United Builders Pty. Ltd. v Mutual Acceptance Ltd.

(1980) 144 CLR 673
(1980) CLC 40-663

---

(Judgment by: Mason J.)

United Builders Pty Ltd & TKM Finance (Aust) Ltd v Mutual Acceptance Ltd

Court:

Judges: Barwick C.J.
Gibbs
Stephen

MasonWilson JJ.

Judgment date: 7 NOVEMBER 1980

---

Judgment by:
Mason J.

This is an appeal from the Full Court of Queensland (Kneipp, Sheahan and Demack JJ.) (1979) 4 ACLR 176 which allowed an appeal from a decision of D. M. Campbell J. A number of issues were argued before Campbell J. but the issue before this Court is whether a charge given by United Builders Pty. Ltd. ("United") on 8th March 1973 to Mutual Acceptance Limited ("Mutual") in respect of United's interest in a partnership with Mutual constituted a floating charge so as to require registration under s. 100 (3) (d) of The Companies Act of 1961 (Q.). (at p684)

On 31st July 1972 United entered into a deed of partnership with Mutual to "purchase, develop, subdivide and resell land at Currumbin known as Marlin Waters as a joint venture" ("the partnership"). On 8th March 1973 Mutual lent United the sum of $500,000 (for purposes unconnected with the partnership) which was secured by a deed of charge whereby United charged "all its right title and interest" in the partnership ("the deed of charge"). This charge was not registered. A further loan was made to United on 1st March 1974 by TKM Finance (Aust.) Ltd. ("TKM"), then known as Kemsley & Co. Pty. Ltd. This loan was secured by a mortgage debenture which was a floating charge and which was registered on 15th March 1974 ("the mortgage debenture"). (at p684)

United fell behind in its repayments under the mortgage debenture and on 20th September 1974 TKM notified United that it was appointing a receiver pursuant to its powers under the debenture. Mutual was similarly notified on 23rd September 1974. On 25th September 1974 Mutual notified United of its determination of the partnership and also of United's default under the deed of charge. A winding-up order was made against United on 13th September 1976. (at p685)

This appeal concerns the priority of the two securities given by United. If the deed of charge between United and Mutual is a fixed charge, being earlier in time, it will prevail over the mortgage debenture. If, however, the deed is a floating charge it is required to be registered. (at p685)

Sub-sections 100(1),(2) and (3)(d) of The Companies Act of 1961 provide:

"(1) Subject to this Division, where a charge to which this section applies is created by a company, there shall be lodged with the Registrar for registration within thirty days after the creation of the charge a statement of the prescribed particulars and -

(a)

the instrument (if any) by which the charge is created or evidenced;

or

(b)

a copy thereof together with an affidavit verifying the execution of the charge and also verifying the copy as being a true copy of the instrument,

and if this section is not complied with in relation to the charge the charge shall, so far as any security on the company's property or undertaking is thereby conferred, be void against the liquidator and any creditor of the company.

(2) Nothing in subsection (1) of this section shall prejudice any contract or obligation for repayment of the money secured by a charge and when a charge becomes void under this section the money secured thereby shall immediately become payable.

(3) The charges to which this section applies are -

. . .

(d)

a floating charge on the undertaking or property of a company;"

The deed of charge was not registered under s. 100(1). (at p685)

At first instance Campbell J. found that the deed of charge was a floating charge. This finding was reversed by the Full Court. The reasoning of Demack J. (with whom Sheahan and Kneipp JJ. agreed) was that United's interest in the partnership was "something quite distinct from its own undertaking". His Honour considered that a fixed charge would not be a serious restriction on the business of the company. Further, his Honour thought that United's interest in the partnership was a "specific identifiable chose in action" which under s. 34 of The Partnership Act of 1891 (Q.), as amended, could be assigned and that the interest was property over which a fixed or specific charge could be given. (at p685)

The appellants argue that, although the deed of charge is silent upon the question whether it be a fixed or floating charge, the property which is the subject of the charge is such that the parties must necessarily have contemplated that the charge should operate as a floating security. In essence the argument consists of these propositions: (a) that, although a partner has no title to specific property owned by the partnership, he has a beneficial interest in each and every asset of the partnership; (b) that the deed of charge creates an equitable security over that beneficial interest; and (c) that the equitable security must operate by way of floating charge if the partnership business is to be carried on in a continuous and regular fashion. (at p686)

In support of its third proposition the appellant relies heavily on the distinction between a fixed charge and a floating security as it was elaborated by Romer L.J. in In re Yorkshire Woolcombers Association Ltd. (1903) 2 Ch 284 , at p 295 . According to his Lordship, a charge is a floating charge if (1) it is a charge on a class of assets of a company present and future; (2) that class is one which in the ordinary course of the business of the company would be changing from time to time; and (3) it is contemplated that, until some future step is taken by or on behalf of those interested in the charge, the company may carry on its business in the ordinary way as far as concerns the particular class of assets. (at p686)

Woolcombers (1903) 2 Ch 284 was affirmed on appeal by the House of Lords in Illingworth v. Houldsworth [1904] AC 355 . Lord Macnaghten (with whom Lord James and Lord Lindley agreed) expressed the distinction between a fixed or specific charge and a floating charge in the following terms (1904) AC, at p 358 :

"A specific charge, I think, is one that without more fastens on ascertained and definite property or property capable of being ascertained and defined; a floating charge, on the other hand, is ambulatory and shifting in its nature, hovering over and so to speak floating with the property which it is intended to affect until some event occurs or some act is done which causes it to settle and fasten on the subject of the charge within its reach and grasp." (at p686)

If the subject of the present charge was the property and undertaking of United there would be no doubt that the charge was of the floating variety. Otherwise United would be unable to dispose of its assets in the ordinary course of its business and Mutual would not have the benefit of a charge on future assets. (at p686)

But the problem here is that the property over which the charge has been given is not the undertaking, or any part of the general assets, of United, but its interest in the partnership. It is at this point that the appellants' argument breaks down, for I do not agree with the appellants' second proposition that the charge created an equitable security over United's beneficial interest in each and every asset of the partnership. (at p687)

In the deed of charge United charged "all its right title and interest in the partnership" to Mutual. Clause 1 stated that should United default or fail to fulfil any of the conditions in respect of the finance facilities the deed of charge "shall be deemed an automatic and absolute assignment and forfeiture in favour of Mutual Acceptance Limited of United Builders Pty. Ltd.'s interest in the said partnership, partnership property and assets". (at p687)

Both the judge at first instance and the Full Court held that, if this clause were penal in operation, it was severable from the charge itself and the charge was a valid simple charge (subject to any requirements of registration). As the question of severability was not fully argued before us, I accept what their Honours have decided. (at p687)

The vital question is: What rights passed to Mutual by virtue of the charge over United's right, title and interest in the partnership? The answer to this question is that, according to long established principle, a mortgage or charge over a partner's share or interest in the partnership does not vest any interest in the assets of the partnership against the other partners. What the mortgage or charge does is to confer an entitlement on the holder on dissolution of the partnership in relation to the partner's share of the partnership assets. Section 34 of The Partnership Act specifically provides that a mortgagee is on dissolution entitled to receive the mortgagor's share of the assets and that, for the purpose of ascertaining that share, he is entitled to an account from the other partners as from the date of dissolution. (at p687)

This principle does not in my opinion deny the existence of a partner's beneficial interest in each of the partnership assets, but this interest is of a special and non-specific kind (Canny Gabriel Castle Jackson Advertising Pty. Ltd. v. Volume Sales (Finance) Pty. Ltd. (1974) 131 CLR 321 , at pp 327-328 ; Federal Commissioner of Taxation v. Everett (1980) 143 CLR 440 , at pp 446-447 ). In Helmore v. Smith (1887) 35 Ch D 436 , it was recognized that a sheriff under a writ of fi. fa. could sell a partner's chattel interest in the partnership. But, as Lindley L.J. pointed out, the purchaser "has to find out what he has really had assigned to him, and that he can only do by a partnership account" (1887) 35 Ch D, at pp 447-448 . This in itself will virtually ensure a dissolution of the partnership. It is significant that The Partnership Act now provides that a writ of execution shall not issue against any partnership property except on a judgment against the firm (s. 26 (1)) and that the court may by order charge a partner's interest and his share of profits with payment of a judgment debt and by subsequent order appoint a receiver of that partner's share of profits and of any other money which may be coming to him from the partnership (s. 26(2)). What is more, a partnership may at the option of the other partners be dissolved if any partner suffers his share of the partnership property to be charged under the Act for his separate debt (s. 36(2)). (at p688)

The vital consideration is that the partner's interest is in truth a chose in action, which, as Everett acknowledged, "consists of a right to a proportion of the surplus after the realization of the assets and payment of the debts and liabilities of the partnership" (1980) 143 CLR, at p 446 . A mortgage or charge is considered to vest rights over that chose in action but it is not considered to carry any title to the specific assets until dissolution. (at p688)

It follows that so long as the partnership business is carried on, its assets may be disposed of in the ordinary course of that business free of any claim to title by the holder of a mortgage or charge over a partner's share in the partnership. What I have said applies to an individual who is a partner as well as to a corporate partner. A fixed charge is appropriate to create a security over a partner's share. It gives rise to a present security over the chose in action which is the partner's share. Although it creates no specific interest in the partnership assets until dissolution, this is not because the charge is dormant; it is because the rights conferred by the charge relate to the existing chose in action and that the security over the chose in action confers no entitlement to the assets of the partnership until dissolution. A fixed charge is equally appropriate to secure to a lender rights over a corporate partner's share in a partnership. (at p688)

In the result I consider that Mutual's charge was a fixed charge and that it did not require registration. (at p688)

Accordingly, I would dismiss the appeal. (at p688)