Is the lodgement of a caveat over the real estate of a director or a director's spouse prohibited by operation of section 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. 

If you want more information or to speak to one of our solicitors, please feel free to reach out to either Chris Hadley or Andrew Tanna of our Commercial Recovery and Insolvency team.