The importance of getting security and charges right

A recent Queensland Supreme Court decision highlights the importance to both banks and practitioners to prepare loan documentation carefully to ensure that appropriate security is taken. In Bank of Western Australia Limited v National Australia Bank Limited [2011] QSC 379, Bankwest and NAB were contesting the application of funds deposited with NAB by a borrower in circumstances where Bankwest held a fixed and floating charge over the borrower's assets. Bankwest alleged that, upon the borrower giving a guarantee to NAB without Bankwest's consent, Bankwest's charge became a fixed charge over these deposits and that NAB was required to account to Bankwest for the funds.

The court dismissed Bankwest's claim. It was held that Bankwest could not place itself in the position of holding a fixed charge over the term deposits prior to the borrower executing the guarantee to NAB, because the crystallisation of its charge occurred as a result of, and contemporaneously with, the execution of the guarantee.

This case highlights some of the difficulties faced by lenders in obtaining effective security. This is particularly so when the security given by the bank includes a fixed and floating charge, and the borrower also has accounts or lending arrangements with other financiers. It is important for the bank to be aware of what contractual rights other financiers have, and if necessary, enter into appropriate documentation to ensure that the security position of the bank is maintained. This is particularly so in relation to contractual rights of set-off, which will not necessarily be defeated by an earlier charge.