Charging clauses: is near enough still good enough?

The incorporation of charging clauses in commercial agreements (and particularly supply agreements) is commonplace. Notwithstanding the frequency with which such clauses are encountered in practice, and that the legal principles applicable to their construction are settled, the Supreme Court of Victoria’s decision in Re Carter Holt Harvey Woodproducts (Australia) Pty Ltd (No 1)[1] (Re Carter) was the second recent case[2] involving a challenge to a charging clause.

In this article, we explore the court’s reasoning in Re Carter, which confirmed (among other things) that charging clauses will generally be construed liberally, even when incorporated in a guarantee. Robson J’s reasons surveyed the principles applicable to charging clauses, which we review.

Background

Carter Holt Harvey Woodproducts Australia Pty Ltd (CHH) sold goods and services to Amerind Pty Ltd (recs and mgrs apptd) (in liq) (Amerind) pursuant to a supply agreement. Mr Naja David, the sole director of Amerind, guaranteed the trade debt by a written guarantee and indemnity which contained the following term:

[Clause 2.6A]

The Guarantor will charge in favor of CHH all estates and interest in any land and any other assets whether tangible in [sic] intangible in which they now have any legal or beneficial interest or in which they later acquire any such interest, with payment of all monies owed by the customer and agree upon request, to execute a registrable instrument transferring to CHH the Guarantors estate and interest by way of security.[3]

After executing the guarantee, Mr David acquired three (further) real properties. Amerind’s debt to CHH grew to $4,927,452.19.

The effectiveness of the charging clause was a critical issue in three separate proceedings, namely:

• •CHH’s debt recovery proceedings seeking approximately $6 million and the sale of certain properties held by Mr David;
• •unfair preference proceedings by the liquidator of Amerind against CHH, which CHH sought to defend on the basis that amounts paid to it (totalling $10,048,637.19) were secured; and
• •proceedings by CHH against the receivers of Amerind, by which CHH sought payment of a receivership surplus arising from the receivers’ sale of properties CHH claimed secured (by reason of the charge) Amerind’s debt to CHH.

While Mr David defended CHH’s claim, at the hearing the liquidators were the only party actively challenging the effectiveness of the charge. The liquidators (consistently with Mr David’s pleaded position) did so on the following two bases:

• •the charging clause did not create a present charge, rather it was an agreement to create a charge by a future act, and therefore consideration was required (and was absent); and
• •the wording of the charging clause was so uncertain and ambiguous that it was rendered void and unenforceable.

As explored below, the liquidator’s arguments focused on the meaning of the words “will charge” in the charging clause.

Principles applicable to charging clauses

Robson J confirmed the following principles applicable to the creation of an equitable charge:[4]

• •an “equitable charge” does not require any specific wording, rather it is sufficient that the grantor of the charge manifest a present intention to charge the land specified as security. It may also apply to after-acquired property so long as the property was identifiable at the time of enforcement of the charge;
• •the requirement that there be a present intention to charge land does not require the property over which the charge is to be created to be owned by the charger at the time agreement is entered into. The temporal requirement indicated by the word “present” is of the “intention” to create a charge, not the property subject to the charge;
• •in addition to the requirement that the charge be over land, and recorded in writing, where consideration is necessary, it must be executed consideration. That is, the money must have been actually advanced and a promise to enter into a transaction could not itself constitute valuable consideration;
• •there will be a valid charge where there is an intention that property, be it existing or future, be used as security, even if that security is enforceable in the future with the assistance of the court; and
• •it is sufficient that the court can ascertain the parties’ intention that the relevant property will amount to security.

Did the charging clause create a present charge?

The liquidator argued that an intention to create an immediate charge is not created by the word “will”, as that word connotes an agreement to do something in the future (in this case, an obligation to charge the relevant assets later acquired). Accordingly, such an agreement does not create a present charge and does not evidence a clear intention to create a charge.

The court rejected that argument, finding that the words “will charge” manifested the necessary present intention to create a charge. The fact that the charge would not come into being until credit was extended did not affect this conclusion.

The liquidator further argued that the word “will” referred to the promise to “execute a registrable interest” and do so “upon request”. This, it was argued, amounted merely to an agreement to enter into future documents. The fact that further acts were contemplated was important for two reasons.

First, the agreement to create a further security by the execution of further documents was inconsistent with a present intention to create a charge. This contention was rejected, Robson J finding that the promise to execute a registrable instrument of transfer is a separate and distinct promise made under the clause creating a charge.[5]

Second, the liquidator argued that even if the requisite intention was present, the agreement should fail for lack of valuable consideration. As the supply agreement contained a retention of title clause, the supply of goods could not be valuable consideration.[6]

Again, the court rejected this argument, finding that as the guarantee and indemnity was by deed, consideration was not required, and in any event, the provision of goods on credit to Amerind at Mr David’s request amounted to valuable consideration. The retention of title clause was found to merely provide another means of securing repayment.

Was the charging clause uncertain and ambiguous?

The liquidator asserted that the clause was uncertain in that it purported to operate in respect of property that is undefined and unascertainable at the time of the execution of the charge. This argument was disposed of on the basis that a valid charge may be engaged by the acquisition of property in the future.

The liquidator argued further that the charging clause was ambiguous in the following respects, and therefore unenforceable:[7]

• •first, the word “will” creates a future obligation, but the agreement neither stated when or in what circumstances that obligation would arise, nor was it clear what the charge is securing;
• •second, it was not clear whether the charge related to moneys owed but not yet payable, moneys due and payable, or moneys that might become owed;
• •third, the circumstances in which Mr David was to execute a registrable instrument other than upon request were unclear;
• •fourth, the system of registration referred to by the registrable interest was unclear;
• •fifth, the registrable instrument referred to contemplated a transfer, which goes beyond a charge;
• •sixth, the term “estate and interest” is vague, and inconsistent with the broad reference to assets found elsewhere in the clause; and
• •finally, the transferring of Mr David’s estate and interest was purportedly by way of security, without reference to what was being secured.

As the charging clause was contained in a guarantee, the liquidators urged the court to view the asserted ambiguities through the prism of the principle in Ankar Pty Ltd v National Westminster Finance Australia Ltd[8] (Ankar), with the effect that any ambiguity in the guarantee should be construed in favour of the surety.[9]

Rejecting all of the asserted ambiguities, Robson J held that there was no room for the application of Ankar.

Conclusion

In light of the courts’ historical deference to substance over form in giving effect to charging clauses, the result in Re Carter is unsurprising, even having regard to the opportunity the presence of the clause in a guarantee created to invoke Ankar. Although the charging clause under consideration was not a shining example of draftsmanship, the outcome confirms that in construing and giving effect to charging clauses, near enough will usually be good enough.

The recent decision of the Supreme Court of New South Wales in Coleman v Hart-Hughes[10] (Coleman) underscores this conclusion. That case confronted a similarly ambiguous charging clause, and produced a similar result. The relevant clause was contained in a joint venture deed, and merely provided that the landowner “will consent” to the registration of a caveat, rather than specifically referring to the grant of an equitable charge. The court found that despite no reference being made to the grant of an equitable charge, the reference to a caveat implied an intention to create equitable charge to secure repayments of the moneys advanced.[11]

The decisions in Re Carter and Coleman will not provide encouragement to parties seeking to avoid the operation of charging clauses that might be considered ambiguous. The decisions also serve as a useful reminder to the drafters of such clauses of the importance of ensuring the intention to create a charge is clearly articulated.