Asia Pacific Guide to Lending and Taking Security

Australia

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1. Are there any classes of unsecured and unsubordinated creditor whose claims against a debtor would rank equally with or above those of the debtor’s secured creditors?

No, in the case of a real property mortgage or a security interest in the company's noncirculating assets under the Personal Property Securities Act 2009 (Cth) (PPSA), provided that the security interest was duly perfected. A secured creditor's floating charge (see the answer to question 3 of this section) or security interest attached to circulating assets, however, would rank behind certain employee claims (such as unpaid wages, superannuation payments, etc.) and administrator's fees and expenses.

2. May security given by a company rank in a specified order so as to secure liabilities owed to different creditors of the company in that order and, if that is not possible, is it viable for parties to enter into a contractual arrangement for the purposes of moderating this order?

Yes, secured creditors may agree that their respective securities rank in any order.

3. Does this jurisdiction recognise the concept of floating security or similar equivalent (i.e., security over a changing pool of assets that the company giving the security is free to buy, sell and generally deal with)?

Yes. Floating charges and security interests attached to circulating assets are referred to as circulating security interests in the PPSA.

4. If so, are there any practical reasons why floating security is difficult to take, maintain or enforce?

No. However, please note that claims under a floating security rank behind certain employee claims and administrator's fees and expenses, as mentioned in the answer to question 1 of this section.

5. May security be granted to a trustee to be held on trust for the lenders from time to time, in such a way that a change of lenders does not require new security to be taken?

Yes. 

6. If not, are there any techniques that can be used to achieve substantially the same effect (e.g., parallel debt structures)?

Not applicable. 

7. If an agent holds security for the lenders rather than a trustee, is it necessary to take new security on a change of lenders? If no, why not? If yes, are there ways to structure the transaction to avoid such a requirement?

Although the concept of agency is recognized in Australia, a trustee usually holds the security.

8. Under the laws of this jurisdiction, is there any class of asset over which it is difficult or impossible to grant effective and perfected security, or in relation to which any security granted will be of limited effect?

Generally, no. However, and as mentioned in the answer to question 1 of this section, a secured creditor's floating charge or security interest attached to circulating assets would rank behind certain employee claims and administrator's fees and expenses.

9. Under the laws of this jurisdiction, are there any restrictions on offshore lenders taking security over any class of asset?
Generally, there are no such restrictions specific to offshore lenders. However, offshore lenders must comply with the FATA and FIRB requirements described in question 1 of the "When considering whether to lend" section.
10. Must a company receive a corporate benefit in return for giving a guarantee or security? In particular, are there restrictions on the grant of upstream and cross-stream guarantees and security? If yes, briefly what is the effect of these laws?

Yes. The enforceability of a guarantee or security may be affected by certain laws in Australia that require the guarantee to benefit the guarantor (known as "corporate benefit") or certain laws relating to creditors' rights and the giving of a financial benefit to a related party of a public company, which requires approval from shareholders. Companies should also observe financial assistance rules in Australia, as described in the answer to question 12 of the "When lending to borrowers" section. Apart from the above, unless there is a specific restriction contained in the constitution of the guarantor or the grantor of the security, there would not be other restrictions.

11. What type of security interests does your jurisdiction recognise, e.g., pledge, charge, mortgage, hypothecation? In relation to each type of security interest, please state the formalities required to create and perfect that security.
Types of security interest

Security over land in Australia is granted under a real property mortgage. In relation to other types of tangible and intangible personal property, the PPSA has introduced a new concept of a "security interest" that not only covers pre-existing forms of security interests, such as fixed charges, floating charges, pledges and liens but also extends to any interest in personal property provided for by a transaction that, in substance, secures payment or performance of an obligation. This new concept of security interest includes an interest in personal property provided by a range of transactions that were previously not treated as security arrangements in Australia if the transaction, in substance, secures payment or performance of an obligation, such as flawed asset arrangements, retention of title arrangements and leases of goods.

Formalities

Generally, a real property mortgage must be registered in the relevant land register. Each Australian state and territory has its own land titles office that administers the land register in relation to that place. To be registered, the mortgage must be validly executed and sufficiently identify the land that is the subject of the mortgage, the debt secured by the mortgage and the interest in the land that is to be mortgaged. Various other local formalities for registration in each state or territory must also be complied with, including in relation to registration forms, execution requirements and requirements regarding relevant title certificates.

The formal requirements that apply to security over personal property are less prescriptive. Under the PPSA, the creation of an effective security interest in personal property generally requires the security interest to have "attached," be "enforceable against third parties" and be "perfected".

Attachment

"Attachment" occurs under the following conditions:

  • The grantor has sufficient rights in the collateral or power to transfer rights in the collateral to the secured party; and
  • Value is provided for the security interest or the grantor carries out an act by which the security interest arises.

This requirement is usually satisfied by the provision of a loan or other financial accommodation in return for the granting of the security interest or by the grantor signing a security agreement.

Enforceability against third parties

Being "enforceable against third parties" is a further step required by the PPSA and is satisfied when attachment has occurred and one of the following is satisfied:

  • The secured party has "possession" of the collateral.
  • The secured party has perfected the security interest by "control" of the collateral (which applies in relation to certain forms of personal property such as shares and certain bank accounts).
  • The grantor has signed a security agreement that describes the collateral.
Perfection

"Perfection" is the final formal requirement and occurs when the security interest is attached to the collateral, the security is enforceable against a third party and any of the following applies:

  • The secured party has "possession" of the collateral;
  • The secured party has "control" of the collateral (which only applies in relation to certain forms of personal property such as shares and certain bank accounts); or
  • A registration on the PPSR in favor of the secured party is effective with respect to the collateral (see the answer to question 12 of this section below).
12. Are there any registration, translation or notarization requirements in relation to security, guarantees, subordination or intercreditor documents?

Yes, there are registration requirements in relation to security in Australia.

For security over land, while it is not mandatory to register a mortgage if the mortgage is not registered, it will not have the benefit of registration and may be defeated by subsequent holders of legal interests in the land (including holders of subsequent mortgages). There is no prescribed time limit within which the registration of a mortgage must occur. However, until registration occurs, the secured party does not have the benefit of registration.

In relation to personal property, while registration is not mandatory, it is the most common method of perfection under the PPSA. The priority of unperfected security interests over personal property is generally deferred to perfected security interests and will generally vest in the grantor if the grantor becomes insolvent (i.e., it will not be enforceable against a liquidator or administrator of the grantor). For Australian companies and foreign companies doing business in Australia, the registration in respect of the security interest must generally occur within 20 business days of the creation of the security interest.

There are no registration requirements for guarantees and subordination or intercreditor agreements in Australia.

There are no translation or notarization requirements for security, guarantees and subordination or intercreditor agreements in Australia.

13. Are there any stamp, documentary, registration, notarization or other taxes, duties or fees chargeable in respect of security, guarantees, subordination or intercreditor documents? If yes, what are the amounts and when are they payable?

No state or territory in Australia charges ad valorem stamp duty on these documents. However, where the document contains a declaration of trust over cash receivables, such as the amount of a loan repayment, certain fixed duties may apply. Fees of a nominal amount are payable on the registration of security with the PPSR (see the answer to question 12 of this section).

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