A lender was first registered mortgagee ahead of the bank securing a $35m loan to a related company of the lender. A proposal was made to the bank by the directors of the company to convert the loan to equity and the mortgage was discharged and the lender went into liquidation. The liquidator challenged this on the basis that the lender received no consideration in respect of the discharge and sued on the loan outstanding, alleging it was secured by an equitable mortgage pursuant to the loan agreement irrespective of the discharge, which attached to the sale funds of the borrower’s properties. The liquidator sought an order freezing those sale funds, requiring them to be paid into court pending trial. The borrower previously gave undertakings to the court not to dispose or encumber its assets, to keep the liquidator informed of its sales and not to spend more than $100,000 without prior notice to the liquidator unless it was in the ordinary course of business. Essentially the borrower needed the proceeds from the sale of its completed development to enable it to complete a separate development because it had no other source of income and it would otherwise go insolvent.
The court noted that the sale of the completed development was by no means certain so there was a choice between avoiding a company’s insolvency by using funds that arguably were not its funds to deal with, in the hope that enough profit would be made on the second development to repay those funds.
The court found that the liquidator had a good arguable case that the borrower owed a significant debt to the liquidated company protected by an equitable mortgage (even though its registered mortgage was discharged). However the court declined to grant the liquidator an order freezing those funds on the basis that then the borrower would be unable to complete its second development and there was apparently no danger that a judgment in the liquidator’s favour at trial would be wholly or partly unsatisfied. It seems that the liquidator’s failure to quantify the debt and their failure to serve their evidence on time in their claim in debt was pivotal in the court’s decision to refuse the order.
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