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Where The Better Equity Lies: A Lesson In Registering Interests

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By Krisha Reddy, Law Clerk MST Lawyers and Alicia Hill, Principal, MST Lawyers

The recent Victorian Supreme Court case of GoGetta Equipment Funding Pty Ltd v Mark & Liz Pty Ltd [2018] VSC 91 serves as a reminder to lenders of the importance of registering security interests. The decision handed down by Associate Judge Lansdowne provides an example of how the court will consider the conduct of lenders when deciding which interest should have priority. Lenders need to act with diligence to ensure that their security interests are protected against those of third parties.

The Factual Background

Mr Ruffo was the director of JV Produce Australia Ltd (JV) until it was ordered by the Courts to cease operations on 8 June 2016. Mr Ruffo himself was declared bankrupt on 21 June 2016. Mr Ruffo owned land (Property) that was sold to cover the business’s debts. After paying off the debts with the proceeds of the sales, Mr Ruffo was left with surplus funds. It was over these surplus funds that a dispute arose.

Two parties, GoGetta Equipment Funding Pty Ltd (GoGetta) and Mark & Liz Pty Ltd (M&L), each claimed that their interest gave them priority over the surplus funds.

GoGetta operated an equipment lease business. It had entered into five separate rental agreements with JV during the period from November 2014 to February 2015. JV defaulted on payments and was in arrears from mid-2015 onwards. GoGetta lodged a caveat over the Property on 26 November 2015.

M&L provided Mr Ruffo with a personal loan on 1 June 2015 secured by way of a personal guarantee and an unregistered mortgage over the Property. While M&L did not register the mortgage, a caveat was placed over the Property on 3 June 2015.

The Issues

Her Honour had to determine two main issues in deciding whether GoGetta or M&L had the better claim:

  • Did GoGetta have an effective charge over the Property?
  • If so, would the interest of GoGetta or M&L prevail?

Was there an effective charge?

While Mr Ruffo signed the rental agreements with GoGetta, he never signed the Standard Terms and Conditions (T&C). Further, he was not told by GoGetta that the T&C’s contained a security clause creating a charge over his property.

Despite this, the fact that the signed rental agreements referenced the T&C’s was enough for the Court to incorporate these documents. This meant that the security clause could create an effective charge over the Property.

Priority of Legal Interests

The law

When there are two competing equitable interests, a court will apply the ‘better equity’ test as outlined in Latec Investments Limited v Hotel Terrigal Pty Ltd (in liq) (1965) 113 CLR 265:

  • If the merits of both parties’ claims are equal, the party with the priority of time will succeed;
  • If the merits of both parties’ claims are unequal, the party with the better equity will succeed.

Factors in determining better equity

GoGetta, the Court found, had taken a ‘relaxed approach’ to safeguarding its interests. There was no evidence that Mr Ruffo had been given a copy of the T&C’s containing the charge. Nor was he told when in arrears that action may be taken against the Property.

As the rental agreement was over vehicles which GoGetta retained ownership of, Mr Ruffo may not realise that security over other property could exist. The Court further stated that while lodging a caveat only upon default may be standard practice, GoGetta would be assuming the risk of third parties registering charges over the Property in the meantime.

The Court stated that M&L had also taken steps which were of a ‘limited nature’. While M&L did ask Mr Ruffo about the Property and conducted a title search before proceeding with the loan, the Court questioned whether more was required. M&L had previously engaged in business dealings with Mr Ruffo where he had defaulted.

Overall, Her Honour found that the factors were not equally balanced and that GoGetta’s interest should be postponed to that of M&L. Thus, even though GoGetta’s charges were created before M&L’s unregistered mortgage, M&L’s interest prevailed as their caveat was registered on 3 June 2015 compared to 26 November 2015. M&L, therefore, received the surplus funds to go towards the debt owed to them. GoGetta did not receive any funds.

Practical Implications

This case emphasises the importance of registering security interests, even if this might go against standard commercial practice. If a lender fails to do so, they are at risk in situations similar to this that a Court may give priority to a later third party claiming priority.

The decision also reiterates the need for consumers to carefully read T&C’s which may create unexpected charges over their property.

For more information about registered security interests, please email Alicia Hill or Davide Cavalleri at MST Lawyers by email or phone +61 3 8540 0200.