Who will win in a priority dispute between a secured creditor and a judgment creditor?

  • Author : Bill Stark - 23-04-2013

The Supreme Court of Queensland recently had to decide a priority dispute between a secured creditor and a judgment creditor (see Brava Trading Pty Ltd v Leybourne Nominees Pty Ltd & Anor [2012] QSC 328, a decision by Philippides J).

The plaintiff, (“Brava Trading”) held a registered mortgage debenture provided by the second defendant, (“Brava Marine”), now in liquidation. The first defendant, ("Leybourne") obtained default judgment against Brava Marine for outstanding rent in the sum of $66,366.69.

Leybourne issued an enforcement warrant directed to the National Australia Bank (NAB). On 20 July 2009, the NAB debited the sum of $67,321.53 from the trading account of Brava Marine, and drew a cheque in favour of Leybourne.

Subsequently, Brava Marine applied to set aside the default judgment obtained by Leybourne. It was given leave to defend and the sum of $67,321.53 from the NAB was ordered to be retained in Leybourne's solicitors' trust account.


 

Subsequently again a receiver was appointed over the assets of Brava Marine pursuant to the Charge, and then Brava Marine was wound up and liquidators appointed.

Leybourne was granted leave to proceed against Brava Marine in the District Court proceeding and it obtained another judgment against Brava Marine.

Issues
The issues for determination were:
1. Whether, by reason of the crystallisation of the registered charge, Brava Treading was entitled to the moneys deposited into the trust account in priority to Leybourne? That raised the issue of whether there was an event of default and, if so, what effect the crystallised security interest had?
2. Did the enforcement warrant create a security interest, which gave Leybourne priority to the fund?  
3. Were any rights Brava Trading had as chargee over Brava Marine lost upon the completion of the process of execution against the NAB?

The court concluded that:
1. The issue of a winding up application on 20 July 2009 was an event of default crystallising the Charge (based upon the terms of the Charge document); and more importantly,
2. Leybourne did not acquire any interest in or entitlement to the trust moneys prior to crystallisation of the Charge on 20 July 2009.

Relying on old authorities, the court concluded: If prior to the crystallizing of the floating charge a judgment creditor receives judgment from the garnishee, then the mere existence of the floating charge is not sufficient to give the mortgagee a right to the debt. The debt must be an actual security under the charge by its crystallization before payment to the judgment creditor.

The court concluded that when the Charge crystallised, Brava Marine became a trustee of the moneys for Brava Trading. The subsequent payment of the moneys into the solicitors’ trust account to give effect to the order did not derogate from Brava Trading’s then existing entitlement pursuant to the crystallised Charge. After the making of the order, the funds paid into the solicitors’ trust account remained subject to any pre-existing beneficial interest of Brava Trading arising from the crystallisation of its Charge which rendered Brava Marine a trustee of the debt. The payment of the moneys into the solicitors’ trust account, albeit that it was made pursuant to a court order, did not alter the entitlement that Brava Trading already had to the moneys.

Conclusion
A judgment does not give a creditor any security in priority to a secured creditor, provided that secured creditor's security has crystallized.

It is therefore important to ensure that any charge relied on as a security includes very broad 'events of default'. That way the charge will crystallize before judgment is obtained by an unsecured creditor. As a result, a secured creditor will be able to collect any proceeds of execution obtained by the judgment creditor.

About the Author

Bill Stark

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