Briefing

Caveat conundrum: Federal Court finds royalty rights extinguished by tenement holder’s DOCA

In Kirkalocka Gold SPV Pty Ltd (subject to Deed of Company Arrangement) (Receivers and Managers Appointed) v SCL Aus Limited [2025] FCA 1490, the Federal Court considered the nature of the rights granted by a royalty deed and security provided by a consent caveat, finding the royalty right was extinguished by the tenement holder’s DOCA and ordering the removal of the caveat that purported to secure it.

Background

Kirkalocka Gold SPV Pty Ltd (Kirkalocka) operated the Kirkalocka Gold Project (the Project), situated within the area of Mining Lease M59/234 (Mining Lease).

On 21 December 2018, Kirkalocka, SCL Aus Limited (SCL) and another party entered a royalty deed (Royalty Deed), agreeing Kirkalocka (as grantor) would pay SCL (as royalty holder) a royalty of $35 per ounce of doré produced.

On 2 November 2023 (Appointment Date), receivers and managers and administrators were appointed to Kirkalocka. On 8 December 2023, Kirkalocka’s creditors resolved to enter into a deed of company arrangement (DOCA) with the administrators appointed as deed administrators.

The DOCA provided that repudiation of the royalty deed and removal of the caveat were conditions precedent to distribution of the Deed Fund.

The Court first considered whether the DOCA extinguished SCL’s rights and claims under the Royalty Deed. Then, in determining whether to order that the caveat be withdrawn, considered:

whether the Royalty Deed conferred a proprietary interest in the Mining Lease; and
whether the rights conferred by the Royalty Deed were sufficient to support a caveat under the Mining Act 1978 (WA) (the Mining Act).

The Royalty Deed

The Royalty Deed required Kirkalocka to pay SCL the royalty quarterly, based on production in each year. The Royalty Deed also provided:

Both Kirkalocka and SCL were entitled to lodge a consent caveat (in favour of the Royalty Holder as caveator) against the Mining Lease under s122A(2) of the Mining Act.
The rights and obligations under the Royalty Deed (including the obligation to pay the Royalty) were intended to run with the ownership of the tenement.
If:
(a) the mining lease was due to expire;
(b) Kirkalocka was not going to apply for renewal or wished to surrender the Mining Lease,
SCL had the right to apply for the relevant ground specified in the Mining Lease or take transfer of it for $1.

Did the DOCA extinguish SCL’s rights?

The DOCA provided for the extinguishment of all monetary claims against Kirkalocka. The Court determined that, pursuant to s444D of the Corporations Act 2001 (Cth) (the Corporations Act), the DOCA could extinguish monetary claims for damages for possible future breaches of an obligation that had not occurred by the date specified in the deed (i.e. the obligation to pay the royalty).¹ These claims were contingent claims, capable of calculation pursuant to s444D(1) of the Corporations Act.² Accordingly, they were extinguished and replaced with the entitlement to a dividend pursuant to the DOCA.

The Court noted that, to the extent the result of such a clause in a DOCA might be unjust, that could be dealt with by appropriate drafting of the DOCA or by applications to Court to set aside alternatively vary the DOCA.³ However, SCL brought no such application.

The Court then found that the obligations in the Royalty Deed relating inter alia to the entitlement to lodge a caveat pursuant to s122A(2) of the Mining Act were ancillary to and supportive of SCL’s central right to receive payments of money.⁴ Accordingly, those rights were released pursuant to the DOCA and replaced by SCL’s right to prove its contingent claim for damages.

Did the Royalty Deed confer a proprietary interest in the Mining Lease?

Pursuant to s444D(3) of the Corporations Act, proprietary interests are not extinguished by a DOCA and the effects of s444D(1).

Accordingly, if the Royalty Deed created a proprietary interest, SCL would have had an independent right, not extinguished by the DOCA, to maintain its caveat pursuant to the Mining Act.

However, the Court found that the Royalty Deed did not confer proprietary interests in the Mining Lease because:⁵

The Royalty Deed was subject to privity of contract; and
The mining tenement was personal property.

Privity of Contract

The Royalty Deed did not automatically bind successors in title. This was demonstrated by the provision in the Royalty Deed requiring execution of a deed of covenant by a transferee, before that transferee would be bound by the obligations of the Royalty Deed.⁶

Mining Leases are personal property

The High Court of Australia has determined that a mining lease is personal property, not real property.⁷ An owner of personal property (the Mining Lease) has an absolute right to use and dispose of that property as they think fit. Restrictions cannot be imposed on this absolute right to deal with that property – except by positive law or by the owner’s own conduct.⁸

Accordingly, the mere expression of contractual intention for the royalty right to ‘run‘ with the mining lease did not create a covenant that ran with the tenement.⁹

Requirements for a consent caveat under section 122A(1) of the Mining Act

Although not required to determine the outcome of the case, the Court considered whether certain other heads of power would have entitled it to remove the caveat.

The Court considered it could have used s122E(2)(a) of the Mining Act, which confers powers on a Mining Warden, to direct the removal of a caveat.¹⁰

As to whether the s122E(2)(a) power would have been exercised, the Court considered:¹¹

whether the circumstances validly permitted the lodgement of the caveat at the time it was lodged; and
whether those circumstances remain.

Regarding the circumstances at the time of lodgement, the Court noted the functional difference between s122A(1) and 122A(2) of the Mining Act.¹² Pursuant to s122A(1) the focus is on whether the caveator has an interest in the tenement. In s122A(2) the caveator need not have an interest, but there must be a connection with the interest of the tenement holder in the tenement.

The Court found SCL’s rights under the royalty deed were not connected in any meaningful sense to Kirkalocka’s interest in the Mining Lease; the royalty was a contractual right to payment determined by reference to doré produced from the Mining Lease. As a result, the Court accepted that a Royalty on the terms of the Royalty Deed was not a matter sufficiently connected with the interests of the tenement holder (Kirkalocka) in the tenement (the Mining Lease).¹³

The Court did accept Kirkalocka’s argument that the clause of the Royalty Deed which provided SCL an option to take transfer of the tenement if Kirkalocka intended to transfer the tenement or no longer intended to mine it gave rise to the entitlement for a caveat pursuant to s122A(2)(a)(ii).¹⁴

Implications

The decision is a reminder for parties to carefully consider how their rights, including royalty rights, are secured and that a DOCA may extinguish the rights of a royalty holder, even when the deed provides it is intended to bind future parties and supported by a caveat registered against the tenement pursuant to s122A(2) of the Mining Act. A party unfairly prejudiced by a DOCA may challenge the DOCA pursuant to the mechanisms of the Corporations Act and, following this decision, may need to do so if its royalty rights are unsecured.

Footnotes

at [94], [148].
at [107], [114] and [148].
at [116].
at [147], [149]-[150] and [158]-[159].
at [165].
at [166].
at [165] referring to TEC Desert Pty Ltd & Anor v Commissioner of State Revenue [2010] HCA 49; (2010) 241 CLR 576at [27]-[36], [39] and [47].
at [165] and [168].
at [168].
at [205]-[206].
at [207].
at [209].
at [210].
at [213] and [215].