CBFC Limited v Corporate Consulting (Aust) P/L (in liq) & ANOR

(I) Introduction

On 22 October 2010, Boddice J handed down an interesting and important decision granting an extension of time under s 266(4) of the Corporations Act 2001 (“the Act”) for lodgement of notification of a charge with ASIC.   

In the case, CBFC Limited (“the CBA”) advanced monies under an equipment loan facility to fund the entire purchase price of a prime mover, secured by a fixed charge over the vehicle.  The CBA inadvertently failed to lodge notification of the charge with ASIC within the time required by s 263(1) of the Act.  The borrower serviced the repayments dutifully for 18 months, and then was put into voluntary liquidation by special resolution of the members. The CBA only discovered its omission when it was brought to its attention by the liquidator.

The case is significant because the extension was allowed notwithstanding a delay of some 18 months, and despite the fact that the application was not brought until after the company had been placed in liquidation.  His Honour discussed and explained the older line of case which suggested that a post-liquidation extension could only be granted in “exceptional circumstances”.   His Honour was content to ask, instead, whether the circumstances were such as to satisfy him that it was appropriate to grant the discretion, notwithstanding that the company was in liquidation.

His Honour also dealt with an alternative claim by the CBA to establish an equitable lien, which His Honour dismissed, whilst at the same time acknowledging that he did not need to decide the point.  His Honour took the view that the claim by a lender to assert a lien by subrogation was on the facts liable to interfere with the scheme of the Act with regard to distribution of assets in a winding up.  In this regard, the judgment is likely to whet the appetite of equity enthusiasts.  

This Note sets out the Facts (in section II), summarises the relevant statutory framework (section III), and then summarises His Honour’s conclusions with respect to each of the s 266(4) issue (section IV) and the lien issue (section V).  Some evaluative comments will be made at appropriate points below, but will be kept to a minimum having regard to the needs of the audience to which the Note is addressed.  For suggestions as to further reading, readers are welcome to contact the writer.

(II) Factual background

On 5 December 2008, CBFC Limited (“the CBA”) paid the purchase price of a prime mover, at the request of Corporate Consulting (Australia) Pty Ltd (“the Company”) which purchased the vehicle from Volvo Truck & Bus Brisbane (“Volvo”).  

The Company provided long distance trucking and transport services, operating out of leased premises in northern NSW, under the style CA & SE Neave Transport.  That referred to the name of the sole shareholders, Colin and Sharon Neave.  Colin Neave was the sole director.

The Company started out in 1992 and grew due to Colin Neave’s relationship with Linfox, which actively chased Colin Neave for his services because he used to work for Linfox and his long term industry experience.  The Company eventually had a number of other well known customers, as well as Linfox, such as Toll, Australian Air Express and T&T.

The Company had a fleet of trucks, each of which were fully financed through separate equipment loans from a variety of banks and other lenders.  This is not unusual in the industry.

In November 2008, the Company was looking to acquire a new Volvo prime mover to replace a 2006 Volvo prime mover which had been financed through Suncorp and which loan was due in early December 2008. Suncorp had agreed to fund a replacement prime mover, but decided to withdraw from the equipment finance market altogether. The Company therefore needed a new financier for the replacement prime mover.

Through the broker, Centrepoint Alliance, the Company caused an application for equipment finance to be prepared and lodged with the CBA on 13 November 2008.  The CBA had previously financed two other trucks for the Company (the accounts for which had been conducted in an “A class manner”).  Charges had been duly registered with ASIC for those, one on 6 September 2005 and the other on 29 October 2008.

On 17 November 2008, the Bank gave preliminary approval for an equipment loan for a particular Volvo prime mover, but amended that approval on 26 November 2008 because the proposed supplier, Volvo, only had a different model – a demo – in stock.

The preliminary approval advice forms (which were faxed to either the Company or the broker) each stated “security to be registered” and at settlement a fee of $135 would be required for “ASIC registration fee”.

On 26 November 2008, the CBA gave final approval and provided an indicative asset finance quote, for payments of $4,728.32 to be made monthly in arrears over a 48 month term.

On 27 November 2008, Volvo issued its final Invoice to the Company for the sale of a new Volvo 2008 FH16 580 HP 6 x 4 prime mover reg. No. 990KSD & VIN No. YV5AUF0D87D130229 (“the Vehicle”) for the price of $233,645.40 inc. GST and on-road costs.

On 2 December 2008, the Company (by Colin Neave and Sharon Neave) executed in the presence of the broker a 4 page “Equipment Loan Schedule” and a number of other related documents, all of which, together with the CBA’s Usual Terms and Conditions, were faxed by the broker to the Bank on 3 December 2008, with the originals being sent later.

By the Equipment Loan Schedule, which incorporated the CBA’s Usual Terms & Conditions, the Company:

• offered to borrow $233,645.40 from the Bank to be repaid by monthly repayments of $4,728.32 over 48 months (total repayments $285,369.36 comprising the loan amount plus interest of $51,723.96);
• stated “I authorise and request you to pay the Loan Amount … to VOLVO TRUCK & BUS BRISBANE”;
• offered to secure the Loan Amount and interest by the grant of “a first mortgage over” the Vehicle;
• offered to “charge the [Vehicle] … as SECURITY for the payment of the AMOUNTS OWING under the CONTRACT”;
• offered to pay a “Security Registration Fee” of $135, which was the ASIC registration fee for notification of charges.

The other documents executed for the Company on 2 December 2008 and sent to the CBA included:

• an Irrevocable Authority whereby Colin Neave stated, as director of the Company “I … irrevocably authorise and direct [the CBA] to pay the loan amount … to [Volvo]” ;
• a Form 309 (Notification of Fixed Charge) signed by Colin Neave;
• an undated Form 350 (certification as to stamp duty) signed by Colin Neave and intended to be lodged with the Form 309;
• a Direction (attaching the signed Form 350) signed by Colin Neave as director of the Company requiring the Company to hold the Form 350 until the Charge had been stamped and which:

The Usual Terms & Conditions also purported to grant a charge, and set out the rights available to the CBA in the event of default.   Importantly also, the Usual Terms and Conditions:

• expressly preserved other rights and remedies (including under any “SECURITY”) independently available to the CBA; and
• separately provide that other “SECURITY” rights do not merge in the equipment loan contract;
• defined “SECURITY” to include a “lien”.

On 5 December 2008, the CBA paid the sum of $233,645.40 direct to Volvo, thereby accepting the Company’s offer.

The Company took delivery of the Vehicle, and proceeded to make its regular monthly repayments of $4,728.32.

The charge created by the Equipment Loan Schedule and the Usual Terms & Conditions was registered on the Qld Register of Encumbered Vehicles (REVS) on 8 December 2008. But the Form 309 (Notification of details of charge) was not lodged with ASIC.  A then employee of the CBA in the Broker & Agency Sales division failed to input the appropriate code into the Bank’s computerised accounting system, and the Settlements Team was hence not alerted to the need to lodge a charge with ASIC and did not send the appropriate electronic notification to those responsible for paying ASIC and lodging the Form 309.

The Company ceased to trade its transport business in February 2010, and around the same time a related company (CCA Transport Pty Ltd) started up a substantially identical business from the same address in an arguably phoenix-like fashion.

It was not until May 2010 that the Company defaulted in paying its monthly repayments.

On 18 June 2010, the Company was placed into voluntary liquidation by a special resolution of its members (Colin and Sharon Neave) under s 491 of the Act, appointing the Second Respondent (“Mr Pearce”) as liquidator.  

Following correspondence from the liquidator on 14 July 2010, the CBA discovered that it had not lodged the Form 309 with ASIC.  It promptly lodged the Form on 29 July 2010.

The liquidator disputed that the CBA had any security, and asserted that the CBA was nothing more than an unsecured creditor, unless and until the Court granted relief under s 266(4) of the Act.  The liquidator asserted that, there were insufficient assets to meet the claims of even the priority creditors, and that without the Vehicle, the priority creditors would receive a substantially lower dividend. The non-priority creditors were unlikely to receive any dividend, unless recovery actions were successfully brought.

By that time, some $175,297.94 was still outstanding to the CBA under the equipment loan.

(III) Statutory Framework

As will be recalled, s 263(1) of the Act provides that:

“Where a company creates a charge, the company must ensure that there is lodged, within 45 days after the creation of the charge …  (a) a notice in the prescribed form setting out [certain particulars thereafter referred to] … and (c) if … the charge was created or evidenced by an instrument … the instrument…”

There was no issue in the case that the CBA’s mortgage was a “charge” within the meaning of s 9  of the Act.  It was also a “registrable charge” to which s 263 applies, by reason of s 262(1)(d) of the Act, which provides:

By sub-s (3) of s 262, a charge on a personal chattel refers to “a charge on any article capable of complete transfer by delivery …”.

But it is otherwise with regard to equitable liens.  Section 262(2)(a) of the Act provides that:

“The provisions of this Chapter mentioned in subsection (1) do not apply in relation to:  (a) a charge, or a lien over property, arising by operation of law…”

The Parliament must be taken to have used this language in its technical sense.1 In short, the CBA’s mortgage or charge was required to be registered with ASIC within 45 days of 5 December 2008.  But any equitable lien was not required to be registered.

The consequences of non-compliance with s 263 are set out in s 266(1)(c), which provides:

“Where … an order is made, or a resolution is passed, for the winding up of a company … a registrable charge on property of the company is void as a security on that property as against the liquidator …. unless a notice in respect of the charge was lodged under section 263 … within the relevant period …”

The phrase “relevant period” is defined in s 266(2) to mean relevantly:

“the period of 45 days specified in [s 263(1)], or that period as extended by the Court under subsection (4) of this section”

Section 266(4) provides:

“The Court, if it is satisfied that the failure to lodge a notice in respect of a charge … as required by any provision of this Part: (a) Was accidental or due to inadvertence or some other sufficient cause; or (b) Is not of a nature to prejudice the position of creditors or shareholders; or that on other grounds it is just and equitable to grant relief, may, on the application of the company or any person interested and on such terms and conditions as seem to the Court just and expedient, by order, extend the period for such further period as is specified in the order.”

Against that background, I shall turn to the decision itself. 

(IV) Extension of time to register charge

His Honour held at [13]-[14] that the Court had power to grant the extension of time despite the fact that the Company was already in liquidation at the time of the application. His Honour referred to previous authority which expressed doubts about the issue, but where courts had regarded themselves bound to uphold jurisdiction, leaving the matter as one for the High Court.

His Honour found at [18] that the failure to lodge the notice within the required time was due to inadvertence within the meaning of s 266(4)(a).   His Honour thus held that the threshold hurdle for enlivening the discretion in s 266(4) had been met.  His Honour also found, in any event, it was “just and equitable” for the extension of time to be granted: [20], [27].

As to the discretion, His Honour noted at [21] the comments by the Full Court of Queensland in Sanwa Australia Finance Ltd v Ground-Breakers Pty ltd (in liq),2 which might be thought to have laid down that an application made post-liquidation could only be granted in “exceptional circumstances”.  His Honour, however, referred with approval to the explanation of such statements given by Branson J in Hewlett Packard Australia Pty Ltd v GE Capital Finance Pty Ltd3, as indicating “circumstances sufficient to render it just and equitable to grant relief, notwithstanding that the grant of relief will defeat rights of unsecured creditors”.

Turning to the facts, His Honour stated at [24] to [26]:

“[24]    In the present case, factors favouring the granting of an extension are:

(a) The charge was for a particular asset and not a general charge over the first respondent’s assets.

(b) The charge related to the very asset which was acquired by the loan funds advanced by the applicant, and in respect of which the charge was granted.

(c) The first respondent has had the use of the vehicle obtained pursuant to the advance of those funds.

(d) A condition of the provision of the loan funds was the granting of a charge, and the first respondent agreed to that condition.

(e) If an extension of time is not granted, the applicant will be deprived of the benefit of security for which it had given value and which the first respondent had consented to the applicant having the benefit of.

(f) The charge was registered on REVS on 8 December 2008.  A search of that register by any creditor would have revealed the existence of the charge.

(g) At the time the appellant entered into the transaction, it had no real reason for concern as to the solvency of the first respondent.  The respondents contend the applicant had available to it, at the time of making the advance, information which should have caused it to question the capability of the first respondent to meet its commitments.  I do not accept that contention.  Mr Aspinall sets out the information at the applicant’s disposal at the time of approval of the advance.  I accept that that information evidenced a capacity to meet this commitment.  Regard must also be had to the fact that at the time of making the advance, the applicant had information that the first respondent had satisfactorily met previous loans advanced by the applicant, and Suncorp.  That information, when considered in the context of the financial information provided by the first respondent, gave the applicant no real cause to be concerned as to the solvency of the first respondent.

[25]    Factors which favour against the exercise of the discretion to extend the time are:

(a)    the application was only made after the first respondent had been placed in liquidation;

(b)    the failure to lodge the respective notice in time was the applicant’s.  It had assumed responsibility for undertaking that step;

(c)    the rights and interests acquired by priority unsecured creditors upon the liquidation will be affected, as may, potentially, any rights available to unsecured creditors (although this appears to be an unlikely outcome); and

(d)    the general reluctance of the Courts to make such an order when the company is in liquidation.

[26]    Balancing all of those factors, I am satisfied the factors favouring the grant of an extension of time far outweigh those favouring its refusal such that it is just and equitable to grant relief, notwithstanding that it will adversely affect the rights of the priority unsecured creditors.  In reaching this conclusion, it is of particular significance that the charge, the subject of the application, relates solely to the vehicle obtained by reason of the applicant’s loan advance.  The Volvo truck the subject of the charge is only an asset of the first respondent by reason of the loan advanced by the applicant.  That loan was only provided after the first respondent agreed to provide security for that loan.  If an extension of time is not granted, the creditors of the first respondent will receive a windfall.” (footnotes omitted)

The factors taken into account by His Honour may not have been, considered individually, particularly novel.  However, the combination of factors considered by His Honour and the weight given to them led to a unique and, with respect, sensible decision on the particular facts, and one which will be well received especially by financiers. 

(V) The equitable lien issue

Before turning to the decision, it is convenient to make some brief introductory comments.

This was not in issue in the case that equitable liens, like mortgages or charges, confer a security interest that enjoys priority over unsecured creditors of an insolvent company.4  Nor was it in issue that equitable liens did not have to be registered. The argument was more about whether there was a lien at all.

The argument for the CBA was put on the basis that the CBA was entitled to an equitable lien over the Vehicle arising because the bank was subrogated into Volvo’s vendor’s lien, being the lien which Volvo would have had but for the payment of the purchase price by the Bank.

As Muir J said in Commonwealth of Australia v South East Qld Aboriginal Corporation for Legal Services: “A lender who has advanced the purchase price is entitled to a lien by subrogation”.5

One of the cases cited by Muir J in support of that proposition was Nottingham Permanent Building Society v Thurstan.6 The ratio of Thurstan has been described by Lord Salmon in Orakpo v Manson Investments  Ltd7 in the following terms:

“When A, acting as B’s agent, pays out of his own pocket at B’s request, the price of land which B has contracted to buy from V, and V thereupon conveys the land to B. The law will subrogate to A the rights which V had over the land after the contract of sale and before completion.”

Although It also seems to be required that the payor intended to be advance the money upon security, as opposed to making the payment on the basis that s/he was a mere unsecured creditor.8 The question is whether it was the common intention of the parties that the payor should get some security.9

The rationale for the rule is based on general notions of justice and fairness, not on implied contract.  In Hewett v Court,10 Gibbs CJ (referring to Isaacs J’s judgment in Davies v Littlejohn), stated:

“A vendor’s lien for unpaid purchase money has been said to be founded on the principle that ‘a person, having got the estate of another, shall not, as between them, keep it, and not pay the consideration’ “.11

Similar statements have been made concerning the doctrine of subrogation.12

 In principle, the present was the kind of case where these requirements were likely to be met:

•  The Company requested and directed the Bank to pay the purchase price for the Vehicle, which the CBA did according to that direction;
• The Company and the CBA were both bound by that direction; the money could not be used for anything else;
• The CBA did not intend to be a mere unsecured creditor of the Company.  The CBA  and the Company contemplated that the CBA would be a secured creditor, and the CBA made the payment to Volvo on that basis;
• If the CBA’s charge were void against the liquidator, it would be unconscionable for the Company (and the liquidator and unsecured creditors can be in no better position) to continue have the benefit of the Vehicle which it had already enjoyed for 18 months, without paying for it.  That would be to get something for nothing. 

There was nothing in His Honour’s judgment which gainsaid any of that, at least as a general proposition.  On the other hand, there some complexities in applying the equity of subrogation to the case before His Honour. This was not a case where the contract between the CBA and the borrower was inconsistent with a lien, because there were clauses in the loan agreement which expressly provided that no other “SECURITY” rights (including liens) merged into the loan agreement, and which expressly preserved other rights arising independently of the loan agreement. However, there were still other difficult issues, notably:

• Whether the CBA could be subrogated into an unpaid vendor’s lien in respect of chattels, as opposed to land (and bearing in mind that, as regards Torrens land, the doctrine of vendor’s lien has been abolished in Queensland by s 191 of the Land Title Act 1994);13
• Whether the  Sale of Goods Act 1896 (Qld) is a comprehensive code as regards securities over goods; 14
• Whether it would be inequitable to allow reliance on a lien;
• Whether the implication of a lien would interfere with the policy of the Corporations Act 2001.

His Honour briefly canvassed the CBA’s submissions on these and other points at [31], but did not find it necessary to decide all of the issues relating to the lien case.  His conclusion, which was prefaced by the remark that he did not have to decide the issue of lien at all because of his conclusion to allow an extension of time under s 266(4) of the Act, was to hold against a lien, it appears, on at least the penultimate ground (if not also the final ground) in the list contained in the previous paragraph hereof.

His Honour said at [31] to [33]:

“[31]    The first respondent … asserts that the applicant is not entitled to an equitable lien by way of subrogation as the fundamental basis of subrogation is equity’s concern to prevent one party obtaining an advantage at the expense of another which, in the circumstances of the case, is unconscionable and there is no occasion for equity to intervene by way of subrogation where there is available to the third party a remedy at law or an equity sufficient to avoid an unconscionable result. [32]    The first respondent further submits that the circumstances in which a lender will be subrogated are not unlimited and a lender cannot claim subrogation if it obtains all the security it bargained for.  Where, as here, a party takes as a security for his money a security which is for the full amount of the outstanding purchase price, which extends to the whole of the property conveyed, which reserves a much higher rate of interest than would be covered by the ordinary unpaid vendor’s lien and which comprises all the remedies afforded by that lien, that party intends to abandon any entitlement to a lien and to rely upon the security selected. [33]    In my view, there is much force to the first respondent’s submissions.  Whilst the security documents contained a provision reserving rights in relation to reliance upon other security, the applicant obtained valid legal security for its loan and only lost that security by reason of its own failure to lodge the security for registration as required by the relevant Act.  To resort to a claim in equity to overcome its own failures would render nugatory the reason for the statutory scheme.”  (footnotes omitted)

On that basis, His Honour thus held that there was no equitable lien, a conclusion which did not matter on the facts because the CBA got an extension of time under s 266(4) of the Act and thus could enforce its charge against the liquidator.

(VI) Conclusion 

The case raises the spectre of a number of vexed issues, including the ones mentioned in this Note.  There is not much law as to the inter-relationship between equitable liens and s 266(4), whether it is because s 266(4) is successfully availed of before too much time elapses, because the liquidator disclaims the property as onerous, or because a lien does not otherwise arise on the facts or for other reasons.  Conversely, it is also hard to imagine a case where an extension of time is refused under s 266(4), yet a claim to establish an equitable lien would still have legs.  It would seem therefore not to be practical to dwell further on the vexed issues that surround the question whether and when a lender can maintain a claim for an equitable lien if notification of the charge is not given to ASIC within the required time, and the company later goes into liquidation.

In that light, with respect, the judgment is a welcome addition to the jurisprudence in the field and, at the same time, is written with appropriate economy and arrived at a plainly sensible result.

Stephen Lee 

Footnotes

1. Cf  London and Cheshire Insurance Ltd v Laplagrene Property Co Ltd [1971] Ch 499, cited with apparent approval by Gibbs CJ in Hewett v Court (1983) 149 CLR 639, 649 (see also 645 & 663 re nature of equitable liens).
2. [1991] 2 Qd R 456, 464-5.
3. (2003) 135 FCR 206 [28]-[29].
4. Cf Hewett v Court (1983) 149 CLR 639; Associated Alloys Pty Ltd v ACN 001 452 106 Pty Ltd (2000) 202 CLR 588; Weston v Carling (2000) 175 ALR 202.
5. [2006] 1 QdR 12 [30].
6. [1903] AC 6.
7. [1978] AC 95, 110.
8. Meagher, Gummow & Lehane, Equity: Doctrines & Remedies 4th ed [9-030] to [9-055].
9. Banque Financiere de la Cite v Parc (Battersea) Ltd [1999] 1 AC 221, 233 D, 241-2.
10. (1983) 149 CLR 639, 645.
11. See also Dean J at 668.
12. See eg Bofinger v Kingsway Group Ltd (2009) 239 CLR 269 [94].
13. In support of the argument that such a lien case exist over personalty in a proper case, see: Hewett v Court, (1983) 149 CLR 639, 646, 663; Transport and General Credit Corp v Morgan [1939] Ch 531, 546; Halsbury’s Laws of England 4th ed vol28 “Lien” at [556], [560]; and Sykes & Walker, The Law of Securities, 5th ed pp751-2.
14. In support the affirmative of that proposition, see Court & Evans v Hewett (1981) 39 ALR 627, 637. The High Court refrained from deciding the point, because their Honours were concerned with a contract for work and materials, not a contract for the sale of goods: see Gibbs CJ at 646 and Deane J at 662, cf Murphy J at 650. See also Wilson and Dawson JJ (diss) at 654. The main support for the contrary view is Atkin LJ’s dicta in In re Wait [1927] 1 Ch 606, 635-7.