PPSA case: Prentice v Pitt

A new NSW Supreme Court case, about parents trying to keep their property out of the hands of their daughter’s bankrupt estate, briefly mentions the PPSA.  It says the PPSA would have defeated an argument the parents might have used to claim they had a charge over proceeds of the sale of the property. But did the point really need to be abandonned?

Prentice v Pitt [2015] NSWSC 262

Nicole Marjoribanks bought a property with her parents, Mr and Mrs Pitt, Nicole holding a 50% interest and the parents jointly holding the other 50%. Nicole borrowed her half of the purchase price from a bank, while her parents paid cash for their half. But the bank required a mortgage over the whole property, and the parents agreed to join in granting it.

Nicole and the Pitts entered into a co-owners Deed, in which they agreed that if the property was sold, the mortgage should be discharged from Nicole’s half of the sale proceeds.

Nicole went into bankruptcy. Prentice, her trustee in bankruptcy, sought to sell the property. Prentice said that full sale proceeds should be applied to pay out the mortgage, and he (as trustee) would take half of the balance, leaving the Pitts to claim against the bankrupt estate. The Pitts said that the mortgage should be discharged from Nicole’s half of the proceeds.

The court agreed with the Pitts. They were effectively sureties for Nicole’s debt, and as such were entitled to a right of exoneration, meaning amounts received by Prentice were subject to the Pitts’ equity and should be paid over to them, with the mortgage debt being discharged first from Nicole’s half share of the proceeds.

From a PPSA perspective, the court noted that the Pitts might also have had a claim based on a charge arising under the Deed, but had not pursued this claim as it would have been defeated by the PPSA. Although the argument was not pursued (and didn’t need to be, as the Pitts won on the exoneration point), it might be queried whether the Pitts needed to concede this point. Presumably it would have been argued that the Deed created a charge over the sale proceeds, to secure the promise to apply them in discharge of the mortgage debt. Would this really have been a charge that vested in Prentice for want of perfection? Possibly the Pitts could have argued that it was outside the scope of the PPSA under s8(1)(f)(ii): ‘the creation of an interest in a right to payment [the sale proceeds] … in connection with an interest in land’.

Digest of PPSA cases

I have added the case to my digest of reported Australian cases – please go to PPS cases for a link to the digest.

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