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Restructuring & Insolvency

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Focus: What does an ambiguously worded charge 'secure'?

25 September 2012

In brief: A recent Supreme Court of Western Australia decision suggests that when resolving ambiguities regarding which property is intended to be covered by a charge, the surrounding 'commercial circumstances' may be considered. If necessary, the court may rectify the wording of the charge document, even if the chargor company is under administration. Partner Philip Blaxill (view CV), Lawyer Scott Ivey and Research Assistant Emma Cundale report.

How does it affect you?

  • While the decision1 concerned a fixed and floating charge deed, the reasoning is equally applicable to written security agreements under the Personal Property Securities Act 2009 (Cth). Secured parties should take care, when preparing such documents, to set out clearly exactly what property is intended to be captured by their security interest.
  • Grantors should be aware that where the wording of a charge or security agreement is ambiguous or capable of more than one interpretation, the courts will look to the circumstances surrounding the parties' negotiation of the document, and the nature of the loan or value being provided to the grantor to determine what the parties intended. The court may then give effect to this intention through proper construction or rectification of the terms of the security agreement.

The facts

In April 2008, Westgem Investments Pty Ltd entered into a facility agreement with BankWest and BOS International (Australia) Ltd (together, the financiers) for the purpose of securing funding for the development of the Raine Square site in the Perth CBD. Contemporaneously with the execution of the facility agreement, Westgem and BOSI Security Services Ltd (the security trustee) entered into a deed entitled 'Fixed and Floating charge (all assets)' (the deed). Various mortgages were granted to the security trustee, as further security for the loan.

On 11 January 2011, the financiers appointed receivers and managers to Westgem's property under the terms of the deed. An administrator was appointed to Westgem the same day.

On 21 January 2011, the security trustee appointed receivers and managers over the property that was the subject of the mortgages.

The plaintiffs, Mr Saraceni (Westgem's sole director) and Saracen Project Management Pty Ltd (of which Mr Saraceni was also a director), commenced proceedings in the Supreme Court, seeking declarations under sections 418A and 447B of the Corporations Act 2001 (Cth) including one that the deed, on its proper construction, was ineffective to charge any of Westgem's assets, and so the appointment of receivers to Westgem's property was invalid.

The decision

The deed's proper construction

A central point of disagreement was the proper definition of the term 'Secured Property' in the deed.

Clause 3.1 of the deed provided that: 'the Chargor charges the Secured Property to the Security Trustee to secure the payment of the Secured Money.' 'Secured Property' was not defined in the deed; however, it was defined in the facility agreement as any asset:

mortgaged, charged or otherwise secured in favour of the Security Trustee or any other Finance Party by way of a Security as security for the Secured Money or any of the Borrower's or any other Transaction Party's other obligations arising under any Transaction Document.

The plaintiffs argued that this definition was imported into the deed by cross-reference under clause 1.3 of the deed, under which terms and expressions defined in the facility agreement applied in the deed. In the plaintiffs' opinion, the facility agreement's definition of 'Secured Property' referred to assets secured at the time that the facility agreement and the deed were made (ie it referred to property that had been charged, not property that was to be charged). Since there were no assets that had been secured in favour of the security trustee at that time, the plaintiffs contended that the deed did not charge any of Westgem's assets or undertaking.

The defendants contended that the facility agreement's definition was not incorporated into the deed by cross-reference and that, on a proper construction of the deed, 'Secured Property' meant all of Westgem's assets and undertaking2.

Justice Corboy held that the deed, on its proper construction, charged all of the assets and undertaking of Westgem and, consequently, the receivers were validly appointed under the deed.3

Construction vs rectification

Justice Corboy distinguished between the court's power to construe and to rectify instruments.

Construction gives effect to what the parties objectively intended by the actual record of their agreement.4 Rectification is used to ensure that an instrument conforms to the parties' prior agreement or common intention, including what they agreed or intended would be the effect of their agreement.5

Relevance of 'commercial circumstances' to construction

Justice Corboy (referring to Justice Mason's decision in Codelfa Constructions Pty Ltd v State Rail Authority (NSW)6, reaffirmed by the High Court in Western Export Services Inc v Jireh International Pty Ltd7) found that evidence of the commercial circumstances the deed addressed and the objects it was intended to achieve was admissible in construing the deed.8 These commercial circumstances included the following:

  • a condition of the financiers' offer to provide financial accommodation was that Westgem would grant a fixed and floating charge over all of its assets and undertaking;
  • the parties did not depart from that condition during negotiations over the documents to give effect to the agreed term sheets;
  • drafts of the deed were exchanged with emails that indicated the deed was intended to provide for a first-ranked fixed and floating charge over all of Westgem's assets; and
  • the financial accommodation to be made available by the financiers was substantial and was needed to fund completion of a large commercial property development.9

His Honour remarked that it would have been extraordinary if, in these circumstances, the financiers had not sought whatever security was available to secure the facilities that they were to provide.10 The list of securities set out in a schedule to the facility agreement confirmed that this was the financiers' approach. The list included an all assets fixed and floating charge to be granted by Westgem.11

The parties had intended to create a charge, and the question to be decided was whether, on a proper construction of the deed, the property to be charged was identified with sufficient certainty that a legally binding and enforceable charge was created over that property. That question was to be determined by considering the deed as a whole and not by merely focusing on the words 'Secured Property' as they appeared in clause 3.1.12

Of particular importance was clause 4 of the deed, the opening words of which stated that 'this document...constitutes a fixed charge over the present and future interests of [Westgem]' in certain assets. Read together, clauses 3 and 4 created a fixed charge over Westgem's present and future interest in the property itemised in clause 4.13 In relation to the floating charge, Justice Corboy held that the parties had objectively intended a fixed and floating charge be created and, consequently, the term 'Secured Property' in the deed was to be construed as though clause 3.1 read: 'The Chargor charges the Secured Property (being all of the assets and undertaking of the Chargor) to the Security Trustee to secure the payment of the Secured Money.' 14

Whether the deed could be rectified

An alternative argument the defendants advanced, by way of counterclaim, was that the deed should be rectified to incorporate a definition of 'Secured Property' as meaning 'all of the assets and undertaking of [Westgem]'.

Justice Corboy held that, in the event the court's findings about the proper construction of the deed were wrong, it could be rectified in the manner the defendants contended for.15 His Honour held that an instrument may be rectified where it does not give effect to the parties' antecedent agreement or common intention, notwithstanding that its drafting involved a deliberate choice of words and drafting techniques.16

His Honour rejected the plaintiffs' argument that rectification was not possible since Westgem was in administration and it would advance the position of the financiers at the expense of Westgem's other creditors.17 The fact that the chargor company was in administration was merely a factor to be taken into account in exercising the discretion in equity to rectify the instrument.18 His Honour recognised that rectification would have a significant impact on Westgem's administration but remarked that it would be an inequitable outcome if the effect of the administrator's appointment was to deny the financiers the security that they were plainly intended to have.19

Whether Westgem could be estopped

Justice Corboy found that the parties had assumed, in executing the deed, that Westgem had granted a fixed and floating charge over all of its assets. Consequently, the defendants would be entitled to a declaration that Westgem was estopped from denying that the deed took effect as a fixed and floating charge over all of its assets and undertaking.20

Conclusion

In order to reduce the likelihood of disputes, secured parties and chargors alike should take care to ensure that security agreements are clearly drafted and that the collateral is clearly identified. Should they fail to do so and the grantor is later placed into administration, there may be significant confusion, delays caused to the orderly discharge of the administrator's functions and doubt cast upon the validity of a subsequent receiver's appointment, as was the case here.

Footnotes
  1. Saraceni v Mentha [No 2] [2012] WASC 336.
  2. Saraceni at [16] and [88].
  3. At [40].
  4. At [96].
  5. At [96].
  6. (1982) 149 CLR 337.
  7. [2011] HCA 45.
  8. Saraceni at [98]-[100].
  9. At [107].
  10. At [107].
  11. At [107].
  12. At [112].
  13. At [114].
  14. At [116]-[117].
  15. At [41].
  16. At [140].
  17. At [154].
  18. At [154].
  19. At [274].
  20. At [41] and [229].

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