The Queensland court of appeal decision of AG(CQ) Pty Ltd v A&T Promotions Pty Ltd & Anor has highlighted the need for holders of unregistered mortgages to actively take steps to protect their interests in the secured property, and cannot assume that the first mortgage granted by the borrower will take priority over subsequent mortgages.
Disputes over the priority of security interests, particularly where there is insufficient funds to pay all claims (eg in circumstances of insolvency) can be critical to determining whether a creditor will be paid all, some or none of a debt due to them. Equitable securities are prevalent in certain industries, such as the building industry where it is common for suppliers’ terms of trade to include a charge over the assets of a debtor and any guarantor(s).
Many assume that when there are two or more competing equitable security interests over the same property, the interest that was created first will take priority. Before the decision of AG(CQ) v A&T, this was not necessarily the case, there were two distinct lines of authority on how the courts should decide disputes concerning competing equitable security interests, namely:
- that the security interest created first in time prima facie had priority over other interests created later – that is, the first in time took priority unless it could be shown that there was some conduct of the secured party which meant a later interest should take priority; or
- that the security interest created first in time will only take priority if all other things were equal – that is, the court will examine all of the circumstances of the case and the conduct of the parties, and only if it remains unable to decide which party ought to have priority after that examination will it grant priority to the first in time.
The essential facts of the case were that:
- Mr Ikin had an agreement with AG(CQ) under which he was entitled to a lot in a yet to be subdivided parcel of land owned by AG(CQ). AG(CQ) were obliged to transfer the lot to Mr Ikin within 14 days of the subdivision.
- Mr Ikin borrowed money from A&T and granted it a mortgage over the lot in the yet to be subdivided parcel of land. A&T were unable to register the mortgage because the certificate of title for the lot had not yet been created.
- Around six months later, Mr Ikin borrowed money from AG(CQ), and granted it a mortgage over the same lot, which was still yet to be subdivided. AG(CQ) were not aware of A&T’s existing mortgage.
- A&T and AG(CQ) both claimed that their mortgage took priority over the other. Both parties were relying on an ‘equitable’ mortgage, which is a mortgage which, for some reason or another, has not been registered against the certificate of title.
Decision and reasoning
The court of appeal found that, despite A&T’s mortgage having been granted earlier, AG(CQ)’s mortgage took priority.
The court in AG(CQ) v A&T did not specifically make a direct ruling as to which test is the more correct, it made clear that the order in which the competing security interests were created matters very little, and it is the conduct of the parties (or lack thereof) and the circumstances of the case that will determine which party has ‘better equity’ and whose security has priority.
AG(CQ)’s mortgage, although second in time, had priority over A&T’s mortgage essentially because A&T failed to act as a prudent lender, and did not take the steps it could have to ensure its mortgage would have priority over AG(CQ)’s. The circumstances of the case that lead to the decision included:
- Although both parties took a risk by accepting a mortgage over a lot in a parcel of land which was yet to be subdivided (and there was a risk that it never would be), AG(CQ)’s risk was less because they were the owner of the land that was to be subdivided.
- The nature of A&T’s loan and mortgage was such that they could not ensure that Mr Ikin would not grant subsequent mortgages over the same land to other parties.
- A&T could have asked AG(CQ) when the land would be subdivided and informed it of its mortgage, but didn’t.
- Aside from being told by Mr Ikin, A&T did not ensure it would be informed when the land would be subdivided (and when it could register its mortgage).
However, other matters which the courts have considered when deciding which competing security interest should have priority include:
- The circumstances behind the creation of the security interests.
- The relative risks faced by the lenders.
- The capacity of the lenders to perfect their equitable interests.
- Whether the lender(s) lodged a caveat over the property, and when.
- Whether the lender allowed the borrower to retain possession of the title deeds.
- Whether there was fraud or unconscionable conduct on the part of the lender(s) or borrower.
This list is not exhaustive, and the court will look at all of the circumstances of the case and the conduct of the parties before determining the priority of competing security interests.
The lesson for lenders with unregistered securities is that they must take active steps to ensure they have the ‘better equity’ and cannot simply assume that a first in time security will take priority.
We thank Warren Jiear and Hynes Lawyers for allowing us to reproduce this article in our e-Update.