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Criteria for enforcement
What are the common enforcement triggers for loans, guarantees and security documents?
Common enforcement triggers are:
- insolvency (including events relating to insolvency, such as receivership);
- failure to pay an amount under the loan;
- breach of a transaction document (although sometimes only if a materiality threshold is passed or a remedy period has expired);
- misrepresentation (although sometimes only if a materiality threshold is passed or a remedy period has expired);
- in many cases, cross-default;
- in many cases, material adverse change in the borrower’s circumstances; and
- in many cases, change of control.
Process for enforcement
What are the most common procedures for enforcement? Are there any specific requirements with which lenders must comply?
Where a lender has security over all of the borrower’s property, it is most common for a receiver to be appointed to realise security and repay the secured party. A receiver can be appointed if there is a contractual right to do so. Certain aspects of the receiver's conduct are regulated by the Receiverships Act 1993 (eg, the receiver's obligations in relation to other secured creditors).
In other cases, the secured party commonly takes possession of the secured property and sells it to realise its debt. This procedure is generally regulated by the Personal Property Securities Act 1999 and there are certain procedural requirements. Notice of intention to sell must usually be given to the debtor and other secured creditors and the secured party is obliged to get the best price reasonably obtainable.
In some situations, the secured party can simply exercise other contractual rights that are equivalent to enforcing security. For example, a lessor that is deemed to have a security interest can repossess under its lease.
In the case of land, a process for carrying out a mortgagee sale of the land is prescribed in the Property Law Act 2007. In particular, notice must be given to the mortgagor with prescribed particulars and there is a duty to obtain the best price reasonably obtainable for the property.
Ranking in insolvency
In what order do creditors rank in case of the insolvency of a borrower?
The general rule is that:
- secured creditors rank first;
- certain preferential creditors (eg, the Inland Revenue Department) rank second; and
- unsecured creditors rank third.
In relation to some types of property (eg, accounts receivable and inventory), the preferential creditors can rank ahead of secured creditors. However, the secured creditor will still usually rank ahead if it is a transferee of an account receivable for new value or holds a purchase money security interest (PMSI), which is essentially a security interest granted in property to secure amounts advanced to finance the purchase of that property. If that property has been sold in exchange for an account receivable, the secured party will generally have a PMSI in the account receivable as well.
As between secured creditors where the secured property is land, the general rule is that the first person to have registered a mortgage against that land has first priority, the second has second priority and so on.
As between secured creditors where the secured property is personal property, the rules are more complex. Priority will generally depend on which secured creditor was first to either take possession of the collateral or register a financing statement in relation to it on the Personal Property Securities Register, but there are other rules as well. The most significant of these is that a PMSI will usually have higher priority than other security interests in the same collateral.
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