It is common these days for there to be a charging clause in a credit or finance agreement / guarantee.
A credit provider or financier will rely on the charging clause to lodge a caveat over land owned by the debtor / guarantor when a debtor is in default.
Once a caveat is lodged, what’s next?
A credit provider or financier who has a charging clause in a credit or finance agreement / guarantee:
- is a secured creditor of the debtor / guarantor;
- has security over land owned by the debtor / guarantor in the form of an equitable charge.
A credit provider or financier can enforce an equitable charge over land owned by the debtor / guarantor by applying to a court for the land to be sold by:
- the creditor provider;
- a receiver or receivers.
This is an effective way of recovering moneys owing to the credit provider.
Charging clause in a guarantee.
Financier lodged a caveat against land owned by the guarantor.
Guarantor became bankrupt.
Financier enforced equitable charge over land owned by the guarantor by applying to a court for the land to be sold by the financier.
Financier sold the land by auction. The land was sold at the auction for $860,000.00, $60,000.00 above the market value of the land.
Financier was paid in full (debt + interest + costs on a full indemnity basis) at the settlement of the contract of sale of the land.
The sale of the land generated surplus net proceeds in the sum of $128,018.30 (Surplus). Financier paid the Surplus to the bankruptcy trustee of the guarantor for the benefit of unsecured creditors of the guarantor.
Charging clause in finance agreement.
Financier lodged caveats against 3 parcels of land, one owned by the debtor solely and the other two owned by the debtor jointly with the debtor’s spouse (Properties).
Financier enforced equitable charge over the Properties by applying to a court for the Properties to be sold by the financier and receivers.
Court made orders that the Properties be sold by the financier and receivers.
The debtor entered into a payment arrangement with the financier to pay the amount owing to the financier together with interest and costs on a full indemnity basis to avoid the Properties being sold by the financier and receivers.
Article written by Christopher Yam.