A director lent money to his company to complete a development and was later reimbursed by the company. The company was insolvent at the time of the repayment. The director was ordered to repay the money after the court found he was an unsecured creditor and the transaction was voidable as an unfair preference under section 588FF(1)(a) of the Corporations Act. The director appealed. The loan agreement provided that the company, if requested by the director at any time, had to immediately grant the director a legal mortgage over the land. Whilst the loan agreement provided that security could be requested at any time, the director did not request such security.
A specifically enforceable agreement to grant a legal mortgage over property will constitute an equitable mortgage. An equitable charge may take the form either of an equitable mortgage or of an equitable charge not by way of mortgage. An equitable charge which is not an equitable mortgage is said to be created when property is made liable, or specially appropriated, for payment of a debt and confers on the chargee a right of realisation by the appointment of a receiver or an order for sale. For either an equitable mortgage or equitable charge, there must be an intention to confer an immediate proprietary interest or immediate right of recourse to a particular asset. If not, the creditor is unsecured.
The court found that the loan agreement did not confer an immediate right of recourse to the property for the following reasons:
- the obligation to grant the mortgage was expressed to be upon request;
- the proposed security was expressed as alternatives;
- the form of security was not settled but was required to be in a form acceptable to the director’s legal advisers.
The appeal court dismissed the appeal.