The recent Court of Appeal’s decision in FTG Securities Limited v Bank of New Zealand deeming the assignment of a deed of priority invalid as between secured parties, highlights the importance of not overlooking boilerplate provisions in contracts: in this case, a prohibition on assignment.
Tuam Ventures Limited (Tuam) entered into loan agreements with Bank of New Zealand (BNZ) and (formerly) Canterbury Finance Limited (CFL), in connection with its development of a property in Christchurch. Both BNZ and CFL were granted general security agreements and mortgages over the property by Tuam and accordingly the parties entered into a deed of priority and subordination (Deed of Priority) to agree (as between them) how security proceeds would be distributed. The Deed of Priority provided BNZ’s position as first ranking secured party with a priority amount of $7,500,000 plus two years’ interest and costs and CFL was second ranking with a priority amount of $10,000,000 plus interest and charges.
CFL subsequently purported to assign its debt and security interests in Tuam to Crown Asset Management Limited, which then purported to assign the same to FTG Securities Limited (FTG). On neither of the purported assignments was BNZ’s consent sought to the assignment. This contradicted a provision in the Deed of Priority prohibiting assignment (by either secured party) without obtaining the other secured party’s consent to the form of the deed or contract of transfer or assignment.
In July 2009, Tuam defaulted on its facilities with BNZ. BNZ subsequently recovered over $12,000,000 from the distribution of Tuam’s assets. The case was brought by FTG in an attempt to enforce the Deed of Priority against BNZ.
In summary, the Court held that by failing to obtain BNZ’s consent, as expressly required by the Deed of Priority, neither assignment was valid as against BNZ, nor was FTG able to enforce or rely upon the Deed of Priority against BNZ.
In reaching its decision, the Court rejected a number of arguments made by FTG seeking to uphold the validity of the assignment. These included that the commercial purpose and intention of the prohibition, and of the Deed of Priority itself, meant that a failure to seek BNZ’s consent should not invalidate the purported assignment. It was further argued that the relevant provision could be seen as “conditionally permitting an assignment”, with BNZ not being able to arbitrarily or unreasonably withhold or delay its consent. However, the Court rejected these arguments and concluded that the plain meaning of the provision prohibiting assignment was clear – BNZ’s prior consent was required, and was not sought nor obtained.
FTG also argued that it acquired an indefeasible interest in the debts and securities of Tuam (including the Deed of Priority) when it obtained indefeasible title to the mortgage. This argument also failed, with the Court noting that a mortgage does not operate as a right to sue on separate contractual documents, and likewise that its existence cannot trump a contractual obligation to seek consent. Similarly, the transfer of a mortgage would not constitute a transfer of the underlying loan agreement and monies secured by that mortgage.
Restrictions on assignment are commonplace in contracts, and as this case illustrates, if not complied with can have costly implications for a creditor.
The Deed of Priority was clear in its requirement for consent to assignment being sought. This is not the first time a prohibition on assignment has been challenged in court, and the Court saw no policy reason as to why its view should differ in relation to an assignment by a secured party to a deed of priority.
In the present case, FTG knowingly took an assignment of the Deed of Priority in breach of the prohibition, although a Court is equally likely to take the same view where such a prohibition is simply overlooked.
If you have any queries in connection with the case or you like us to review your loan or security arrangements, please do not hesitate to contact a member of Lane Neave’s Banking and Finance team.
Business Law team
Gerard Dale, Claire Evans, Graeme Crombie, Evelyn Jones, Anna Ryan, Joelle Grace, Peter Orpin, Ellen Sewell, Matt Tolan, Carlo Wan, Kristina Sutherland, Jacob Nutt, Whitney Moore, Alex Stone, Ben Cooper, Lisa Catto
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