Fixed and floating charges and when first in time does not apply

02 May 2008

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Last month the Supreme Court of New South Wales considered when a floating charge’s priority according to time of registration will be displaced by a fixed charge. The case is reported as B&B Budget Forklifts Pty Ltd v CBFC Ltd [2008] NSWSC 271.

The facts

A forklift company went into liquidation with two secured creditors holding charges over the property of the company. When the property of the company was realised it was insufficient to pay out both creditors. B&B Budget Forklifts Pty Ltd (B&B) had a floating charge over the assets of the company that had been both created and registered prior to CBFC Ltd’s (CBFC) fixed charge over the forklifts owned by the company. CBFC had acquired the charge after funding the company’s purchase of its forklifts from St George who had a finance lease over them. While effectively the transaction was a refinancing, legally it was a purchase. The CBFC charge was in place over the forklifts prior to the company acquiring them from St George.

The question before the court was whether there were any circumstances that displaced the rule of priority according to time of registration.

Decision

Barrett J held that in this case priority according to time of registration was displaced because section 279(3) of the Corporations Act 2001 (Cth) applied and it was held that B&B had consented to its charge being postponed.

Section 279(3) provides that the holder of a prior registered floating charge is taken to have consented to postpone their priority to a subsequently registered fixed charge that is created prior to the floating charge becoming fixed unless:

1. the creation of the subsequent fixed charge contravenes a provision of the instrument evidencing the floating charge; and
2. a notice in respect of the provision that limits the subsequent fixed charge has been lodged with ASIC (in its current version this means the relevant box on an ASIC Form 309 has been completed).

In this case the ASIC Form 309 did not provide any notice that subsequent security interests were limited and as both preconditions must be met to show B&B had not consented, it was held that B&B had consented to CBFC taking priority.

In the alternative Barrett J also held that even if this was not the case, CBFC would still have priority because the company never held the unencumbered title to the assets as they were already charged by CBFC when it received them. Hence they never became subject to the floating charge as the interest was always held by CBFC.

The key points to take from this case are as follows:

1. it is desirable, if commercially possible, to seek to limit any future fixed charges over the assets that fall under the floating charge as they may take priority over the floating charge; and
2. as the obligation is on the holder of the floating charge to prove they have not consented, extreme care must be taken when completing an ASIC Form 309 to ensure that section 279(3) does not operate to alter priority.
   
   
   

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