pearls).

The purchaser’s right to take the land on which the Sheraton Mirage was situated unencumbered was not in issue; section 86 of the Property Law Act 1974 (Qld) clearly provides that when a mortgagee exercises its power of sale over land, the purchaser takes the land free of the mortgagee’s interest and free of subsequent encumbrances.

The dispute arose because in Queensland there was no similar statutory provision relating to a mortgagee’s sale of personal property, in this case the business assets of the SP Hotel. Both Perpetual and LJK refused to provide Westpac with releases under their fixed and floating charges, preventing the settlement of the sale without judicial intervention.

The respective priorities of Westpac, Perpetual and LJK were not in issue (Deeds of Priority gave Westpac priority up to $78 million). The issue before the Court was whether, upon completion of the contracts, Pearls would take the property and undertaking of SP Hotel free of the respective interests of Perpetual and LJK.

A threshold question for consideration by her Honour was whether the Minister for Natural Resources, Mines and Energy and Minister for Trade had properly consented to Westpac selling the land via private contract as opposed to public auction in accordance with section 346(1) of the Land Act 1994 (Qld). Her Honour found that this requirement had been satisfied.

In the absence of legislation dealing with the rights of a purchaser acquiring personal property from a mortgagee in possession, her Honour considered the position of Pearls pursuant to the general law. She reasoned that, in principle, when a mortgagee sells under a power of sale, that sale defeats the rights of all subsequent charge holders, whose remedy is then against any surplus money in the hands of the vendors. Her Honour said that this reasoning was consistent with a mortgagee exercising its power of sale, holding any surplus proceeds on trust for subsequent mortgagees according to their priorities, and ultimately for the mortgagor.

Accordingly, her Honour decided that as long as Westpac had the necessary powers given by the charge and “conveyancing mechanisms”, it could convey the legal interest in the SP Hotel to Pearls free of the interests of Perpetual and LJK.

The “conveyancing mechanisms” referred to by her Honour are the requirements of section 84 of the Property Law Act. That section essentially provides that a mortgagee shall not exercise its power of sale unless and until notice of the intended sale has been given to the mortgagor in accordance with the section.

Perpetual and LJK argued that the notice served by Westpac on SP Hotel did not comply with section 84. Whilst the notice contained a full description of the land, it did not contain any description of the other property (including the assets and undertaking of the hotel) secured.

Her Honour said that the notice was “clumsily drafted”. The notice referred to the Charge and Mortgages “in respect of the property including that described as [the land] (Property).” She said that “Property” might mean only the land or it might mean “property including the land”. But even if it meant only the land, notice that the other property might be sold was sufficiently given by the words “or exercise all or any of the other powers conferred by the Securities…or by the Property Law Act 1974…”

In any event her Honour was not persuaded that the notice needed to contain a description of the property to be sold. She took the view that section 84 did not require this, pointing out that the purpose of the section is to enable the recipient to understand with reasonable certainty what it is required to do, and the notice served by Westpac satisfied this requirement.

Her Honour made a declaration that, under the contracts for sale dated 23 November 2009, Pearls would take the property and undertaking so conveyed to it free of any interest of Perpetual and LJK. Her Honour ordered Perpetual and LJK to pay Westpac’s costs of the proceeding to be assessed.