Lending, Security and Enforcement: Navigating Simple and Complex Financing Arrangements

Security provided is commonly in the form of a registered mortgage over the property of the Borrower and/or Guarantor and a Personal Property Securities registration (PPS registration) over the personal property of the Borrower and/or Guarantors.

There are various scenarios to be aware of and to consider when entering into simple and complex financing arrangements, some of which are explored below.

Taking security properly: Avoiding common Personal Property Securities Act 2009 (Cth) (PPSA) and priority pitfalls

It is important to be aware of key sections of the PPSA and the Corporations Act 2001 (Cth) (Corporations Act) to ensure the valid registration of any PPS interests on behalf of the client.

Registering within the prescribed period

Section 588FL of the Corporations Act provides that any security interests granted under a Security Agreement between a Lender and security provider must be registered within 20 business days of the date of that Agreement.

If not registered within that time, or not registered over 6 months before the grantor is wound up, is under administration or restructured, the Lender’s security interest is likely to have vested. However, if the 20 business days have passed, it is crucial that the interest is registered as soon as possible. It is important to note that should the grantor enter administration, liquidation or bankruptcy within six months of this late registration, the interest will vest (unless approval is obtained from the Court for extension of the time to register). An alternative option to remedy a late registration is to negotiate a priority deed with any secured parties that may have registered ahead of the Lending entity.

Identifying correct grantor entity

When making PPS registrations, it is important to ensure that the entities identified as grantors in the relevant Security Agreement are the same as the entities with which the interests are registered against.

Similar to the solutions identified above, should the grantor entity be found to be incorrect, the registration should be amended as a matter of urgency. If this does not take place prior to the grantor being under administration, liquidated or declared bankrupt, it is likely that the interest has vested. Should the grantor not be insolvent, however, the same process as set out above with respect to seeking an extension of time to register and considering negotiating a priority deed are alternative options to seek the valid registration of a security interest.

Attending to full release of security interest rather than assigned or partially released interests

If a grantor has sought for a partial release of security (e.g., they are released from their obligations by a secured party or an item of security that is no longer required and the grantor would like to seek for it to be encumbered by an alternative secured party), this will need to be reflected in amending the PPS registration.

It is crucial that where a partial release is all that is permitted, that the registration is amended rather than discharged. Should the registration be discharged rather than amended, the ability to seek that the registration be made again and be valid could be attempted by contacting the Personal Property Securities Act 2009 (Cth) (PPSR) and seeking for the restoration of the registration. This will be important to maintain the Lender’s priority where a new registration will not necessarily do this.

Subordination agreements: Protecting minor creditors in layered financings

Layered financing (or mezzanine financing) refers to a situation where there are various elements of funding to assist with a company’s expansion or acquisitions. This is often in the form of senior debt, mezzanine debt and equity. The mezzanine debt is subordinate senior debt, however, will have priority over equity.

A subordination agreement, in this context, formalises a debt ranking behind another debt in terms of priority. Often a junior Lender may agree to enter into a subordination agreement to a senior Lender as it can result in them being able to charge the Borrower a higher interest rate and fees for agreeing to the subordination. This can offer a form of protection or compensation should the Borrower default on their obligations and the junior Lender not be fully paid out once the senior Lenders take possession.

Before a junior Lender enters into any form of subordination agreement, it is crucial that they consider their security position and the equity that remains in the security should they subordinate their position. Should entering into a subordination agreement result in a lesser likelihood of being able to recover any secured moneys, the junior Lender may require further security from the Borrower.

Conclusion

Obtaining appropriate legal advice and conducting due diligence into the security offered by the Borrower as well as ensuring the perfection and valid registration of security are critical considerations for a Lender when entering into financing arrangements. Where issues arise with ensuring the ability to have recourse to a form of security should the Borrower default, it can result in the Lender needing to consider alternative options for recovery, which are unlikely to be as strong as the ability to act as mortgagee in possession and acting on PPSR registrations.

For any assistance with preparation of and advice on loan documents, as well as with any disputes that arise under a loan facility, you can contact Madyson Jewell, Solicitor, or the commercial and litigation teams at Watson Webb.

‍Disclaimer‍

This article is provided for general information purposes only and does not constitute legal advice. It is not intended to address the specific circumstances of any individual or business, and reliance should not be placed on it as a substitute for obtaining legal advice tailored to your particular situation.

You should obtain independent legal advice before entering into, varying, or relying on any loan documents or financing arrangements.