Position of creditors
Forms of security
What are the main forms of security over moveable and immoveable property and how are they given legal effect?
There are two main types of security:
- security over real property (ie, land); and
- security over personal property.
The most common security interest over real property is a mortgage.
There are diverse security interests for personal property, which are non-exhaustively described in the Personal Property Securities Act 2009 (Cth). Common security interests include:
- fixed and floating charges;
- chattel mortgages;
- conditional sale agreements;
- hire purchase agreements;
- title retention arrangements; and
The legal effect of these security interests comes from the general law and various statutory regimes.
Security interests in land are regulated on a state and territory basis. They may be registered under statutes that exist in each Australian state and territory (which follow the so-called ‘Torrens’ system of land registration).
Security interests in personal property may be registered under the Personal Property Securities Act. In each case, registration affords some level of protection to the holder of the security interest, including priority over unregistered interests. In general, personal property security interests that have not been registered will not be effective in case of the grantor’s insolvency.
Ranking of creditors
How are creditors’ claims ranked in insolvency proceedings?
In a liquidation (where the company is being wound up), Part 5.6 of the Corporations Act 2001 (Cth) sets out a priority ‘waterfall’ stipulating how creditors’ claims are ranked. Where a creditor’s claim ranks will depend on whether it is a secured creditor or another type of priority creditor and what the assets are. A secured creditor ranks first, except in relation to circulating assets. The main circulating assets are:
- inventory; and
- accounts (debtors).
Employees and administrators and liquidators have a statutory priority in relation to circulating assets, including:
- certain expenses of the liquidator or administrator;
- the costs of the winding-up application; and
- employees’ wages, superannuation and other entitlements.
Other unsecured claims are then ranked equally and paid proportionally.
Can this ranking be amended in any way?
Statutory priorities cannot be varied in liquidation. Priorities as between secured and/or unsecured creditors may be amended by contract (and bind the relevant parties to the contract). Priorities may be varied in a deed of company arrangement (passed by a creditors’ resolution in a voluntary administration), provided that creditors are no worse off than they would be in a liquidation.