We had a case very recently where a company in liquidation had a number of charges registered and listed in the ASIC search over its assets.
The first in time was a fixed and floating charge in favour of an individual as a lender. He had lent the initial capital to the company (the director was a relative) in order to start the business. He had sought legal advice and had reduced the loan to a written agreement and secured his debt by way of the registered charge. The charge was valid and registered within time.
There were other fixed charges on various assets used by the business (it was in the construction industry) and these were created and registered after the Fixed and Floating charge.
We were appointed and took possession of all of the assets, contacting each secured creditor. The initial secured creditor (Mr SC) contacted us as he could not understand why some of the assets that the company had at the time of the appointment were not covered by his charge, and that finance companies with later charges wanted to take those assets.
While we were looking for the details to fully answer his question (“‘Cos that’s the way it is” did not seem an appropriate response), we came across a few sections of the Corporations Act that we had not needed to consider for some time, and we were directed to a 2008 case that was on point.
The items under the fixed portion of Mr SC’s charge – as detailed in the charge documents – were not in dispute. He was concerned about the items of plant acquired since that time that he believed were covered by his floating charge.
The priority of charges is set out in sections 279 and 280 and these were considered in the case.
The first point was whether another party could get a charge over assets at all, as Mr SC did not know of or approve any other charges. Section 279 deals with whether there is deemed consent to other charges being created against assets.
279(3) The holder of a registered charge, being a floating charge, on property of a company is taken, for the purposes of subsection (2), to have consented to that charge being postponed to a subsequent registered charge, being a fixed charge that is created before the floating charge becomes fixed, on any of that property unless:
(a) the creation of the subsequent registered charge contravened a provision of the instrument or resolution creating or evidencing the floating charge; and
(b) a notice in respect of the floating charge indicating the existence of the provision referred to in paragraph (a) was lodged with ASIC under section 263, 264 or 268 before the creation of the subsequent registered charge.
Mr SC could not tell us whether his charge denied that consent. In fact it did.
Section 280 sets out the priority provisions usually set for charges. There are always exceptions, but the basic position is that a charge has priority over charges that are registered after it unless the chargee had knowledge that the later registered charge was actually created before their charge. Other special rules on priority are set out under section 282, but do not apply to our position.
280(1) A registered charge on property of a company has priority over:
(a) a subsequent registered charge on the property, unless the subsequent registered charge was created before the creation of the prior registered charge and the chargee in relation to the subsequent registered charge proves that the chargee in relation to the prior registered charge had notice of the subsequent registered charge at the time when the prior registered charge was created; and
(b) an unregistered charge on the property created before the creation of the registered charge, unless the chargee in relation to the unregistered charge proves that the chargee in relation to the registered charge had notice of the unregistered charge at the time when the registered charge was created; and
(c) an unregistered charge on the property created after the creation of the registered charge.
But these sections did not really help us. They provide for priority when charges compete for assets and the floating charge had not ‘fallen’ to cover the item before the fixed charge was created. Certainly the floating portion of the charge had not fallen over the assets when the fixed charges were created, but these charges were directly related to the acquisition of the assets. Mr SC had denied the right for other parties to create charges only over the assets that were already covered by his charge.
The case that we were referred to was B&B Budget Forklifts Pty Ltd v CBFC Ltd and Ors (2008). It is a NSW Supreme Court decision.
In that case, CBFC (holding the second registered but fixed charge) lent money to the company to purchase the asset that was subject to the charge. B&B had a floating charge that had been registered previously. The Court found that the company “acquired legal title to the [new] chattels, but subject to the [CBFC] charge”. The charge did not attempt to secure an asset that was already subject to the B&B floating charge, a new asset was introduced. The asset covered by the B&B charge was subject to the security interest of CBFC.
The court went on to say: “On that basis, it is said, CBFC acquired what is sometimes called a “purchase money security” which was not “fully competing” with B&B’s pre-existing charge, so that the scheme of priorities created by s 280 and related provisions does not apply and CBFC’s charge has priority over B&B’s charge.”
Apply that position our case, Mr SC’s floating charge does cover the assets in question, but the first call to those assets goes to the finance company that holds a fixed charge where the acquisition of the item and the granting of the charge occurred under one transaction. Mr SC is entitled to any surplus in these assets under his charge.