Lending and taking security in Australia: overview
A Q&A guide to lending and taking security in Australia. The Q&A gives a high level overview of the lending market, forms of security over assets, special purpose vehicles in secured lending, quasi-security, negative pledge, guarantees, and loan agreements. It covers creation and registration requirements for security interests; problem assets over which security is difficult to grant; risk areas for lenders; structuring the priority of debt; debt trading and transfer mechanisms; agent and trust concepts; enforcement of security interests and borrower insolvency; cross-border issues on loans; taxes; and proposals for reform.
To compare answers across multiple jurisdictions, visit the Lending and taking security in country Q&A tool.
This article is part of the global guide to finance. For a full list of contents visit www.practicallaw.com/finance-guide.
Overview of the lending market
2013 was a mixed year for Australia's loan markets. The first half of 2013 was characterised by moderate loan volumes, which were driven by a lack of borrower demand rather than constrained bank liquidity. Business and consumer confidence was relatively restrained with borrowers continuing to seek to diversify their sources of funding through the debt capital markets (including the Australian bond market and international markets such as the US Term Loan B market).
In the third quarter of 2013, favourable borrowing conditions continued, with banks hungry for business in a low growth environment, resulting in significant margin compression and banks offering favourable covenant packages for refinancings and new money deals. In the fourth quarter, however, a surge of activity delivered strong loan volumes, with 12 deals in excess of AUD1 billion, spread amongst a variety of sectors including:
Most of those transactions were refinancings, rather than new money deals, with the major exceptions being some significant dividend recapitalisation transactions.
While several very large project and infrastructure financings in the energy and resources sector were executed in 2012, conditions for new project finance and merger and acquisition activity has remained soft and there has not been a lot of event-driven activity.
Towards the end of 2013, the syndicated debt markets have been more active, but there remains a significant number of transactions completed using bilateral loan and club loan (bilateral loans on largely common terms as between the financiers) structures. There has also been an increase in bank support for private property developers on residential construction projects, together with a more active mezzanine debt and preferred equity market.
Forms of security over assets
Australia has a federal system and power is shared between the federal government and the government of each State or Territory. Australia has six States and two primary mainland Territories, plus some other minor territories. The definition of real estate and a financier's ability to take security over it varies depending on the State or Territory in which the property is located. For example, in New South Wales (NSW), real estate includes:
Messuages (that is, dwelling houses).
Hereditaments (that is, inheritable land).
Land held under building licences.
Any lease with a duration of over 21 years.
Most land in Australia is registered under a system known as the Torrens system. Each State and Territory operates its own Torrens system (including its own register) for land located in its jurisdiction. Registration in the Torrens system creates title to the relevant parcel of land. Consequently, on a sale of Torrens title land it is registration of a transfer, not execution of the instrument of transfer, that passes title to the purchaser. The main types of tenure are freehold estates (that is, freehold ownership), leasehold estates and crown land. The relevant State or Territory register records details of the land and any registered interests in that land (for example, mortgages, leases and easements). Some land in Australia is not registered under the Torrens system, for example, land known as "old system" land and also unalienated Crown land.
An important and fundamental principle of the Torrens system is that the register is paramount, the purpose of which is to save persons from "going behind the register" to investigate the history and validity of the title to the interest in land. Accordingly, the registered proprietor of an estate of interest in land obtains what is known as an "indefeasible" title to its interest. This means title is not defeated by existing defects in title prior to registration or other unregistered interests. Importantly for financing transactions, the registered proprietor includes a mortgagee of Torrens land. There are some limited exceptions to indefeasibility, including prior registered interests, fraud, easements and surveying errors, among others.
Common forms of security
Generally, the most common form of security granted over real estate is a registered real property mortgage. A Torrens title mortgage operates as a statutory charge on the relevant lot or interest in the land for the amount of debt or liability secured, once registered (see below, Formalities). By contrast, a common law mortgage over "old system land" (that is, not Torrens land) takes effect as a conveyance or transfer, subject to a right of the mortgagor to seek a re-conveyance on payment of the debt at the required time, known as an "equity of redemption".
While it is usual for a general security agreement granted by a grantor to a lender to secure all assets of the grantor including land, the PPSA excludes interests in land. Therefore, any PPSR registration in relation to the secured property the subject of the general security agreement will not perfect the security interest in relation to land. To achieve the benefits of indefeasibility in relation to the land, a lender would strongly prefer a registered mortgage of land (registered on the Torrens register) over an unregistered general security.
The following formalities must be complied with in relation to registered mortgages of Torrens title land:
Registered mortgages. A mortgage is registered on recording the particulars in the freehold land register. To be registered, a mortgage must be validly executed, stamp duty paid where required and include a description that sufficiently identifies the:
land to be mortgaged;
debt or liability secured by the mortgage; and
interest to be mortgaged.
The parties must also observe certain other formalities for registration, each of which vary according to the local requirements in each jurisdiction. For example:
the prescribed registration forms for instruments of mortgage vary by size, ink, printing and appearance;
execution requirements vary by jurisdiction (including requirements for witnessing the execution of a registered mortgage and certain requirements to take reasonable steps to ensure that the person who executes an instrument of mortgage as mortgagor is identical to the person who is, or who is about to become, the registered proprietor of a lot or an interest in a lot);
the relevant certificate(s) of title must accompany the mortgage in some States, but not in others where paper certificates of title are not issued).
Mortgages of lease. For leasehold interests in land, a mortgage of lease is commonly used. A mortgage of a sub-lease is less common.
Personal property in real estate financings
Section 8(1)(f)(i) of the PPSA provides that the PPSA does not apply to the creation or transfer of an interest in land. Accordingly, if a party grants a security interest solely over land, this security interest will not be registrable on the PPSR (although the State-based Torrens registration rules continue to apply). However, the PPSA is not irrelevant to real estate financings because personal property is often an important and valuable part of the collateral package securing the finance. In particular, where financiers wish to take specific security over certain personal property such as rental accounts, intellectual property (IP) relating to the property or goods on the property, or general security over all the assets of the borrower, they will wish to ensure their security over such property is properly perfected under the PPSA.
Tangible movable property
Tangible movable property
The PPSA is a law with respect to security interests in personal property. Section 10 of the PPSA defines personal property very widely, as any kind of property other than land, or a right, entitlement or authority that is granted by a law of the Commonwealth, State or a Territory and declared by that law not to be personal property for the purposes of the PPSA. In section 8, the PPSA also lists certain specific exclusions (namely, interests to which it does not apply) even if those interests are interests in personal property. The effect of these provisions is that generally the PPSA applies to all security interests in both tangible and intangible personal property, for example, tangible property (goods), financial property (chattel paper, currency, documents of title, investment instruments, negotiable instruments), intermediated securities, intellectual property and so on.
Common forms of security
Following the introduction of the PPSA, security over tangible movable property is generally created under either:
A general security agreement over the general assets of a grantor, including tangible movable property and other property such as intangible property.
A specific security agreement over specified goods.
Security over tangible movable property which is stock-in-trade ("inventory" under the PPSA) is usually a circulating security interest over fluctuating assets, known as "circulating assets". Circulating assets are collateral over which the secured party has given the grantor authority to transfer the collateral in the ordinary course of the grantor's business free of the security interest. In addition, the PPSA deems certain assets to be circulating assets, unless special conditions are satisfied.
A security interest over collateral that secures the obligations of a grantor to pay the purchase price of the collateral is a purchase money security interest (PMSI) under the PPSA. Other examples of PMSIs include the interest of a supplier on retention of title terms, and the interest of a lessor of goods under a "PPS Lease". PMSIs are significant in the PPSA environment as they afford their holder a form of super-priority (that gives that secured party priority over the relevant collateral in priority to even a prior-perfected secured party).
PPSR registration. Following the implementation of the PPSA, security interests over tangible movable property are perfected by the registration of an electronic financing statement (an electronic notice that contains certain information about the security provider, the security holder and the secured property) on the PPSR. A financing statement should be registered as soon as possible as long as there is a reasonable belief that the security has or will be granted. Secured parties may pre-register a financing statement before financial close, and in many cases it is advantageous to do so because of the general priority rule that the earlier registration prevails over a later registration.
There are strict timelines for registration under the PPSA. In the case of a corporate security provider, a financing statement must be registered within 20 business days of the grant of the security interest. Specific timelines apply for PMSIs (see below).
It is not mandatory to perfect a security interest under the PPSA. However, if a security interest is not perfected (or not perfected in a timely manner), it loses priority to another (perfected) security interest in the same collateral. Importantly, a security interest may be ineffective on the insolvency of a corporate grantor if not registered within 20 business days of the date on which the relevant security agreement comes into force (if no other method of perfection is used).
Secured parties must choose one class of collateral for each financing statement they register. There are wide collateral classes such as "all present and later-acquired property" and narrower classes such as "motor vehicles", "watercraft", "aircraft", "financial property" and "intangible property". Some tangible movable property is "serial numbered property" for the purposes of the PPSA (aircraft, aircraft engines and helicopters, watercraft and motor vehicles). Registration rules differ depending on the type of serial numbered property. Commercial serial numbered property may be registered by serial number, whereas consumer motor vehicles, aircraft and watercraft must be registered by serial number.
If a security interest covers more than one collateral class multiple financing statements should be registered.
A financing statement must contain a description of the collateral that complies with the PPSA (and the PPS Regulations).
Under the PPSA, financing statements are registered in respect of property and not security interests. This means that, as long as a financing statement adequately describes the property which is the subject of a security interest, a separate financing statement does not need to be registered for each subsequent security interest taken by the same security holder in the relevant property.
See also Question 29.
Purchase money security interests must be perfected by registration. The financing statement must specify that the collateral is a PMSI.
If the collateral is inventory, the PMSI must be registered before the collateral is supplied to the grantor (if the inventory is goods), or before the security interest attaches (for other inventory).
If the collateral is equipment (not inventory), the PMSI must be registered within 15 business days of the secured party supplying goods to the grantor, or within 15 business days of the security interest attaching (for collateral other than goods).
A properly-registered PMSI has super-priority over earlier registered security interests which are not PMSIs.
Company shares are the most common form of financial instrument over which security is granted.
Common forms of security
A general security agreement is a common form of security over shares, under which the security provider usually grants security over all its assets (including any company shares it owns). Alternatively, a security provider can grant a specific security agreement to provide security specifically over company shares.
Creation and perfection
Company shares are considered personal property for the purposes of the PPSA. Generally, security interests over shares may be perfected either by control or by registration. It is preferable to perfect by control because the PPSA provides that a security interest perfected by control has a higher level of priority protection than a security interest perfected by registration.
Perfection by control: shares in unlisted companies. A security holder can perfect its security over unlisted shares by control if the share issuer registers the secured party as the registered owner of the shares.
For a security interest over certificated shares in an unlisted company, the secured party can perfect by control by holding share certificates and being able to transfer the shares to itself or another person or otherwise deal with the shares. The ability to transfer the shares may be facilitated by collecting blank transfer forms for those shares signed by the security provider but with the details of the transferee left blank.
In the case of a security interest over uncertificated shares in an unlisted company, a secured party will have control if there is an agreement in force between the secured party and the grantor of the security interest whereby the secured party is able to initiate or control sending instructions by which the shares can be transferred or otherwise dealt with. A secured party may also have control if a registered owner of the shares who is not the grantor or debtor acknowledges in writing that it holds the shares on behalf of the secured party and there is an agreement under which the secured party or its nominee is able to initiate or control the sending of electronic messages regarding dealings with the shares.
Perfection by control: shares in listed companies. Shares in Australian Securities Exchange (ASX) listed companies are uncertificated and are evidenced in a company's electronic register. The shares are transferred through the Clearing House Electronic Subregister System (CHESS). A secured party can perfect its security over such shares by entering into a CHESS security deed with the CHESS participant to minimise the risk of a security provider transferring shares that are subject to a security interest without the secured party's consent. Under this agreement, the CHESS participant entity agrees (among other things) to hold the shares subject to the secured party's order.
A secured party may also have control if the shares are maintained in the secured party's name or in the name of another person (who is not the grantor or debtor), and that person acknowledges in writing that it holds the shares on behalf of the secured party.
Perfection by registration. Technically, where the secured party has perfected its security interest by control, it is not necessary to perfect by registration as well but it is common practice to perfect by registration of a financing statement on the PPSR in case control is inadvertently relinquished.
Claims and receivables
Claims and receivables
The most common forms of claims and receivables over which security is taken are debts (such as secured or unsecured loans or book debts such as trade receivables) bank accounts and contractual rights.
Common forms of security
Before the implementation of the PPSA, the most common forms of security taken in Australia over claims and receivables, would have been a fixed charge, floating charge or mortgage of contractual rights (that is, an assignment of the relevant rights by way of security). In respect of either a fixed charge or a floating charge, a fixed charge would have been more advantageous given that:
Fixed charges generally had a higher priority than uncrystallised floating charges under the Corporations Act and general law.
Certain claims (such as receiver's costs and employee entitlements) had priority, under the Corporations Act, over a floating charge on enforcement of the charge or the security provider's insolvency.
A floating charge (as opposed to a fixed charge), created shortly before a company's liquidation could have been void in certain circumstances set out in the Corporations Act.
Under the PPSA, security will generally be created under either a general security agreement (over the general assets of a grantor) or a specific security agreement (over specified assets, such as any particular claims or receivables). However, the distinction between a fixed charge or floating charge is generally no longer applicable for personal property under the PPSA and the security will simply take effect as a PPSA security interest.
However, the PPSA concept of a "circulating asset" has preserved certain features of the old floating charge security device, including those limitations listed above. To the extent that the secured party has expressly or impliedly authorised the grantor to transfer the claims and receivables in the ordinary course of its business free of the security interest, then the collateral will be treated as a circulating asset and the security interest will be a circulating security interest.
Regardless of whether or not the secured party has granted such an authority, certain assets, such as accounts, are deemed to be circulating assets unless both of the following criteria apply:
An effective registration of the security interest discloses that the secured party has control over the collateral.
The secured party has control over the collateral. Whether a secured party is in fact exercising control over the account can be a difficult issue to determine and will be determined as a question of fact. The PPSA specifically states that control may occur if the secured party has control within the ordinary meaning of that term.
However, irrespective of whether or not specific collateral constitutes a circulating asset, under the PPSA the grantor can deal with claims and receivables in the ordinary course of its business. The PPSA allows third parties to take assets free of any security interests granted by the grantor, if they are sold in the ordinary course of the grantor's business of dealing with property of that kind. However, to avoid default occurring under any existing security agreement entered into by the grantor, the grantor must also ensure that the assets are the subject of a specific permitted disposals covenant.
Creation and perfection
The security interest over a claim or receivable is generally expressly created under either a general security agreement or a specific security agreement. If such an agreement has been entered into and the secured party creates an effective registration on the PPSR for the security interest, then the secured party will have perfected its security interest. Under the PPSA, a security granted by a company should be registered within 20 business days (or a shorter time if the security interest is a purchase money security interest (PMSI)) of the date on which the relevant security agreement comes into force.
Under the PPSA, a security interest is also deemed to be created following the transfer of an account to a transferee (with the transferee being the secured party). While this constitutes a registrable security interest under the PPSA, it arises in the context of a sale of a claim or receivable rather than the granting of security in the context of a secured lending. Under s340(4A) of the PPSA, the collateral constituted by the account which is transferred would not be treated as a circulating asset.
Secured party is not the deposit holder
Before the inception of the PPSA, security over cash deposits in bank accounts was generally taken by way of a charge or by making the relevant bank accounts subject of a mortgage. Now that the PPSA is operative, security over cash deposits in bank accounts is generally taken under a specific security agreement in respect of the relevant bank accounts. It is customary for bank accounts that are the subject of such security to be held with an authorised deposit-taking institution (ADI). Where the secured party holds a security interest over an account maintained by another ADI (that is not the secured party):
The security interest in that ADI account is most commonly perfected by registration of a financing statement on the PPSR.
It is market practice in Australia for the secured party to enter into an agreement with the ADI in respect of that security interest (often known as an account bank deed). Without such an agreement, any security interest which the ADI takes in respect of the account will have priority over the secured party's security interest (even if perfected by registration) because the ADI is said to have perfected its security interest by control over the account (section 57(1), PPSA). Even where the ADI holds no such security interest capable of perfection by control, rights of combination or set off which the ADI may have in respect of the depositor would likely prevail as against the secured party's registered PPSA security interest, hence the need for an account bank deed.
Secured party is the deposit holder
While security over rights in respect of bank accounts can be granted to a person other than the bank with whom the relevant account is held, prior to the PPSA there was some uncertainty as to whether a charge or a mortgage over a bank account in favour of the bank with whom the account is held was effective as a security. This is because it was unclear whether a bank could take security over its own indebtedness as it could be regarded as "conceptually impossible" to do so (Broad v Commissioner of Stamp Duties  2 NSWLR 40 at 46). Following the decision in Cinema Plus Ltd (Administrators Appointed) v ANZ Banking Group Limited  NSWCA 195 (which adopted the position taken in the House of Lords case of Re Bank of Credit and Commerce International SA (No 8)  AC 214), an alternative view arose that security over a bank account created in favour of the bank with which the account is held is effective.
The PPSA clarifies the position where the secured party taking security over deposits in bank accounts (by way of a specific security agreement or other document) is also the deposit holding ADI. An ADI can take a security interest in an account that is kept with the ADI and, subject to the attachment rules under the PPSA, the security is automatically perfected by control.
Under the PPSA a holder of currency takes the currency free of any security interest if the holder has no actual or constructive knowledge of the security interest. Therefore, the practical effectiveness of security over cash contained in bank accounts depends on the extent to which the secured party can exercise control over cash moving out of the account that is the subject of the security.
The most common forms of IP over which security interests are granted are trade marks, patents, registered designs and copyright.
It is also possible to grant security interests over certain IP agreements (for example, trade mark licences), if the agreement does not prohibit the grant of security interests. However, a security interest over an IP agreement is subject to the terms of the agreement. For example, a security interest granted by a licensee/borrower over an IP agreement may be of little value to a financier if the licensor has the right to terminate the agreement when the licensee encounters financial difficulties.
Common forms of security
Following the introduction of the PPSA, the most common forms of security granted over IP are general security agreements and specific security agreements.
Under the PPSA, any security interest over IP (including an IP agreement) must be registered on the PPSR to preserve its priority. IP is generally serial numbered property for the PPSA, so if it is consumer property it must be described by serial number in the financing statement (if it is commercial property this is optional).
Under the PPSA it is generally necessary to register a security interest granted by a company within 20 business days of the date on which the relevant security agreement comes into force (if no other method of perfection is used).
In addition, specific registers exist for certain types of IP (patents, registered trade marks and registered design rights) and security interests can be recorded in those IP registers. Those registers are maintained by the Intellectual Property Office of Australia (IP Australia).
An application to record a security interest against a registered trade mark must be made by both the security interest holder and the registered owner, and submitted to IP Australia. The security document itself is not required to be filed with IP Australia.
An application to register a security interest against a patent or a registered design may be submitted by either party and should be submitted to IP Australia. IP Australia requires evidence of the interest being registered (usually a copy of the document creating the security).
Any security interests existing before the commencement of the PPSR on 30 January 2012 will not be automatically recorded against the PPSR (except security interests which were registered on the ASIC Register of Company Charges and automatically migrated to the PPSR). For example, security interests previously recorded against IP Australia's registers have not been automatically migrated onto the PPSR. Accordingly, such earlier security interests must be separately recorded on the PPSR.
Security can be granted over most types of assets, including future assets, fungible assets, intangible assets (such as contracts, debts, shares, and other securities), insurance, and IP rights. As Australia is a common law jurisdiction, the most common forms of security over these types of assets (before the commencement of the PPSA) were fixed and/or floating charges.
The introduction of the PPSA has affected the way that security over personal property is taken. In particular, distinctions between the legal form of security transactions have largely been removed and effective security is created by granting a security interest in the relevant property, including future property. For more information, see Question 29.
See above, Future assets.
See above, Future assets.
Release of security over assets
Common forms of security (other than real property mortgages), such as general security agreements and specific security agreements, are usually released either by:
A deed of release of secured property between the security provider and the security holder.
A deed poll of release given unilaterally by the security holder in favour of the security provider, if there is no reservation of rights by the security holder.
In addition to the deed or deed poll of release, the appropriate supporting de-registrations of the security from the register on which the original security was recorded, should be effected.
In the case of personal property, the secured party must discharge a financing statement registered on the PPSR electronically.
In the case of real property, the secured party must provide the discharge of mortgage form for the relevant state or territory in which the mortgage is registered. The discharge of mortgage form must be lodged at the land titles office for that state or territory.
Deeds and deed polls of release must be both:
Executed as a deed, sealed (whether actual sealing, or deemed sealing under various statutory provisions) and delivered.
Discharges of real property mortgages must be in the form prescribed by the relevant State's or Territory's land titles office. The requirements vary between States and Territories, including specific requirements as to:
The form of the discharge and any annexure (which must be the current version of the form and in certain circumstances must be licensed for use).
How the discharge is printed (for example Western Australian discharges must be printed double sided, but New South Wales and Queensland discharges must be printed single sided).
Execution of the discharge, including with respect to the exact form of language to be used in the execution clause, discharges executed under power of attorney, and requirements for witnesses and identification of signatories.
Releases of financing statements are simply performed electronically on the PPSR by updating the PPSR using the relevant financing statement's registration number and the token required to access that financing statement.
Special purpose vehicles (SPVs) in secured lending
It is not common practice to take security solely over the shares of an SPV that has been set up to hold certain of the debtor's assets. Generally, financiers also require direct security over those assets. The primary reasons for this are to:
Ensure control over assets and the ability to maximise the proceeds of realisation of the security.
Mitigate competing claims by ensuring first ranking security (with appropriate negative pledge covenants) over the assets and cash flows of the SPV (and thereby minimise the risk of structural subordination).
Minimise administration risk. Administration risk describes the risk for a financier that its security becomes subject to a moratorium (section 441A, Corporations Act) if an administrator is appointed to the company. This risk is reduced if the financier has security over all, or substantially all, of the company's assets (which may not be the case if security is simply taken over a shareholding in the SPV).
Where possible, a financier will also take security over the shares in an SPV to give additional flexibility in enforcement.
Certain quasi-security arrangements are available. However, since the introduction of the PPSA, distinctions between the legal form of security transactions have largely been removed and nearly all of the quasi-security structures described below are now treated as security interests (although specific cases in relation to the correct characterisation of most quasi-security arrangements have not yet been considered by the Australian courts in a PPSA context). In addition, before adopting such quasi-security arrangements, all applicable stamp duty and taxes must be carefully considered as these can be significant (see Question 29).
As quasi-security arrangements have now largely been re-characterised as a grant of security, a security holder under one of these types of quasi-security arrangements must perfect its security interest over the relevant collateral. Perfection is most commonly achieved by registering a financing statement on the PPSR within a specified timeframe. Under the PPSA, some of these arrangements (such as hire purchase arrangements and retention of title arrangements) are now characterised as purchase money security interests (that is, security interests securing the purchase price of the collateral), which give priority advantages to the security holder if the security holder complies with certain timeframes for perfection of the security interest (see Question 3).
Importantly, under the PPSA, financing statements are registered in respect of property and not security interests. This means that, as long as a financing statement adequately describes the property which is the subject of a security interest, a separate financing statement does not need to be registered for each subsequent security interest taken by the security holder in the relevant property (for example, one financing statement can perfect multiple supplies of goods under a retention of title arrangement). This means that a single financing statement can be registered at the outset of a trading relationship to cover all supplies made under a standard set of terms. However, a separate financing statement is required if a subsequent security interest is taken by a different security holder over the same property). See Question 29 for more information on the PPSA.
The various quasi-security (now generally treated as security) arrangements commonly used in Australia are set out below.
Sale and leaseback
This is an arrangement where one party sells property to a buyer, who leases the property back to the seller at an agreed amount (usually equivalent to the purchase price plus interest) for a specific period (usually the economic life of the asset) with a repurchase option. If the lessee defaults, the lessor retains the asset.
This arrangement allows businesses to sell their trade debts to raise finance, or to limit their administrative duties or bad debt losses. A company usually sells its receivables at a discount to a factoring company in return for immediate cash payment (invoice discounting). A company's debtors continue to deal with the company but are required to make payments into a nominated bank account controlled by the factoring company.
This is when a credit institution acquires an asset and leases it to a lessee immediately before, or at the outset of, the hire purchase. The purchase price is paid in instalments to the finance institution (not the original vendor) who retains the legal title until full repayment.
Retention of title
A retention of title clause in the assignment contract provides that while possession of the asset may pass to the assignee, legal title only passes on full repayment. A valid clause gives the seller priority over secured creditors on the buyer's insolvency (see Question 21).
The following structures are also used:
Sale and repurchase agreements (reciprocal purchase agreements (repos)). An entity transfers absolute title in a fungible asset (typically a security) to another entity. In return, the transferee undertakes to transfer the security, equivalent to the original security, back to the transferor at the end of the transaction. On default, the parties' respective obligations terminate and are offset.
Flawed asset/security over deposit (SOD). The flawed asset contractual arrangement restricts the depositor (borrower) from withdrawing money from the deposit account, held by the financier, during the loan term. The financier can use the funds in the account to set off amounts owed to it by the borrower. The SOD (also known as a chargeback) is a security in favour of a financier over a cash deposit held with that financier. The impact of the PPSA on these types of arrangements remains to be seen, however clause 12(2) of PPSA indicates that these types of arrangements are intended to be covered by the PPSA regime. It is therefore likely that the Australian courts will consider a flawed deposit arrangement to be a security interest requiring perfection.
Where the financier holds a security interest over an account maintained by another ADI (not the financier), the security interest in that ADI account is most commonly perfected by registration of a financing statement on the PPSR. Where the financier taking security over cash deposits in a bank account is also the deposit holding ADI, the financier's security interest in the bank account that is kept with the financier, subject to the attachment rules under the PPSA, is automatically perfected by control. See Question 6 for more information on perfection of security over cash deposits.
Right of set-off. This contractual arrangement allows a financier to consolidate a loan, or set off the loan balance, against money in the borrower's bank account. The PPSA does not deem this type of arrangement to be a security interest.
Specific and irrevocable power of attorney. This enables a financier to do something that the borrower fails to do. It is commonly used where the borrower has a right to call for more capital from a parent entity. The financier, as attorney, can call on the capital and use the funds to pay the outstanding debt.
Security deposit. A supplier (pursuant to a supply agreement) or a landlord (pursuant to a lease) may require a security deposit to be paid to secure the customer or the tenant's ongoing obligations (for example, the payment of rent or to make good any damage to property).
Guarantees are very common in Australian financing transactions. A guarantee takes effect as a secondary obligation that depends on the existence of a primary obligation (for example, under a loan contract). Often, financiers to a corporate group will require cross guarantee from all obligors in the group (that is, each guarantor guarantees the performance of each other guarantor's obligations).
By contrast, an indemnity is a primary liability. It is a separate and independent obligation to make good, by payment of money, specified loss suffered by the beneficiary of the indemnity. Typically, financiers insist borrowers provide indemnities to supplement the guarantee and give full effect to the parties' intentions that the financier be provided adequate credit support irrespective of the efficacy of the primary liability.
The usual principles of the law of contract apply to guarantees and indemnities (including the requirements that there be an agreement, intention to create legal relations, privity, consideration and so on). There are also formalities in some States and Territories, including a requirement a guarantee be in writing and signed by the guarantor. The Consumer Credit Code also specifies certain formalities for guarantees by natural persons in respect of certain credit contracts.
Guarantees may be discharged by operation of law in certain circumstances. For example, where the underlying loan contract is varied and the variation may prejudice the guarantor, such as an increase in the guaranteed monies without the guarantor's prior consent being obtained either in the initial guarantee or at the time of the increase. There are many circumstances in which a guarantee might be discharged by operation of law and, consequently, usually the market has developed generally accepted provisions that parties incorporate into guarantees to prevent guarantors being released from their guarantee obligations unexpectedly. Well-advised financiers usually insist on supplementing their contractual rights under those provisions by obtaining confirmations of the effectiveness of the guarantee from all guarantors, whenever such circumstances arise.
Risk areas for lenders
A company registered in Australia can only provide financial assistance to a person to purchase shares in the company, or the shares of the company's holding company (even if that holding company is incorporated outside of Australia), if:
That assistance does not materially prejudice the company or its shareholders, or the company's ability to pay its shareholders.
That assistance is approved by shareholders under a process known as a "whitewash".
There is a special exemption available under the Corporations Act (these are rarely available in a typical acquisition financing transaction).
If a financial assistance issue arises on a transaction, parties typically undertake a whitewash. The whitewash involves passing a resolution at a general meeting of the company, which approves the giving of financial assistance. The resolution must be either:
A special shareholders' resolution where the person acquiring the shares (or its associates) cannot vote.
A resolution by all of the ordinary shareholders.
If immediately after the acquisition the company will be a subsidiary of a listed domestic company, the financial assistance must be approved by a special resolution passed at a general meeting of that company.
In addition, the financial assistance must be approved by a special resolution passed at a general meeting of the company to become the holding company, if immediately after the acquisition the company will have a holding company that both:
Is a domestic company but not listed.
Is not itself a subsidiary of a domestic company.
Notice of all shareholders' resolutions must be lodged with the ASIC at least 14 days before the provision of the financial assistance. Any special resolution passed must be lodged by the company, listed domestic company or holding company within 14 days after it is passed.
Directors of Australian companies have duties, under statute and common law, to act in good faith, in the company's best interests, and for a proper purpose. When determining if the transaction is sufficiently beneficial to the company, both direct benefits (such as the company's ability to use the financing facility) and indirect benefits (for example, if the company requires the ongoing support of other companies within the group) can be considered. Importantly, each company must derive sufficient benefit itself when entering into a finance transaction. It is not sufficient that the benefit is derived by the corporate group (of which the company is a member) as a whole or by other members of its corporate group.
It is possible to reduce the risk of the transaction being voidable under corporate benefit rules by obtaining shareholders' approval for the transaction. In addition, a director of a corporation that is a wholly-owned subsidiary of a body corporate is taken to act in good faith in the best interests of the subsidiary, if the director acts in good faith in the best interests of the holding company, provided that certain conditions are satisfied. One of those conditions is that the constitution of the subsidiary must expressly authorise the director to act in good faith in the best interests of the holding company.
Loans to directors
There are certain restrictions for a company making or guaranteeing a loan to its directors or the directors of a related company:
Related party benefits. If the company is a public company a loan to a director would constitute the giving of a related party benefit (for further restrictions on related party benefits, see below).
Commercial benefit. Whenever a financier makes funding available, the financier must satisfy itself that there is sufficient commercial benefit. Absence of adequate commercial benefit to a company which enters into an agreement means that the agreement may not be enforceable against that company.
Directors' duties. A board of a company proposing to grant a loan to a director must exercise their powers and discharge their duties both:
in good faith in the best interests of the company and for a proper purpose; and
with the degree of care and diligence that a reasonable person would exercise if they were a director of the company in the company's circumstances.
The board must consider the company itself and the benefit it might receive and the detriment it might suffer. To commit a company to an agreement that is not in its best interest is a breach of the directors' fiduciary duties.
If there is no commercial benefit to the company or the benefit is inadequate, having regard to the risk that it assumes, then a court may find that the agreement is unenforceable with respect to that company.
Where loans conflict with a fiduciary duty that a director owes, a range of remedial orders will be available to the company, including compensation and pecuniary penalty orders.
Further, in certain circumstances, a company can be subject to fringe benefits tax (currently at a rate of 46.5%) on the value of loan benefits provided to a director. Also, where a private company makes a loan to a director that is a shareholder (or an associate of a shareholder), the loan may give rise to an assessable deemed dividend in the hands of the director (or the associate).
Individuals are largely protected from being charged excessive rates of interest under unfair contract terms regulations. These statutory protections, however, do not extend to corporate borrowers. In these circumstances, the adequacy and appropriateness of the interest charged by one corporate party to another are governed by the terms of the relevant contractual arrangements and the application of the common law.
The approach of the common law is particularly relevant in circumstances where a default rate of interest is charged (that is, a higher rate of interest is charged under, for example, a loan agreement where an event of default has occurred). Higher rates of interest in such circumstances are vulnerable to being deemed a penalty if it can be shown not to be a genuine pre-estimate of the damage which could result from the default.
A public company, or an entity that the public company controls, cannot give a financial benefit to a related party of the public company unless the public company or entity obtains the approval of the public company's members in accordance with the provisions of the Corporations Act and either:
The public company gives the benefit within 15 months after the approval.
The giving of the financial benefit falls within defined exceptions set out in the Corporations Act. Some of these exceptions are where the financial benefits are given on arm's length terms or given to or by a closely held subsidiary.
See also Question 23.
A financier's environmental liability in relation to its security over land depends on the law of the relevant state or territory.
In general, there are specific liability exemptions for mortgagees in possession of land, in relation to:
Past contamination (occurring before the mortgagee gained possession).
However, mortgagees can be liable for environmental harm caused after they acquire possession. In NSW, for example, financiers can incur liability for land contamination, regardless of their involvement in the contamination, under the Contaminated Land Management Act 1997 (NSW).
Structuring the priority of debts
Contractual debt subordination is common. Parties typically use a subordination agreement to rank or otherwise regulate contractual debt claims by way of subordination. By contrast, a priority agreement is the appropriate document to regulate priority in relation to security and enforcement rights. Where parties wish to rank both debt claims and priority of securities, an inter-creditor agreement is used.
Common subordination mechanisms include:
Contractual subordination. A subordinated creditor undertakes to defer payment of some or all of its claims until the senior loans are paid in full.
Trust subordination. Contractual subordination is combined with a declaration of trust by a subordinated creditor in favour of, initially, a senior creditor over amounts of the subordinated debt received (including on the debtor's insolvency) by the subordinated creditor.
Non-trust turnover subordination. The subordinated creditor undertakes to transfer proceeds it receives on the debtor's insolvency to the priority creditor.
Subordination and assignment. This combines contractual subordination with an assignment (charge) by the subordinated creditor, in favour of the priority creditor, of the:
subordinated debt claim; and/or
proceeds on the debtor's winding-up.
Structural subordination occurs where a financier who lends to the parent becomes subordinated to other financiers who lend to subsidiaries in the group. The financier to the parent is structurally subordinated because it will not have access to a subsidiary's assets until that subsidiary's creditors have been paid in full.
Inter-creditor arrangements are common, and are typically used in circumstances where creditors want to regulate both the priority (and proceeds) of security and subordinate competing debts. Typical parties include the senior and junior financiers and any obligors that have provided security for the transaction. In a syndicated transaction, where there is common security, the inter-creditor arrangements are often set out in the security trust deed, and the security trustee is a party.
Debt trading and transfer mechanisms
Participations in a syndicated loan (whether as an underwriter or existing participant) are generally considered to be tradable assets and secured debt is commonly traded. Financiers usually "sell down" their participation by transfer or, less commonly, sub-participation.
The existing participants usually appoint a security trustee to hold security, granted by the borrower group, for their benefit. The class of beneficiaries for which the security trustee holds the security typically covers any future participants. Therefore, an incoming participant simply accedes to the security trust as a beneficiary, and the departing participant transfers its rights to the incoming participant (usually by a substitution agreement).
An assignment of debt may constitute a deemed security interest under the PPSA which will require perfection and certain notice formalities (there are various exceptions under section 8 of the PPSA). Therefore, it is preferable that a transfer of debt is effected by a novation/substitution agreement which should avoid any registration and notice requirements under the PPSA.
Agent and trust concepts
The concept of agency is recognised in Australia, provided that the extent of the agent's authority is clearly delineated in the relevant authorisation.
Syndicated loan documentation usually contains comprehensive provisions outlining the scope of the facility agent's capacity, authority and liability in its role as agent. Typically, those provisions limit the facility agent's obligations to those set out in the finance documents. Such provisions will also provide that the facility agent does not act as trustee or have any fiduciary relationship with any other financier (except as expressly set out in the finance documents).
Australia recognises trusts and they are very common in Australian financing arrangements.
A security trustee can enforce its rights in the Australian courts where it holds the security on trust for the financiers.
Lending to trustees of trusts is common practice, especially in the real estate investment trust (REIT) market. Lenders need to ensure the trustee has power under the constituent trust documents (such as trust deed) to borrow and grant security. Lenders should also verify that the trustee's indemnity out of trust property is not flawed. Trusts are not separate legal entities but merely an equitable obligation imposed on the trustee. They are however treated as separate entities to some extent for certain limited purposes (such as goods and services tax, perfection of security interests and regulation of collective investment schemes). Australian REITs are often structured as managed investment trusts (MITs) for income tax purposes. MITs allow for concessional withholding tax treatment on the rental and capital gains components of distributions to unitholders that are resident in countries with which Australia has an exchange of information agreement.
Enforcement of security interests and borrower insolvency
A financier's ability to enforce its loan, guarantee or security is generally regulated by the underlying document. For example, a financier can usually enforce or accelerate its loan on an event of default or other enforcement event, as defined in the loan agreement. This also applies to securities. Events of default entitling a lender to accelerate or enforce will not be implied.
Under the PPSA, a secured creditor, when enforcing its security over personal property in accordance with the enforcement powers in the PPSA, is required to act honestly and in a commercially reasonable manner. The obligation does not apply where a secured creditor appoints a receiver or a receiver and manager and the grantor is a corporation.
There is no general statutory requirement to serve a notice before enforcing a security, except for consumer credit transactions (including retail mortgages and guarantees). However, in relation to on-demand facilities, the courts require reasonable notice (in most cases, short) to be provided. Reasonableness is assessed by reference to the mechanics of effecting payment.
Guarantees can only usually be enforced following a default by the principal obligor (for example, under its loan documentation). Generally, the terms of the guarantee determine whether separate demands must be made against the principal obligor and guarantor.
The courts are generally not involved in the enforcement of consensual security interests against corporate borrowers. The court can, however, order that securities granted to parties related to the company, when the security has been enforced within six months after its creation, are void (Corporations Act 2001). This is regardless of whether the security has been properly registered within the required time period.
Under the PPSA, there are prescriptive rules governing enforcement of security interests in personal property, including notices that must be given to the security provider (called the grantor) or a higher ranking security holder. Most rules can be contracted out of (except in the case of certain consumer transactions). The PPSA enforcement provisions do not apply to security interests created before 30 January 2012, where a privately appointed receiver (or receiver and manager) is realising assets of a corporate grantor, and may otherwise be contracted out of in many instances.
When exercising a power of sale over real property, the secured creditor is required to satisfy various notice requirements contained in State-based property legislation.
Methods of enforcement
Security interests in personal property
A secured creditor has enforcement rights under the security agreement and relevant legislation. For example, a secured creditor generally has the right under the security agreement to enforce its security by appointing a receiver, or a receiver and manager. In addition, a holder of a registered security over all, or substantially all, of a company's assets can appoint a voluntary administrator.
Under the PPSA (which does not apply to interests in land), there is no requirement to obtain a judgment before exercising enforcement rights. A range of additional enforcement options are available, depending on the nature of the collateral, including:
Collection of liquid collateral (for example, as receivables).
Seizure of collateral.
Disposal of collateral.
Purchase of the collateral (or some of it) by the secured creditor following the giving of relevant notices and expiry of notice periods without objection.
Foreclosure (without the need for a court order), by which the collateral is forfeited to the secured creditor but the secured debt is extinguished.
The PPSA enforcement provisions do not apply where a privately appointed receiver or receiver and manager is realising assets of a corporate grantor, and may otherwise be contracted out of in many instances.
Mortgages over land
State and Territory laws regulate real property mortgages. All such legislation provides for an implied power to sell an interest in land that is the subject of the mortgage. In most jurisdictions, a prescribed default notice must be served before the power of sale can be exercised. Enforcement does not, however, require an application to the court. The purchaser takes an interest in land free from all prior interests that rank below the secured creditor exercising the power of sale, but subject to certain limited interests that are protected by statute.
A secured creditor has two common enforcement options. It can either:
Appoint a receiver in relation to the interest in land or rental income.
Enter into possession as mortgagee (including by appointment of an agent) and afterwards exercise a power of sale.
A mortgagee is not a fiduciary prior to the collection of proceeds. However, in most jurisdictions, a mortgagee must act in good faith when exercising the power of sale. This includes:
Taking reasonable steps to determine the market value of the mortgaged property before selling it.
Taking reasonable care to protect the property.
Obtaining the maximum sale price possible in the circumstances of the case.
A mortgagor can restrain the sale where it can be shown that either:
The power of sale has not become exercisable.
The mortgagee has acted improperly in exercising the power of sale (generally reckless indifference to the interests of the mortgagor is required; mere negligence is insufficient).
Foreclosure is available in respect of mortgages over land, but is not commonly used. A court order is required to effect foreclosure over land and extinguishes the secured debt.
Rescue, reorganisation and insolvency
Voluntary administration and schemes of arrangements provide for company rescue or reorganisation outside of insolvency proceedings.
The voluntary administration process under Part 5.3A of the Corporations Act 2001 is the principal method of corporate rescue and reorganisation in Australia. It aims to ensure the continued existence of an insolvent, or nearly insolvent company or, if that is not possible, a better return to creditors than would be the case from liquidation.
Voluntary administration has two essential features:
Appointment of an administrator who runs the company.
Imposition of a temporary moratorium on litigation, recovery of property and enforcement of security interests, to prevent creditors (but not secured creditors with all asset security) from taking actions adverse to the company's interests, during which the administrator can identify and consider potential rescue or reorganisation options.
The company's directors, rather than a secured creditor or liquidator, usually appoint the administrator. On appointment, the administrator assumes control of the company's business and property. The administrator must convene the first creditors' meeting within eight business days of appointment. The creditors can resolve to either:
Replace the administrator.
Appoint a creditors' committee to liaise with the administrator.
Following the meeting, the administrator has 25 business days to investigate the company's operations. The administrator's recommendations must be presented at the second creditors' meeting. This report must address various matters, including the reasons for the company's failure and any options for restructuring.
The administration period can, and frequently is, extended by application to the court and creditors can adjourn the second meeting for a period of up to 45 business days.
Creditors have three options at the second meeting:
Placing the company into liquidation.
Returning the company to the directors' control.
Executing a Deed of Company Arrangement (DOCA), which binds:
the deed administrator;
all unsecured creditors (irrespective of whether they consent); and
secured creditors and owners or lessors of property used by the company that:
vote for the DOCA; or
are bound by an order of the court.
Implementation of a DOCA only requires a creditors' resolution. If a poll is called, a majority of creditors, both in number and value of debt, must vote in favour of the resolution. If the poll does not produce a result, the administrator has a casting vote.
There are only a few terms that must be included in a DOCA and therefore a number of different arrangements can be agreed.
Secured creditors and the moratorium
Subject to the consent of the administrator or court order, a secured creditor is not entitled to enforce its security during the moratorium.
Enforcement of a security interest that has commenced before administration can be stayed or limited by the court on the administrator's application, if the court is satisfied that an administrator's proposed action will adequately protect the secured creditor's interests.
However, a creditor who holds security over all, or substantially all, of the company's property can enforce the security within 13 business days of the administrator's appointment.
During the moratorium, no legal proceedings can be started against the company and no further steps can be taken in any proceedings which have already started, unless the administrator consents or a court order is obtained.
Similarly, during this period, guarantees of the company's debts cannot be enforced against a director of the company, the spouse or a relative of a director, without the creditor first obtaining a court order.
Schemes of arrangement
The scheme of arrangement procedure, familiar to most common law jurisdictions, is generally less flexible than voluntary administration, and requires:
Court approval (including for any amendment to the scheme).
Approval by a super majority of each class of creditors (that is, 75% by value and 50% by number in each class of creditors).
The key advantage of a scheme of arrangement are that, unlike a DOCA:
It can give a binding release of claims against third parties (for example, claims by the company's shareholders or customers against the company's financiers, insurers or directors).
If passed by requisite majorities, it can bind dissenting secured creditors.
It can be used to effect a restructure even though a company is solvent.
If a company goes into liquidation, ongoing litigation proceedings between the insolvent entity and its creditors are stayed, including claims to recover unsecured loans. Where a judgment has already been obtained, execution is not allowed, and if execution was levied within six months of the liquidation, the effect of the execution will be reversed.
In relation to guarantees, if a guarantee has been given for the insolvent company's debts, the liquidation of the insolvent company does not affect the creditor's rights to enforce the guarantee. Subject to questions of double recovery, if the insolvent company is the guarantor of a third party, the creditor will be entitled to prove for the guaranteed debt in the winding-up.
The stay that arises in liquidation does not affect a secured creditor's right to enforce its security. This can be contrasted with the moratorium in voluntary administration (see Question 21).
The Corporations Act 2001 and the PPSA each contain provisions relating to transactions which can be set aside on insolvency. If the transaction is voidable, the court can make a range of orders, including for the repayment of money received by the creditor under the transaction, or the release/discharge of debts or securities. There are also a number of general law rules which affect the validity of loans, guarantees and security interests.
Generally speaking, a security is voidable on the following grounds.
Failure to register
Under the PPSA and the Corporations Act 2001, to be enforceable against third parties on insolvency, a security interest granted by a company must be perfected by control or possession, or by proper registration of a financing statement on the PPSR. A financing statement should be registered on the PPSR within 20 business days of the date on which the relevant security agreement came into force, or at least six months before the start of winding-up or voluntary administration for most security interests (other than deemed security interests that do not secure payment or performance of an obligation and security interests where no other method of perfection is used). The court may extend this period if it is considered just and equitable in the circumstances.
The transitional provisions provided temporary protection for security interests in existence at the PPSA's commencement date (30 January 2012) for two years. Any security interests which were not registered (either through migration of previous registers or by way of a new registration) or otherwise perfected by way of possession or control, by 30 January 2014, will not be enforceable in an insolvency scenario.
There is no requirement to register guarantees, although if the guarantee document contains a security interest of some kind, such as a turnover trust, it may be advisable to do so.
Breach of directors' duties
Where a loan, guarantee or security interest has been given by a company in breach of directors' duties, the court can, on application, make a wide variety of orders. Generally speaking, if the company has had the benefit of the funds, it will be obliged to effect repayment (although unfair terms may be modified).
The principal directors' duties, in this context, are the duties to act for a proper propose and in the interests of the company as a whole, which will include the interests of creditors where a company is in the zone of insolvency.
In addition, a loan, guarantee or security may be voidable on the grounds listed below if the company goes into liquidation. If a company goes into administration and later transitions to liquidation, the liquidation is deemed to have commenced with the appointment of administrators for the purpose of identifying whether a transaction occurred during a period which enables it to be set aside.
A security is voidable, irrespective of whether the security provider had an intention to confer a preference, if all of the following apply:
The security secures repayment of a pre-existing unsecured debt.
The company is insolvent at the time.
The company goes into liquidation within six months of granting the security.
There is a similar rule that renders security over circulating assets unenforceable (except as to new value) if a company goes into administration or liquidation within six months of granting the security.
A loan, guarantee or security may be set aside if both:
The company that provides a loan or grants the guarantee or security, was insolvent at the time and goes into liquidation within two years.
A reasonable person in the company's position would not have entered into the transaction.
Related party transaction
Any unfair preference or uncommercial transaction entered into with a related party can be set aside if entered into within four years before the company goes into liquidation.
Unreasonable director related transactions
Transactions between an insolvent company and a director (or an entity controlled by a director) that would not have been entered into by a reasonable person in the company's position, having regard to the consideration received, can be set aside if entered into within four years before the company goes into liquidation. There is no requirement that the company was insolvent at the time of the transaction.
Transaction for the purpose of defeating creditors
A security granted to defeat or delay creditors, or interfere with their rights, can be set aside at any time if there was an intent to defraud creditors. In addition, security granted to obstruct creditors' rights can be set aside if the company either:
Was insolvent at the time the security was granted.
Goes into liquidation within ten years of the grant.
An unfair loan to a company at any time before liquidation is liable to be set aside, whether or not the company was insolvent at the time the loan was made. A loan is unfair if the interest or the charges in relation to the loan either:
Were extortionate at the time the loan was made.
Have become extortionate, following a variation.
See Question 13.
Secured creditors have priority for payment on the borrower's insolvency out of the relevant collateral; after payment of the costs of collection, preservation and realisation of the collateral.
The PPSA affects priority between competing security interests (in relation to security interests over the same collateral).
A secured creditor's interest in circulating assets (primarily inventory, cash and receivables) is subordinated to:
The claims of employees (excluding directors and their relatives) for unpaid wages, leave entitlements and pension payments (in practice, the beneficiary of this is usually the Commonwealth government, which pays these claims and is subrogated to the employee's position).
Certain liquidation expenses.
The Corporations Act 2001 also provides for mandatory set-off of mutual credits, debts and dealings, provided a creditor had no notice of the debtor's insolvency at the time when the relevant credit was extended or received.
Recoveries under insurance policies are held for the benefit of creditors for whom the claim arose, and have priority. This is effectively a form of statutory trust over the proceeds of insurance recoveries.
All unsecured creditors rank equally, subject to certain limited priority claims and certain subordinated claims. The following claims have priority (in order):
Liquidators' expenses for preserving, realising or gathering in the insolvent company's property, and carrying on the company's business and similar expenses incurred by an administrator during the voluntary administration period.
Liquidators' and administrators' fees and disbursements payable to any related parties of the liquidator or administrator.
Employees' (excluding directors and their relatives) unpaid wages, pensions, leave entitlements and periodic payments in respect of injury compensation.
Redundancy (retrenchment) payments.
Subject to court approval, any creditors' costs for indemnifying the liquidator (for example, for litigation costs).
Where the insolvent company is party to the agreement, Australian courts respect an agreed subordination of debts (see Question 15). Unlike the US, there is no concept of equitable subordination.
Shareholder claims, in their capacity as a member of the company (for example for dividends), generally rank behind all other claims. In 2010, the Australian parliament passed legislation to reverse the 2007 decision of the High Court, which held that shareholders' compensation claims for misleading and deceptive conduct by the company, or its failure to disclose material information, are not brought in their capacity as a member and therefore rank equally with other unsecured creditors' claims. This legislation does not apply to non-shareholder compensation claims (such as claims by the holders of promissory notes or bonds). The legislation also contains provisions which rank post-insolvency interest ahead of shareholder claims.
Security interests over personal property
The priority of competing security interests in personal property generally turns on whether the interest has been perfected, when it was perfected, the type of perfection and whether a specific priority rule applies (see Question 24). Generally, competitions between two security interests which both exist at the PPSA registration commencement date (30 January 2012) will be determined in accordance with pre-existing law.
A perfected security interest ranks above an unperfected security interest in the same collateral.
Priority between unperfected security interests in the same collateral is determined by the order of attachment of those security interests. Subject to some statutory exceptions, security interests in the same collateral perfected by registration have priority in accordance with the time of registration.
A security interest can secure future advances, so a subsequent security holder needs a priority agreement to protect its priority position. Security interests perfected by control have priority over security interests perfected by registration.
The interests of suppliers of goods or financiers of asset acquisitions that have been perfected by registration have "super-priority" under a purchase money security interest if registered within certain timeframes.
Mortgages over land
Priority is determined by the order of registration at the relevant titles office. Notice of a prior mortgage has no effect on the order of priority and the first registered mortgage generally has first priority. However, notice of a subsequent security interest will affect the ability to claim priority for future advances made after notice is received.
A registered mortgage over land has priority over general security interest granted by a company or specific security interest granted in relation to land, unless such an interest is recorded on the register before the mortgage is taken.
Common law regulates the priority of unregistered mortgages. Generally, the first in time prevails but there are many exceptions.
Security interests not validly perfected
Under the PPSA, all security interests (other than for commercial consignments, transfers of an account or chattel paper and certain leases) must be perfected by registration, possession or control in order to be enforceable in insolvency. All security interests which were previously registered with ASIC have been migrated to the PPSR and are therefore perfected by registration (where registration was required by statute). Unperfected interests are ineffective as against a liquidator.
Cross-border issues on loans
There are generally no restrictions on a foreign lender making a loan, or receiving the benefit of security or a guarantee in relation to that loan.
In relation to receiving the benefit of a security interest, the foreign lender must show that the secured property is solely being held as security for the purposes of an agreement that was entered into both in good faith and in the ordinary course of a money lending business (and not dealing with any matter unrelated to that business) (Foreign Acquisition and Takeovers Act 1975).
If a foreign person acquires a security interest in shares in an Australian corporation or in Australian urban land but does not carry on the business of lending money, that foreign person may be required to obtain the Australian Treasurer's approval before taking the security.
A foreign lender's establishment of a new business in Australia, the taking, or enforcing, of security, or receiving a guarantee, may also require the Australian Treasurer's prior approval if the foreign lender is either:
A political body of, or an entity otherwise controlled by (or that could be controlled by), a foreign government, their agencies or related entities (and any associates).
An entity in which a foreign government, its agencies or related entities from a single country hold an aggregate interest (direct or indirect) of 15% or more or in which foreign governments, their agencies or related entities from more than one country hold an aggregate interest of 40% or more.
However, if such a lender is regulated by APRA as an Authorised Deposit-taking Institution (ADI), it is not required to notify the Australian Treasurer when taking security over an asset as part of a "lending agreement" or when the security is enforced and the asset is sold. Notification is required however, if the security is enforced and the ADI gains control over the asset(s) and retains it for more than 12 months.
Generally, a 10% interest withholding tax applies to interest or amounts in the nature of interest paid by an Australian resident entity or a non-resident carrying on business in Australia. There are however certain exemptions from withholding tax available under Australian domestic law (for example, an offer that satisfies the "public offer test") or under the terms of a tax treaty. The rate of interest on a cross-border loan must also be established having regard to Australia's comprehensive transfer pricing regime.
Generally, there are no exchange controls that can prevent repatriation or realisation of loan payments/security proceeds by foreign lenders.
However, in addition to implementing the United Nations Security Council's sanctions under the Charter of the United Nations Act 1945, the Australian Government also imposes targeted financial sanctions on certain foreign persons and entities in implementing its own foreign policy. The legislative framework for such autonomous sanctions is currently set out in the Autonomous Sanctions Act 2011 and the Autonomous Sanctions Regulations 2011 (Autonomous Sanctions Law) and is administered by the Department of Foreign Affairs.
If the Autonomous Sanctions Law provides for such a restriction to apply to a relevant financier, the specific authorisation of the Minister for Foreign Affairs of the Australian Government (or the Minister's delegate) is necessary in relation to the entering into of financial transactions with, or the making available of assets to or for the benefit of, that financier. (For the current list of restricted persons, see www.dfat.gov.au/un/unsc_sanctions/index.html.) Separately, the Anti-Money Laundering and Counter-Terrorism Financing Regulations 2008 impose a general prohibition on financial transactions with Iran valued at AUD20,000 or more.
Taxes and fees on loans, guarantees and security interests
NSW currently levies a stamp duty, called mortgage duty, on security documents (regardless of the governing law) charging assets, located wholly or partly in NSW. The amount of mortgage duty payable is calculated as a percentage of the proportion of the total amount of the advances secured referable to NSW, currently at 0.4%.
Under the NSW Duties Act 1997 it is the security provider who is liable to pay the mortgage duty. However, and of particular relevance to the mortgagee, a security document is unenforceable if it has not been duly stamped and would be inadmissible as evidence in Australian courts.
The other Australian states and territories no longer impose mortgage duty on security documents.
The PPSR levies a nominal registration fee for each security document entered into by an Australian company or a registered foreign company.
On the initiation of security enforcement proceedings, court filing fees are payable by the entity initiating proceedings.
Security documents do not require notarisation to be registered or enforced in Australian courts.
Previously, there were techniques for minimising stamp duty costs. However, additional anti-avoidance provisions were introduced in July 2009 to the NSW Duties Act 1997 which negated the use of these structures. The only way to attempt to reduce stamp duty is through a global mortgage package approach. This involves calculating the amount of secured assets located in NSW as a percentage of the global assets securing the same moneys. The duty (0.4%) is then paid on this percentage of the secured amount, rather than on the whole secured amount.
On 30 January 2012 Australia implemented a major overhaul of its personal property security legislation. The PPSA replaced over 70 Commonwealth, State and Territory Acts and is supported by an online register (PPSR), which replaced approximately 30 Commonwealth, State and Territory registers including the ASIC Register of Company Charges. This legislation is based on concepts used in equivalent legislation in Canada and New Zealand.
The PPSA applies to security interests in all types of property other than land, although there are certain statutory exclusions. It introduces a functional approach to personal property securities where the form of the transaction (and the identity of the person with title to the secured property) is not important if the substantive effect of the transaction is to secure payment of an amount or performance of an obligation. Therefore, legal distinctions between different types of security transactions have largely been removed. In addition, under the PPSA, in some circumstances a person can grant a security interest in property it does not own (for example, property that it holds on lease, or that it has acquired on retention of terms but has not yet paid for).
The introduction of the PPSA has fundamentally changed how security interests in personal property are taken and perfected, and extends to a range of transactions that were not previously considered security (or even quasi-security) before the introduction of the PPSA. For example a security interest may be created under certain leases, retention of title supply arrangements, flawed asset arrangements and turnover trusts.
Generally, the PPSA will apply if secured property is located in Australia or if the grantor of the security interest is an Australian entity.
The two-year transitional period of the PPSA, which afforded a level of protection to pre-existing security interests, expired on 30 January 2014. In April 2014, the Federal government announced it will undertake a review of the PPSA to consider its operation and effects and assess whether the PPSA is meeting its objectives of providing greater certainty to lenders and helping business to access finance. The interim report, which is due on 31 July 2014 will be focused on priority issues in relation to small businesses. The final report is due on 30 January 2015 and is expected to make recommendations on how to improve the Act, including simplification where appropriate.
Description. Official website maintained by the Australian Government containing up to date Commonwealth legislative instruments (including Acts, Regulations and Determinations).
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Description. Official website maintained by the Australian Capital Territory Government containing up to date Australian Capital Territory legislative instruments (including Acts, Regulations and Determinations).
Description. Official website maintained by the Northern Territory Government containing up to date Northern Territory legislative instruments (including Acts, Regulations and Determinations).
Description. Official website maintained by the Queensland Government containing up to date Queensland legislative instruments (including Acts, Regulations and Determinations).
Description. Official website maintained by the South Australian Government containing up to date South Australian legislative instruments (including Acts, Regulations and Determinations).
Description. Official website maintained by the Tasmanian Government containing up to date Tasmanian legislative instruments (including Acts, Regulations and Determinations).
Description. Official website maintained by the Victorian Government containing up to date Victorian legislative instruments (including Acts, Regulations and Determinations).
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Matthew Cunningham, Partner
Professional qualifications. Bachelor of Laws (First Class Honours) (Macquarie University); Bachelor of Civil Law (Oxford); Admitted in Australia (New South Wales), 1999; Admitted in England and Wales, 2005
Areas of practice. Corporate finance; syndicated finance; bilateral finance; technology, media and telecommunications; agribusiness; real estate and property finance; acquisition finance; private equity, restructuring and workouts
Non-professional qualifications. Bachelor of Economics (Macquarie)
- Advising a club of banks on the AUD936 million club financing of an international wheat, barley and canola producer.
- Advising a syndicate of banks on the AUD104 million syndicated financing of a global industrial diversified wheat producer.
- Advising a syndicate of banks on the AUD144 million syndicated financing of a major dairy processor, manufacturer and distributor.
- Advising an Australian building products manufacturer on the refinancing of its AUD535m Australian and offshore facilities.
- Advising a club of 7 banks on the provision of a AUD200 million multicurrency facility to a global manufacturer of polymer resins.
- Advising a large Australian bank on the AUD185 million financing of a leading Australian listed REIT's acquisition of ten regional shopping centres across NSW, Queensland and Western Australia.
Professional associations/memberships. Law Society of New South Wales; Banking and Financial Services Law Association; Asia Pacific Loan Market Association
John Elias, Partner
Professional qualifications. Bachelor of Commerce and Bachelor of Laws (Honours) (University of Tasmania); Admitted in Australia, England and Wales, and Hong Kong
Areas of practice. Securitisation; derivatives; debt capital markets.
- Acted for Westpac in respect of a number of securitisations.
- Acted for Challenger in respect of a number of securitisations.
- Acted for Nissan in respect of its securitisation programme.
- Acted for Hertz in respect of its securitisation programme.
- Acted for Nissan in respect of its Australian debt programme.
- Acted for Mirvac in respect of its Australian debt programme.
Professional associations/memberships. Law Society of New South Wales; Australian Securitisation Forum
James Mok, Partner
Professional qualifications. Bachelor of Laws (First Class Honours) (University of Queensland); Admitted in Australia (Queensland and New South Wales), 1996; Admitted in England and Wales, 2011
Areas of practice. Structured finance; asset finance; aviation finance; trade and commodity finance; general banking and finance (including syndicated, unsecured and secured lending arrangements); acquisition finance.
Non-professional qualifications. Bachelor of Commerce (University of Queensland)
- Acting for Qantas Airways on many Japanese Operating Lease transactions for aircraft, including for the first four B787 aircraft into Australia.
- Acting for financiers on a structured cross-border receivables financing for Accolade Wines involving Australia, United Kingdom, the US and New Zealand.
- Acting for the lessors and financiers in a structured lease transaction for five aircraft for the Department of Defence.
- Acting for the Bank of China in the AUD180 million financing of the acquisition of Centennial Plaza office buildings in Sydney.
Professional associations/memberships. Law Society of New South Wales; Asia Pacific Loan Market Association
Paul Paxton, Partner
Professional qualifications. Bachelor of Laws (Macquarie University), 1996; Admitted in Australia (New South Wales), 1998; Admitted in UK, 2003; Admitted in High Court, 2013
Areas of practice. Project finance/PPP; property and construction finance
Non-professional qualifications. Bachelor of Commerce (Macquarie University), 1996
- Advising on the current Northern Beaches Hospital project.
- Advised on the Victorian Schools PPP and subsequent sale to AMP.
- Advised on the Sydney Ferries Market Review and Franchising projects.
- Advised on the Airds-Bradbury Social Housing PPP.
- Advised on the Northern Territory Correctional Facilities PPP.
- Advised on the Mundaring Water Treatment Plant PPP.
- Advised on the Melbourne Convention Centre project.
- Advised on the South East Queensland Schools PPP.
Professional associations/memberships. Law Society of New South Wales; Banking & Finance Services Law Association; Asia Pacific Loan Market Association