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Asset classes used as collateral for security

Real estate

Can security be granted over real estate? If so, what are the most common forms of security granted over real estate and what is the procedure?

Security over interests in real estate typically takes the form of a registered mortgage. Most land in Australia is registered under what is known as the 'Torrens' system, with each state or territory operating and regulating its own Torrens system and register. If registered as Torrens land, a Torrens title mortgage will be registered as a statutory charge against the entry on the register for the particular interest in land. If not registered as Torrens land, security will be granted by way of a common law mortgage, under which the land will be transferred or conveyed to the mortgagee, subject to the condition that the mortgagor can reclaim the land when the loan is repaid (or other secured obligations fulfilled).

Machinery and equipment

Can security be granted over machinery and equipment? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

The granting of security over tangible movable property, including machinery and equipment, is governed by the Personal Property Security Act 2009 (Cth) and 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; or

·         a specific security agreement over specified goods.

In addition to being evidenced in writing (ie, under a security agreement), the security interest must have attached to the collateral to be enforceable. To attach, the grantor must have rights in the collateral that it can transfer and value must have been given for the creation of the security interest.

The security interest is then perfected under one (or more) of three methods:

  • taking possession of the assets;
  • taking control of the assets; or
  • registering the security interest on the Personal Property Security Register (PPSR).

Security interests are registered on the PPSR by filing an electronic financing statement which identifies the parties and personal property being secured. While a secured party may generally choose not to register a security interest, a corporate grantor has 20 business days to register the security interest under the Corporations Act (Cth); otherwise, it may be ineffective on the insolvency of the grantor.

The registration may be made as soon as there is a reasonable belief that security will be granted; as such, most secured parties opt to register the security before entering into a security agreement. This ensures that the security interest is perfected at the time of creation. 

Security interests over machinery and equipment are typically registered on the PPSR because perfection by another method (ie, possession or control) is unavailable.

Receivables

Can security be granted over receivables? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

The Personal Property Security Act (Cth)also covers receivables so, as described above, security will be taken under a general security agreement or a specific security agreement and registered accordingly. Security over tangible movable property which is stock in trade or inventory is usually a circulating security interest over fluctuating assets – known as 'circulating assets' (the act deems certain assets to be circulating assets). This allows the grantor to transfer the collateral free of the security interest in the ordinary course of the grantor's business.

Financial instruments and cash

Can security be granted over financial instruments? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Financial instruments (eg, shares) are considered to be tangible moveable property for the purposes of the Personal Property Security Act and thus the analysis described above applies.

Generally, security interests may be perfected either by control or registration.

The secured party takes control if the secured party:

  • is registered as the owner of the financial instrument; and
  • takes possession of the certificates of title of the financial instrument and has the ability to transfer or otherwise deal with the financial instrument (generally done by obtaining blank transfer forms for those securities signed by the grantor but with the details of the transferee left blank).

If the instruments are uncertificated, the secured party will have control if there is an agreement in force between the secured party and grantor whereby the secured party can initiate or control sending instructions by which the shares can be transferred or otherwise dealt with.

As shares listed on the Australian Securities Exchange are uncertificated and recorded on an electronic register, they are transferred through the Clearing House Electronic Subregister System (CHESS). Therefore, a specific CHESS security deed is required, by which the CHESS participant entity agrees, among other things, to hold the shares subject to the secured party's order.

Taking control is the preferred way of perfecting a security interest over shares and other financial instruments, as it confers greater priority than perfection by possession or registration. It is market practice for security over certificated shares to be perfected both by taking control and registering the security.

Can security be granted over cash deposits? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

Security over cash deposits in bank accounts can be taken under a general security deed or a specific security deed in respect of the relevant bank accounts.

Where the bank account is held with an authorised deposit-taking institution that is also the secured party, the secured party is automatically deemed to have control. If the bank account is held with an authorised deposit-taking institution that is not the secured party, the secured party will normally enter into an account bank deed with the authorised deposit-taking institution, agreeing that the secured party will have control over the account for the purposes of the Personal Property Security Act.

It is market practice for the security interest also to be perfected by registration.

Intellectual property

Can security be granted over intellectual property? If so, what are the most common forms of security granted over this kind of property and what is the procedure?

The definition of ‘intellectual property’ in the Personal Property Security Act covers most forms of intellectual property, including trademarks, patents, registered designs, copyright and certain IP agreements (eg, licences to use someone else’s intellectual property). Both general security agreements and specific security agreements are commonly used.

The only way to perfect a security interest in intellectual property is by registering it on the PPSR, as it is not capable of possession or control. Intellectual property is described in the registration by including its serial number in the financing statement, described as 'serial numbered property'. It is compulsory to register security over consumer property on the PPSR. As it is optional for commercial property and there may be a number of practical considerations to take into account, a secured party may decide to register the security only if the intellectual property is of high value or otherwise important to the business.

In addition, specific registers exist for certain types of intellectual property (eg, patents, registered trademarks and registered design rights), maintained by the Intellectual Property Office of Australia. Security interests can be recorded in those IP registers.

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