Caveats and the PPSA: A litigation perspective
As many Australian businesses know, taking a caveat out over the land of a debtor is a commercially sensible way of enhancing the level of security that can be recovered as against a debtor in circumstances where a debtor refuses to pay and negotiation or enforcement proceedings are required.
A caveat once lodged prevents further dealings being registered against the title without the caveator’s consent. A caveator cannot force a sale of the land (unlike a mortgagee) but a caveator is entitled, in most cases, to require repayment of a debt as a pre-condition to withdrawing a caveat (which will be required upon the sale of the land).
The normal procedure to obtain a caveat requires a creditor to obtain permission from a debtor through a charging clause in relation to the debtor’s land. This is normally done through a creditor’s Terms and Conditions of Trade and occasionally through ancillary documents, such as a Debt Repayment Deed. Those documents are then relied upon by the creditor in order to have a caveat registered against the land owned by a debtor.
Whilst obtaining a caveat is no guarantee of a financial return, particularly if the debtor also owes money to a lender under a mortgage and that lender seizes and sells the land, this recovery strategy remains an effective tool in both negotiating with a debtor (given a debtor has something to lose) and in enforcement of any judgment.
As many readers will know, the Personal Property Securities Act 2009 (Cth) (“the PPSA”) will come into effect formally in October of this year. This legislation is designed to create one national database for security interests in relation to certain categories of property such as goods, inventory and assignments amongst others.
One question that arises in a litigation enforcement context however is whether a creditor will still need to lodge caveats over any land of a debtor in the future or whether this process will be changed on account of the PPSA.
The answer to that question is that the status quo will remain. In circumstances where a creditor does not have a “mortgage-backed security”, then the PPSA will not apply. That means a creditor must still complete the state and territory based caveat registration process in order to successfully lodge a caveat against land as a form of security.
We believe this is a sensible outcome. One of the purposes of the PPSA is to effectively establish “good title” to certain categories of property in circumstances where a debtor has sold that property and a dispute arises regarding ownership and the enforcement of securities. As the Torrens system of land ownership is an independent system of establishing property interests, it makes sense that land ownership has been excluded from the PPSA.
The net effect of this is that caveat registration will remain unchanged.
So, if you have slow paying debtors who may directly or through directors have land to offer as security for payment of debts, it is certainly worthwhile demanding a charge of the land and protecting that charge via a caveat.
Author: Mark Skermer