At a time in which many businesses are struggling to adapt to often drastic and sudden losses of revenue flowing from the COVID-19 pandemic and are forced to maximise access to existing facilities and to pursue new financing opportunities, it is not surprising that many financiers have an enhanced interest in the risk mitigation that may be afforded by taking robust security interests in support of corporate loans.
This briefing is a high-level guide for off-shore entities to taking and enforcing security in Australia. Our focus is upon security over Australian assets (other than real property) in the context of a commercial transaction.
As a general observation, security may in most cases be taken quickly, cheaply and easily over almost all classes of assets in Australia.
What law governs taking security in Australia?
The Personal Property Securities Act 2009 (Cth) (PPSA) is the statutory regime in Australia that governs security interests in personal property. The PPSA applies to almost all types of personal property, other than land and fixtures and specifically excluded assets (eg certain mining tenements).
What gives rise to a security interest in Australia?
A security interest under the PPSA is:
- any interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation (without regard to the form of the transaction or the identity of the person who has title to the property); and
- certain interests which are deemed to be security interests whether or not the transaction concerned, in substance, secures payment or performance of an obligation: section 12(3) of the PPSA. Broadly, these deemed security interests are:
- interests of a lessor or bailor of goods under a longer term operating lease (>2 years);
- interests of a consignee under a commercial consignment; or
- interests of an assignee or transferee of ‘accounts’ (noting that ‘accounts’ is the PPSA term for receivables).
Therefore a security interest in Australia will include: traditional security interests created by way of a charge, debenture, mortgage, pledge or similar arrangement; ‘quasi-security’ arrangements (such as title based interests arising from retention of title, turn-over trusts and finance leases); and in some cases certain other proprietary interests such as operating leases, bailment or consignment arrangements and transfers of receivables.
How is security taken in Australia?
Security is usually taken by the parties entering into a security agreement. There is no prescribed form of security agreement, however it should be in writing.
For traditional security, the security agreement usually takes the form of a ‘general security agreement’ (if overall assets) or a ‘specific security agreement’ (if over certain assets only). For deemed security interests, the agreement will be the relevant lease, bailment or consignment arrangement or the agreement giving rise to the assignment or transfer of receivable.
There is no formal process to take security over personal property in Australia, however the security interest must:
- attach to personal property, which requires either value to be given by the secured party or for the grantor to do an act by which the security interest arises;
- be enforceable against third parties, which is usually achieved by having a security agreement (in writing) that provides that the security interest covers the collateral; and
- be perfected, as described below.
How is a security interest perfected?
The PPSA requires that a security interest be perfected. Perfection is obtained by either:
- registration, being the most common method of perfection (and invariably recommended);
- possession of the collateral by the secured party; or
- control of the collateral (although only certain limited types of personal property may be perfected by control).
Registration of a PPS security interest is on an electronic register called the Personal Property Securities Register and may be processed quickly and generally at minimal cost. Pre-registration of a security interest before it is actually taken is permitted under the PPSA.
A security interest is registered against the required identifier details of a grantor (i.e. Australian Company Number (ACN), Australian Business Number (ABN) or its corporate name). A security interest may also, in some cases, be registered against the serial number of certain collateral. This may be relevant for motor vehicles, watercraft, aircraft and some intellectual property. Registration against a serial number is required in some cases for the registration to be effective and optional in other cases. In most cases it is optional, but if registered against the serial number the security interest will continue in the personal property if it is sold or leased in the ordinary course of the grantor’s business to a person without actual or presumed knowledge of the security interest (i.e. the security interest will continue despite usual ‘taking free’ provisions under section 46 of the PPSA).
A security interest that is not perfected will ‘vest’ in the grantor upon its liquidation and the secured party’s rights essentially convert to a claim against the grantor (similar to that of an unsecured creditor).
How is security enforced in Australia?
A secured party's ability to enforce security is generally regulated by the terms of the security agreement.
In most cases, the secured party will enforce its security by appointing a receiver. The receiver will usually have a wide range of enforcement powers under the security agreement, in addition to statutory powers available under section 420 of the Corporations Act 2001 (Cth) (Corporations Act).
Generally, there is no statutory requirement for a secured party to serve notice before enforcing security in Australia.
A secured party is not required to obtain judgment from courts in Australia to enforce a consensual security interest. However, courts may order that a security interest is void in certain circumstances, most notably in the case of voidable transactions entered into when a company was insolvent.
Insolvency and pre-insolvency processes in Australia
Aside from corporate rules regarding voidable transactions and preference arrangements (which are outside the scope of this briefing), there are two main pre-insolvency considerations secured parties should be aware of when taking security in Australia. These are:
- the corporate administration process available under Part 5.3A of the Corporations Act; and
- Australia’s ipso facto laws made under The Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017.
With regard to the corporate administration process:
- An administrator may be appointed to a company in Australia for the purpose of determining whether the company may remain viable. The appointment is usually made by directors of the company, although the appointment may also be made by court or a liquidator.
- The administrator is required to decide whether the company should be: returned to the directors to trade; made subject to a ‘deed of company arrangement’ (essentially an agreement among the company’s creditors); or wound up in liquidation.
- Importantly, a moratorium applies while a company is in administration. During that time, no enforcement action may be taken against the company, other than in limited exceptions. A key exception is that a person with security over "the whole or substantially the whole" of the company’s property may enforce that security within 13 business days of the administrator's appointment. A person with security over less than the whole of a company’s property will not enjoy this right, but also will not lose its security (however it will have to wait until the administration ends before enforcing its security, unless court approval is otherwise granted).
With regard to the ipso facto laws:
- These laws were introduced with effect from 1 July 2018. They impose a moratorium on enforcement of certain 'ipso facto' clauses, being any provision that gives a person a right to terminate or modify the terms of a contract with a company if:
- the company enters into voluntary administration;
- a managing controller is appointed over all or substantially all of the company's property; or
- the company is undertaking a scheme of arrangement (but only if it is being entered into for the purposes of the company being wound up in insolvency).
- The purpose of the legislation is to ensure a company is able continue to trade whilst in the pre-insolvency administration process without risk of key contracts (in particular) being terminated.
- For a person taking security in Australia, these laws mean that its security may not be enforceable (or the secured debt may not be accelerated) if an event of default arises only due to the appointment of a voluntary administrator or managing controller or due to the company entering into a scheme of arrangement (for the purposes of the company being wound up), even if the security agreement expressly states that an event of default should arise. However, as with administration, a secured creditor with security over "the whole or substantially the whole" of the company’s property will not be subject to the moratorium and other exceptions may also apply (eg. there are exemptions for syndicated loans).
- It should be noted that the laws apply to ipso facto clauses only and a stay on enforcement will not apply if any other event of default occurs (for example, if there is a non-payment default or other breach of an obligation).
There are a number of other legal and regulatory requirements that a foreign lender must be aware of before taking and enforcing security in Australia which are beyond the scope of this briefing. For example, approval of the Foreign Investment Review Board may be required before a foreign entity takes or enforces security (although a fairly broad 'moneylender' exemption for lenders is frequently available). Further, a foreign lender making a single loan into Australia should not usually require any licensing or other regulatory approvals. However, if the lender could be held to be carrying on a business in Australia, it is very likely that a number of licensing and regulatory requirements will apply.
We would be pleased to assist you with any queries you may have about taking and enforcing security in Australia.