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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
The finance document will generally include a number of events of default, which allow a lender to enforce or accelerate its loan, any guarantees and security documents. These usually include:
- a failure by a borrower to pay amounts under the documents when due;
- insolvency of the borrower (and other related parties such as a guarantor);
- a failure to comply with undertakings; and
- material adverse changes to the borrower’s financial condition or business.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
A secured party will have rights of enforcement under the security agreement and relevant legislation.
For personal property, there are a number of enforcement options, including:
- collection of the collateral (eg, in the case of receivables);
- seizure of assets;
- disposal of assets;
- purchase of all or some of the collateral (provided the relevant notices are given and notice periods complied with); and
A secured party may also appoint a third person (eg, a receiver) to act on its behalf, although the Personal Property Security Act enforcement provisions will not apply where a privately appointed receiver is realising assets of a corporate grantor, and may otherwise be contracted out of in many instances. The act does not require a judgment to be obtained before exercising enforcement rights.
For mortgages of land, a secured party has two common enforcement options:
· to appoint a receiver in relation to the interest in land or rental income; or
· to enter into possession as mortgagee (including by appointment of an agent) and afterwards exercise a power of sale.
In most Australian states, a prescribed default notice must be served before the power of sale can be exercised, but there is no requirement for an application to be made to the court.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
A secured creditor will have priority for payment out of the collateral, after the costs associated with collecting, preserving and realising the collateral. This is subject to certain preferred claims, such as:
- employees for wages;
- leave entitlements;
- superannuation payments; and
- some liquidation expenses.
Priority between competing security interests over the same collateral is determined by the Personal Property Security Act (Cth).
Unsecured creditors rank behind secured creditors and equally among themselves, other than in respect of some limited priority claims (eg, liquidators' or administrators' fees and expenses and certain subordinated claims).
The Australian courts will generally recognise a subordination agreement between the insolvent company and creditors which subordinates certain debts.
Claims of shareholders usually rank behind all other claims.
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