Mining joint venture agreements often give a joint venturer a menu of up to 3 enforcement options when a co-venturer defaults in making required cash contributions:
- enforce a cross charge, appointing a receiver or selling up the defaulter’s interest;
- a default purchase option, exercising a right to buy out the defaulter’s interest at (or just under) fair market value, removing the defaulter from the venture; or
- dilution, reducing the defaulter’s interest by a percentage commensurate with the default amount.
Under the Personal Property Securities Act 2009 (Cth) (the PPSA), parties need to consider whether any of these rights are security interests which should be perfected by a registration on the Personal Property Securities Register. Perfection aims to prevent an interest losing priority, or failing altogether in a liquidation or administration.
The cross charge is certainly a security interest. The other two probably are, though opinions vary. This note focuses on the default purchase option.
A recent case – though it concerns neither mining joint ventures nor the PPSA – has again highlighted the likelihood that a default purchase option would be a security interest, and should be perfected by a registration.
Default purchase option: the test for security interests
A default purchase option would be a security interest if:
- it is an interest in personal property (note that mining tenements themselves are generally not ‘personal property’ for PPSA purposes, but other property subject to the default purchase option will be); and
- the transaction secures payment or performance of an obligation.
There is little doubt that the default purchase option is there to secure performance by the joint venturers of their obligations. The question is whether it is an interest.
‘Interest’ does not have a helpful definition in the PPSA, but there are good grounds for thinking that it must be either a proprietary interest, or something very like it.
Farrand, The Law of Options (1992) concluded from caselaw that an option does not create an equitable interest, in the sense of a right to call for specific performance, until the option is exercised; but that the option holder has a ‘contingent equitable or contingent proprietary interest’.
Some people have considered that a mere ‘contingent equitable or contingent proprietary interest’ is not enough to constitute an ‘interest’ under the PPSA; and so a default purchase option does not (until it is exercised) constitute a security interest.
Linfield Developments Pty Limited v Shuangxing Development Pty Limited  NSWSC 68
Linfield draws on a series of cases (mostly decided since Farrands’ book was written) and supports the opposite conclusion.
Linfield concerned land (and not personal property that would be subject to the PPSA). Linfield and SGX entered into a development agreement for a parcel of land to be acquired by SGX, and SGX granted Linfield a call option over the land, exercisable if SGX defaulted on its obligations. SGX ran out of money and raised a loan from ACFM, granting ACFM an equitable mortgage over the land, in breach of SGX’s undertaking to Linfield not to encumber the land.
Linfield exercised its option, but ACFM argued that its mortgage had priority.
The court held that Linfield’s call option gave it an equitable interest, though only from the time SGX actually acquired the land, which was also the time at which ACFM’s equitable mortgage arose. But, said the court, ACFM lost whatever priority it might have had by its conduct in colluding with SGX to take the mortgage in knowing breach of SGX’s undertaking to Linfield.
When did the equitable interest arise?
ACFM argued that Linfield’s equitable interest under the option did not arise until default occurred (and the option became exercisable), or until it was actually exercised. The court dismissed that argument (at ):
I do not think that is right. There is little doubt that, generally speaking, a conditional call option will create an interest in land at the time of the grant of the option. It is not necessary to wait until the condition has been triggered or the option exercised for the equitable interest to arise…
It is not really necessary to determine whether this is a substantive departure from the concept of ‘contingent equitable interests’ described by Farrands. The important point is that the courts – and Linfield is just one example – are now simply describing options as ‘equitable interests’, which is language very close to the terminology used in the PPSA.
What does this mean for mining joint ventures?
The typical default purchase option in a mining joint venture agreement is very similar to the call option considered in Linfield. Following the reasoning of the case, it is very likely to be an ‘interest’ that is a ‘security interest’ – not merely when default occurs or when it is exercised, but from the outset, when it is first granted in the joint venture agreement.
It would be prudent to make a registration under the PPSA to perfect an interest of this kind.