Gogetta security, but no priority: The importance of a lender’s conduct in determining who has the better equity

This week’s TGIF considers Gogetta Equipment Funding Pty Ltd v Mark & Liz Pty Ltd [2018] VSC 91, which examined a priority contest between competing equitable interests in property.

What happened?

John Ruffo was the sole director and shareholder of JV Produce Australia Pty Ltd (JVA) and entered into rental agreements for five motor vehicles from Gogetta Equipment Funding Pty Ltd (Gogetta). The rental agreements referred to, but did not attach, Gogetta’s terms and conditions (T&Cs).

Pursuant to those T&Cs, Mr Ruffo granted Gogetta a charge over all his real and personal property to secure his obligations under those agreements. Mr Ruffo defaulted on his obligations in May 2015, and Gogetta lodged a caveat over his house on 6 November 2015.

On 29 May 2015, and before the Gogetta caveat was lodged, Mark & Liz Pty Ltd (Mark & Liz) advanced funds to JVA, secured by a personal guarantee from Mr Ruffo and an unregistered mortgage over his house. A caveat was lodged in respect of Mark & Liz’s interest on 3 June 2015.

On 8 June 2016, JVA entered external administration and Mr Ruffo was subsequently made bankrupt. His house was sold and the majority of the proceeds went to the first registered mortgagee.

A surplus of funds remained.

Both Gogetta and Mark & Liz claimed the whole of the surplus pursuant to their securities. Proceedings were commenced in the Supreme Court of Victoria to determine:

• if Gogetta’s T&Cs, and therefore the charging clauses, were validly incorporated into its contract with Mr Ruffo; and
• if so, whether Gogetta or Mark & Liz had priority over the surplus sale proceeds from the house.

Did the charging clause form part of the contract?

Mr Ruffo’s evidence was that when he signed the rental agreements, he was unaware that the T&Cs provided for the charging of all his property and was not told the agreements contained clauses giving security.

Notwithstanding this, the Court held that:

• given the rental agreements contained a signed acknowledgement from Mr Ruffo that he had read the T&Cs and agreed to be bound by them; and
• in the absence of a denial that he had not received a copy of the T&Cs and read them,

the T&Cs were incorporated into the contracts between Mr Ruffo and Gogetta.

Did Gogetta or Mark & Liz have a priority to the surplus funds?

As the Court determined the T&Cs formed part of the rental agreements and were effective in charging Mr Ruffo’s house to secure moneys owed to Gogetta, it was necessary to determine which interest in the proceeds of the house had priority.

The principle applied by the Court to decide which interest had priority was to determine in which interest the better equity lay.

The factors considered by the Court included:

• which interest arose earlier in time;
• when the interests were registered (relevantly in this case, by a caveat); and
• the conduct of both parties in respect of their interests.

Both parties made a number of claims in support of the priority of their respective interest over the other.

The Decision

The Court found that both parties failed to protect their security interests with appropriate diligence, criticising:

• Gogetta for failing to lodge a caveat when Mr Ruffo first went into default in May 2015, which would have put Mark & Liz on notice of their security interest; and
• Mark & Liz for failing to enquire with Mr Ruffo if he owed any other debts, rather than just enquiring if he had granted any other securities.

However, in her Honour’s view, not all other factors were evenly balanced. Critically, in finding that Gogetta’s earlier interest should be postponed to Mark & Liz, her Honour observed that:

• the mortgage granted to Mark & Liz was essential to its decision to enter into the further loan whereas, on the evidence, Gogetta was prepared to lend in the absence of a charge over real property; and
• Gogetta did not tell Mr Ruffo about the existence of the charge, it appeared in a separate document and there was no evidence he was supplied with that document.

For these reasons, Mark & Liz were paid the surplus of the proceeds and their subsequent interest was held to have priority.

Comment

The first in time rule will apply on a priority contest between equitable interests where the merits are otherwise equal.

To ensure the merits are not against you, lenders should act diligently to protect their interests against third parties. This will include registering your interest so as to put subsequent financiers on notice as well as taking steps to draw the borrower’s attention to charging clauses which could be considered ‘fairly well hidden’ in separate, stand-alone, terms and conditions.