It is common practice for creditors to have security over property and one form of security is by registering a caveat on the title of land.
Caveat
A caveat registered on the certificate of title of land signifies to others the ranking held in the “pecking order” of those demonstrating an interest in the property. Additionally, it prevents the registered proprietor from registering plans and dealings against the certificate of title.
Caveatable interest
To have a caveatable interest means to have a legal or equitable interest in the land which can be recorded on title.
A charge is described in Fisher and Lightwood’s Law of Mortgage[1] as follows:
A charge is a security whereby real or personal property is appropriated for the discharge of a debt or other obligation, but which does not pass either an absolute or a special property in the subject of the security to the creditor, nor any right of possession, but only a right of realisation by judicial process in case of non-payment of the debt.[2]
The inclusive definition of “mortgage” under the Property Law Act[3] states that it includes ‘any charge or lien on any property for securing money or money’s worth’.
Generally caveatable interests are raised in credit applications/contracts with a company and any persons guaranteeing the company will raise a “charge” against any real property in order to entitle a supplier/creditor to register a caveat for the purposes of securing paying of a debt.
Judicial Sale
Although the duties for exercising the power of sale are the same for a Judicial Sale and a mortgagee sale, the focus of this piece are the rights of the former who has a caveatable interest and thereby an equitable charge over the property as security in default of payment of a debt.
Associate Justice Derham[4] summarised the relevant matters to the exercise of the discretion of whether or not to order a judicial sale, as follows:
- There must be evidence of value of the property. The reason for this step is to ensure that the Court can impose appropriate conditions to protect the rights of a first mortgagee (e.g. bank)
- The Court will have control over the terms and manner of conduct of the sale, such as fixing of a reserve price, the timing of the sale, who has conduct of the sale and any conditions for the protection of the first mortgagee.
- The Court needs to understand the sum of the debt is secured by the property before orders are made.
The Courts are also required to have consideration for other matters including disputes as to the debt, whether registered mortgagees object to the sale, any potential obstructions to the sale, interests of achieving the just and quick resolution of disputed issues and proportionality of costs.
Key takeaways
It is imperative that your charge is carefully drafted to ensure that the clause stands up to create the necessary caveatable interest and an equitable charge over real property should a debtor fail to pay its debts. That way you will be able to take enforcement action including Judicial Sale to hopefully recover enough sale proceeds to discharge the value of the debt plus costs.
Another important factor is that a “charge” will make you a “secured creditor” for the purposes of an insolvent debtor thus outside the usual pecking order of “cents on the dollar” scenario which unsecured creditors find themselves in when dealing with liquidators/external administrators/
Kennedy Guy Lawyers are experienced in acting for parties seeking to exercise their rights against a judgment debtor. Please reach contact us if you would like to know more via our ‘Enquire now’ button in the top right-hand corner or via (03) 9311 8511.
[1] Tyler, Young and Croft, 2nd Aust. Ed., Lexus Nexus Butterworths, 2005.
[2] Ibid, at p. 49 [2.2].
[3] Property Law Act 1958, section 18 definitions “mortgage”.
[4] Hycenko v VHY Enterprises Pty Ltd & Ors [2020] VSC 834 at [40].
