If you are a secured creditor of a debtor, you may be able to lodge a caveat over the debtor’s property. There remains some uncertainty however who gets priority in terms of payment from the proceeds of the sale of the debtor’s property, when there are multiple registered interests on the title.

General Rule

The general rule is that if the equities are in all other respects equal, priority in time of creation is considered to give the better equity. This general rule may be displaced and priority accorded to the later interest if the merits of the equities are unequal (see for example Bunnings Group Ltd v Hanson Construction Materials Pty Ltd & Or [2017] WASC 132 (Bunnings)). The time a caveat is registered is only relevant if it is relevant to the merits of the equities, for example if the delay is relevant to disentitling conduct by the caveator.

The Court will also look at factors that are relevant to the particular facts of the case, such as the nature and condition of the parties’ equitable interests, the circumstances and manner of the acquisition of those equitable interests, and the conduct of the parties (see Rice v Rice (1854) 2 Drew 73).

In the case of Bunnings, there were two suppliers, being Hanson and Bunnings, who had charges included in their credit application agreements with Capital Works. The credit application agreement between Hanson and Capital Works was entered into prior to the credit application between Bunnings and Capital Works. Bunnings however lodged its caveat first. The Court found that, everything else being equal, Hanson had priority as its charge was first in time. The Court then looked at whether Hanson’s conduct would cause this priority to be defeated. The Court found that it was usual industry practice to only lodge a caveat when it appeared necessary, and so Hanson’s conduct in not lodging its caveat earlier would not affect the priorities. Hanson accordingly was able to rely on the general rule to maintain its priority.

Contentious Cases

In LTDC Pty Ltd v Cashflow Finance Australia Pty Ltd [2019] NSWSC 150, Cashflow entered into an agreement with Madebra and its directors as guarantors, which granted a charge. Cashflow considered that this was secondary security. Cashflow also was granted primary security in the debtors’ book, which it registered on the PPSR. Later, LTDC entered into an agreement with Madebra and its directors granting a mortgage. LTDC lodged a caveat on the same day as the executed loan documents were received. Cashflow had not yet lodged a caveat.

Cashflow adduced evidence that the usual practice in invoice financing was to only lodge a caveat upon default. LTDC adduced evidence that its usual practice as a lender was to lodge the caveat straight away. LTDC argued that it had conducted the relevant searches and had lent the money to Madebra on the basis that the only interest with priority was the first registered mortgagee and it would not have lent the money had it known about Cashflow’s interest.

LTDC’s position was that Cashflow’s conduct in delaying the lodgement of its caveat induced LTDC to acquire its interest. The Court found that Cashflow’s failure to lodge a caveat contributed to LTDC’s conduct in lending the money as it left the guarantors in a position to represent that the property was not subject to any charge by Cashflow. Cashflow only intended to rely on the charge as secondary security and knew that by not lodging a caveat, there was a risk that later interests would be created.

The Court held that considering all these circumstances, LTDC’s interest would therefore have higher priority despite Cashflow’s interest being first in time.