Australian Property Custodian Holdings v Capital Finance Australia [2012] VSC 124

In this case the liquidators and the lender were fighting over the right to sue a third party. The liquidator argued that a charging clause the lender was relying on could not extend to a future right but this was rejected by the court:

There is no reason why a charge (if its proper construction permits) cannot secure an asset that comes into existence after the date of the charge, regardless of whether it is tangible or intangible property. If that were not so, chargees would be deprived of what may prove to be very valuable assets. For example, if the liquidators’ argument were to be accepted, book debts arising out of contracts entered into by the company after the charge was given would be excluded from the charge. That may significantly deplete a charge holder’s security, particularly if there was a long term charge in place. It would undermine the system of corporate finance and security in this country which relies heavily on the ability of floating charges to effectively secure future property.

Acceptance of the liquidators’ position on this point would lead to the Court ignoring the intention of the parties. Language such as “all its assets and undertaking both present and future” conveys an intention to cover every asset that exists at any time whilst the charge subsists. There would need to be a very good reason why that intention ought not to be given effect. At the time of its creation, a floating charge does not operate by way of assignment. Rather, it is a hypothecation. In those circumstances, I do not think that it matters if the property that might later come into existence and be subject to the charge could not have been assigned as at the date of creation of the charge because it did not exist.

The judge also had some seminal comments to make about liquidators:

When properly performing their functions, receivers must be left to gather in and realise the charged assets to repay the secured creditor without hindrance or interference from the chargor or liquidators of the chargor. This does not mean that when receivers have been appointed, liquidators may never prosecute a claim in the name of the company. However, if the prosecution of the claim would have a negative effect on the charged assets or their realisation, then the liquidators must stay their hand.

Click here to read the full judgment

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