Lodgement of Caveats during Voluntary Administration – Insolvency/Bankruptcy

Is the lodgement of a caveat over the real estate of a
director or a director’s spouse prohibited by operation of s.
440J of the Corporations Act?

Section 440J of the Corporations Act provides that during a
company’s voluntary administration, a personal guarantee cannot
be enforced against a director’s spouse or relative. This
provision is well-known to insolvency practitioners and essentially
provides a moratorium so that a director and the director’s
family members are protected from enforcing personal guarantees
while the administration process plays out.

Holman Webb Lawyers recently acted for a trade creditor supplier
that lodged a caveat based on an equitable charge contained in a
Personal Guarantee over real estate owned by the director’s
wife. The caveat was lodged on the same day an Administrator was
appointed to the customer company.

The director’s wife contended that lodging the caveat was
“enforcement” of the Personal Guarantee and was not
permitted because of s. 440J. She then applied to the Supreme Court
of Victoria under s 90(3) of the Transfer of Land Act 1958
to remove the caveat.

In any application to remove a caveat, a Court will first
consider whether there is a case to justify maintaining the caveat
and, secondly, whether the balance of convenience favours
maintaining the caveat.

The primary question for determination by the Court was whether
the caveat was lodged contrary to the prohibition in s. 440J(1),
and if not, whether the balance of convenience favoured the
maintenance of the caveat.

Holman Webb Lawyers contended that s. 440J does not preclude the
lodgement of a caveat, because the registration of a caveat seeks
to maintain – not change – the status quo.

Holman Webb Lawyers relied on the NSW Supreme Court decision of
Waco Kwikform Ltd v Jabbour [2010] NSWSC 1379; 16 BPR
30727, in which an application was made to extend the
operation of a caveat under s 74 of the Real Property Act 1900
(NSW) in response to a lapsing notice served on the caveator.

In Waco, White J considered that ‘the application
for an order to extend the operation of the caveat is not a step by
way of enforcement of the defendant’s guarantee of the
liability of the company in administration’. A caveat under the
Torrens system is treated as analogous to an application for
interlocutory injunctive relief. As observed by White J,
the function of a caveat is to preserve the status quo, but
it does not result in the enforcement of the charge.

The Victorian Supreme Court was satisfied that s. 440J did not
prohibit the lodgement of the caveat during the administration and
the balance of convenience favoured the maintenance of the caveat,
citing White J’s reasoning in the Waco decision to
support its finding.

Link to judgement: https://jade.io/article/1067628

Key Takeaways:

• The Supreme Court in Victoria has further clarified the meaning
  of “enforcement” in the context of section 440J of the
  Corporations Act.




• Whilst Administrators are appointed to a customer company, a
  supplier who benefits from an equitable charge contained in a
  Personal Guarantee is not prohibited from lodging
  a caveat over the real estate of a director or director’s
  spouse.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.