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Trends and regulatory climate

Trends

What is the current state of the lending market in your jurisdiction and have any new trends emerged over the last 12 months?

The Australian bank debt market experienced a slow start to 2016, with declines in loan volume; however, it fared better than overseas markets which experienced lower activity due to sub-investment grade borrowers being negatively affected by the drastic fall in commodity prices (mainly oil). Refinancings rebounded due to some improved borrowing conditions, as did acquisition financings due to a relative increase in M&A activity.

Australian loan volumes were at US$28.43 billion in the first six months of 2016, compared with US$36.50 billion in the same period last year. The volume of deals fell in part due to the uncertainty surrounding Brexit and elections in Australia and the United States.

Australian companies operating outside the mining industry need little external funding because they are making good profits and generating enough internal funds to sustain their financing needs. Loan volumes are also reduced because borrowers that have locked in extended facilities at low interest rates are not pursuing early refinancing due to higher margins in the market at present.

Australian banks are paying increased costs for wholesale funding due to volatility in global markets. Australia's four major banks have paid between 115 and 117 basis points above the bank bill swap rate (BBSW) for five-year bonds, whereas they paid only 80 basis points above BBSW in May 2015.

Despite funding becoming more expensive for Australian lenders, borrowers are unlikely to experience significant increases in loan pricing and borrowing costs. This is because international lenders are providing fierce competition and are able to offer good pricing and loan terms and conditions, as they are not necessarily subject to the same funding and regulatory pressures as domestic banks.

A new trend that has emerged in the market has been increase of non-bank lenders (eg, senior debt funds) in leveraged buyouts and highly leveraged acquisitions and recapitalisations. Club deals (including by way of common terms deeds) have also become increasingly popular, particularly for strong borrowers.

The Australian Prudential Regulatory Authority (APRA) is scrutinising bank lending to commercial real estate projects more closely out of concern that commercial property loans are typically the first to go bad in economic downturns. Australian banks have tightened lending standards to non-residents and some have stopped lending to foreign buyers of inner-city apartments.

Regulatory activity

Is secured lending a regulated activity in your jurisdiction?

Depending on the parties involved, secured lending in Australia may be subject to regulation by:

  • the Australian Securities and Investments Commission (ASIC) – the national regulator for consumer credit and finance broking; and
  • the APRA – supervises financial institutions, including authorised deposit-taking institutions, life and general insurers, and superannuation funds.

APRA approval is required before an entity (including a bank) carries on banking business in Australia.

In most cases, making a single loan or taking security in Australia does not require the lender or secured party to be registered or licensed in Australia. However, this depends on the facts and circumstances. For example, an entity must obtain an Australian financial services licence from ASIC (under the Corporations Act 2001 (Cth)) if it provides a 'financial service', which includes issuing, acquiring or arranging a derivative, swap or deposit product (or providing advice in connection with any of these products).

Depending on the nature and scale of a lender's lending activities in Australia, it must comply with registration and reporting requirements apply under the Financial Sector (Collection of Data) Act 2001 (Cth).

The Australian Bankers' Association is responsible for drafting the Code of Banking Practice,  which sets out the banking industry's charter on best practice standards when dealing with personal and small business customers. Alleged breaches of the code can be referred to the Financial Ombudsman Service.

Mortgages granted over real property are regulated by state and territory laws. Securities granted over personal property are regulated by commonwealth legislation (the Personal Property Securities Act 2009 (Cth)).

Are there any specific regulatory issues which a prospective borrower should consider when arranging or entering into a secured loan facility?

Borrowers should consider the following issues before entering into a secured loan facility:

  • An Australian company may provide financial assistance only to an entity which acquires shares in the company or in its holding company where the financial assistance is approved by shareholders and shareholder approval is lodged with ASIC (otherwise known as a 'whitewash').
  • Transactions may be voidable if there is no corporate benefit to the entity. This can be addressed by obtaining shareholder approval for the transaction.
  • Foreign lenders may be required to obtain approval from Australia's Foreign Investment Review Board (FIRB) before taking or enforcing security over Australian assets. However, they may be subject to relief if they hold security in the ordinary course of carrying on a money lending business and hold the security solely for the purpose of a money lending agreement.

Are there any specific regulatory issues which a prospective lender should consider when arranging or entering into a secured loan facility?

Lenders should consider the following factors before entering into a secured loan facility:

  • An Australian company may provide financial assistance only to an entity which acquires shares in the company or in its holding company where the financial assistance is approved by shareholders and shareholder approval is lodged with ASIC (otherwise known as a 'whitewash').
  • Transactions may be voidable if there is no corporate benefit to the entity. This can be addressed by obtaining shareholder approval for the transaction.
  • Foreign lenders may be required to obtain approval from FIRB before taking or enforcing security over Australian assets. However, they may be subject to relief if they hold security in the ordinary course of carrying on a money lending business and hold the security solely for the purpose of a money lending agreement.

Are there plans or proposals for reform or significant changes to the regulatory landscape in this area?

No proposals for immediate regulatory reform exist. However, an independent review of the Code of Banking Practice is being conducted.

In late 2013, the government established the Financial System Inquiry to examine Australia's financial system. Ultimately, there were 44 recommendations put forth in the final report, most relevant of which was a recommendation for the major banks to hold more capital as a buffer to absorb potential loan losses. Since then, APRA has announced that it will implement the Basel III net stable funding ratio, which will require banks to hold more high-quality capital on and from January 1 2019. Commercially, this will likely affect pricing, as banks will be required to hold more non-income earning capital.

On January 30 2012 the Personal Property Securities Act 2009 (Cth) came into effect and fundamentally changed how security interests in personal property are attached and perfected. The act expanded the concept of security interests by allowing security interests to be created under certain leases, retention of title supply arrangements, flawed asset arrangements and turnover trusts. A single national online register now serves as a notice board of security interests (and registration is generally how security interests are perfected under the act).

Structuring a lending transaction

General

Who are the active providers of secured finance in your jurisdiction (eg, international banks, local banks or non-bank financial institutions)?

There is a mix of secured finance providers, although the four major Australian banks (the Australia and New Zealand Banking Group, Commonwealth Bank, National Australia Bank and Westpac) continue to dominate as lead arrangers for syndicated banking facilities and control over 50% of the institutional loan market.

Since the global financial crisis, European banks have reduced their participation in the Australian syndicated market and have been replaced by Asian banks such as Mitsubishi UFJ Financial Group, Sumimoto Mitsui Financial Group, Mizuho and HSBC, in addition to Singaporean and Taiwanese lenders.

China’s biggest five lenders also have a growing presence in Australia (ie, Agricultural Bank of China, Bank of China, Bank of Communications, China Construction Bank and Industrial and Commercial Bank of China). These banks have typically appealed to Chinese companies and suppliers engaging in local projects and often team up with local banks on syndicates.

Another trend is that more non-banks are participating in syndicated loans, such as Australian superannuation funds like Challenger, IFM and VicSuper (which have their own lending teams) and international investors such as Intermediate Capital Group.

Competition in the syndicated loan market has, to date, inhibited the development of a viable Australian corporate bond market.

Australia does not have a particularly active secondary market where loans can be resold and traded as liquid assets. This is because most syndicated lenders prefer to take a 'buy and hold' approach.

Is well-established market-standard facility documentation used in your jurisdiction for secured lending transactions?

The market-standard documentation issued by the Asia-Pacific Loan Market Association (APLMA), which is similar to the standard form documentation prepared by the UK Loan Market Association, is regularly used as a base for secured lending transactions. That said, no standard secured APLMA loan agreement exists, so the unsecured APLMA loan agreement must be converted into a secured document.

However, law firms and financial institutions often use their own form of loan documentation containing their own nuances and house views. 

The Australian Financial Markets Association (AFMA) also releases industry standard documentation, including for debt capital markets transactions and arrangement letters for international debt offers (excluding the United States).

Syndication                         

Are syndicated secured loan facilities typical in your jurisdiction?

Syndicated secured loans are a common form of loan facility in Australia. The large Australian banks each have syndicated loans desks which originate, structure and distribute syndicated loans.

How are syndicated facilities normally structured? Does the law in your jurisdiction allow a facility agent to be appointed to act on behalf of other banking syndicate members?

Syndicated facilities are typically structured with the following individuals:

  • Lead arrangers – the (senior) lenders chosen by the borrower (usually from among its existing relationship banks) to put the deal together and provide funding. Lead arrangers are responsible for performing credit checks and structuring the loan facility, including negotiating the pricing and terms and conditions. In larger deals, they are also responsible for underwriting and marketing the loan to other lenders.
  • Other (senior) lenders – participate in providing the debt funding on syndication.
  • In some instances, junior lenders, who are subordinated to the senior lenders.
  • Facility agent – acts on behalf of the lenders (in a non-fiduciary capacity) and is responsible for administering the loan agreement after its execution and managing the ongoing relationship between the syndicate members and borrower (the facility agent is typically one of the lead arrangers).
  • Security trustee – holds the benefit of security on behalf of the beneficiaries (typically the agent, lead arrangers, lenders (senior and, if applicable, junior) and hedge counterparties). The security trustee can typically enforce the security if directed to do so by the lenders or agent and must distribute enforcement proceeds in line with the security trust deed (the security trustee is typically a related body corporate of one of the lead arrangers).

No specific licensing or registration requirements exist for agents or security trustees.

In a typical deal (around A$500 million), there are usually two to five lenders involved in arranging and funding the deal.

Does the law in your jurisdiction allow security and guarantees to be held on trust by a security trustee for the benefit of the banking syndicate?

The role of the security trustee is to hold the security on trust for the benefit of the banking syndicate, pursuant to a security trust deed. However, a guarantee provided by the obligors under a syndicated facility agreement will not be held on trust by the security trustee. Instead, the guarantee is a direct contractual undertaking by the obligors in favour of the members of the banking syndicate.

Special purpose vehicle financing

Is it common in secured finance transactions for special purpose vehicles (SPVs) to be used to hold the assets being financed? Would security generally be given over the shares in the SPV or would lenders require direct asset security?

It is common for SPVs to hold the assets being financed. In this case, financiers will usually want to take direct security over the assets, in addition to security over shares in the SPV (if a company) or units in the SPV (if a trust), in order to:

  • gain first-ranking security over the SPV's assets and cash flows (with appropriate negative pledge covenants), so that competing claims are minimised;
  • maintain control over the assets, so that in an enforcement scenario, the lender can maximise the value obtained from realising the security; and
  • lower administration risk in case an administrator to the company and security becomes subject to a moratorium under the Corporations Act (Cth) (administration risk is lowered because the financier has security over all or substantially all of the company's assets).

Lending to trustees of trusts is common, especially to real estate investment trusts. In this case, lenders must ensure that the trustee has power under the trust deed to borrow and grant security and an effective right of indemnity out of the trust property.

Interest

Is interest most commonly calculated by reference to a bank base rate or a market standard variable reference rate (eg, LIBOR, EURIBOR or HIBOR)? If the latter, which is the most commonly used reference rate in your jurisdiction?

Syndicated loans are generally priced as an interest rate spread above a floating reference rate –  most commonly, the bank bill swap rate for Australian dollar-denominated loans and LIBOR in the case of non-Australian dollar-denominated loans.

The spread mainly depends on the borrower's credit risk and the size and term of the loan. The spread may be fixed for the life of the loan or linked to changes in the borrower's gearing or profitability. Recently, spreads have narrowed due to an increase in the supply of loans by banks.

Are there any regulatory restrictions on the rate of interest that can be charged on bank loans?

Consumers are protected against excessive rates of interest under unfair contract terms regulations which are enforced by the Australian Securities and Investments Commission. However, this protection does not extend to corporate borrowers.

Use and creation of guarantees

Are guarantees used in your jurisdiction?

Yes. Financiers to a corporate group will often require cross guarantees from all companies in the group. Under this arrangement, each guarantor guarantees that the borrower and other guarantors will perform their obligations.

Financiers also usually insist that borrowers provide indemnities in addition to guarantees.

The significance of an indemnity is that it is a separate and independent obligation to pay monetary compensation to the lender if it suffers loss, which means that the lender can directly claim against the indemnifying party without having to prove that some other party defaulted on its obligations.

On the other hand, a guarantee is triggered when another party defaults on their obligations (so the guarantee is dependent on specified defaults occurring before it can be enforced by the lender).

What is the procedure for their creation?

Guarantees and indemnities can be either created in a standalone document or be contained as a clause in another document (eg, a loan agreement or security document).

Usual contract law principles apply to the creation of guarantees and indemnities.

Some states and territories also have formalities, such as that a guarantee must be in writing and signed by the guarantor.

The National Credit Code also sets out certain formalities for natural persons giving guarantees under certain credit contracts.

Do any laws affect or restrict the granting or enforceability of guarantees in your jurisdiction (eg, upstream guarantees)?

Restriction and enforceability issues may arise in the common scenario where a subsidiary gives a guarantee in favour of a lender to secure the obligations of its parent or related company (as a prerequisite to the parent or related company obtaining financing).

Directors' duties and corporate benefit

Directors must ensure that, among other things, the giving of a guarantee by a company is in line with their duties to act in the company's best interests. Although there may be little commercial benefit to a wholly owned subsidiary in providing a guarantee relating to its parent's obligations (despite the fact that the giving of the guarantee ensures financing is obtained to support the corporate group as a whole), directors of a wholly owned subsidiary may consider the best interests of the holding company if permitted by the constitution and if the company is solvent at all relevant times.

A guarantee may be rendered void if:

  • it does not commercially benefit the company;
  • a director's duty is breached (which can result in civil or criminal penalties and personal liability for directors);
  • the company’s constitution prevents the giving of the guarantee; or
  • the guarantee is deemed to be an uncommercial transaction or unfair preference (in liquidation).

Financial assistance Shareholder approval may need to be sought if the giving of a guarantee counts as financial assistance (eg, in the common scenario where the guarantee is given in support of a loan used to fund a purchaser's acquisition of shares in the company giving the guarantee).

Shareholder approval is not required if the guarantee will not materially prejudice the interests of the company or shareholders or the company’s ability to pay its creditors. However, it is generally considered risky to rely on these exceptions, so a financial assistance 'whitewash' is most typically undertaken by the relevant companies.

Special rules apply to public companies for shareholder approval.

Certain requirements under consumer protection legislation apply to guarantees given by consumers and small business.

Subordination and priority

Describe the most common methods of structuring the priority of debts and security.

The ranking of the debts between creditors is typically achieved through contractual subordination in the form of a 'subordination deed'. This document will generally provide that, except for certain permitted payments, the junior creditor may not receive repayment of its debt before the senior creditor has been paid out in full. The junior creditor will also undertake to turn over amounts received by it during the subordination period in breach of its obligations under the subordination deed.

The ranking of claims by two or more creditors with respect to separate security over a debtor's assets is dealt with in a priority deed. This document will cover the ability of a security holder to commence enforcement action and the agreed priority of distribution of proceeds of realisation of the secured property. Where two or more classes of secured creditor share the same security, the priority arrangements between those creditors are typically covered in the security trust deed (which in those circumstances may be called a security trust and intercreditor deed).

In deals involving senior and mezzanine debt, it is common for the ranking of debts and security to be achieved via structural subordination. Under this approach, a holding company is inserted into the corporate structure between the previous holding company and the borrower. The senior lenders provide funding to the borrower and take security over each group entity from the holding company down. The mezzanine lenders provide funding to the previous holding company and take security over previous holding company only (including its 100% shareholding in the holding company). Given that this structure involves different levels of lending and no common security, there is prima facie no requirement for an intercreditor agreement between the senior and mezzanine lenders or any other direct contractual nexus between those parties.

Documentary taxes and stamp duty

Are any taxes, stamp duty or other fees payable on the granting of a loan, guarantee or security interest, or on its enforcement?

No taxes are payable on the granting of a loan or guarantee.

As of July 1 2016 no stamp duty is payable in any Australian jurisdiction on security documents. However, security documents in New South Wales relating to liabilities before July 1 2016 will need to be stamped in order to be enforceable.

Depending on the jurisdiction, different registration fees will be payable on the registration of mortgages over real property. Nominal registration fees will also be payable for each security interest registered on the Personal Property Securities Register.

If a secured party wishes to enforce its security interest, court filing fees will also be payable.

Australia levies interest withholding tax (IWT) on interest payments made by an Australian borrower to an offshore lender. The IWT rate is 10% of the gross amount of interest paid. Relief from IWT may be available if:

  • the lending is an issue of debentures (eg, bonds and notes) or a syndicated loan which results from a public offer; or
  • a double tax treaty applies.

Cross-border lending

Governing law

Is it more common for local law to govern the terms of the facility documentation or is the law of another jurisdiction often elected by the parties (eg, English law or New York law)?

Typically, loan agreements and intercreditor agreements are governed by the laws of an Australian state or territory, with security documents governed by the laws of the jurisdiction in which the grantor's assets are located.

Restrictions

Are there any restrictions on the making of loans by foreign lenders or the granting of security or guarantees to foreign lenders?

As a rule, no restrictions apply on a foreign lender making a loan or receiving the benefit of security or a guarantee in relation to that loan (provided that where security or a guarantee is granted, the loan was entered into in good faith and in the ordinary course of a money lending business).

If a security interest or mortgage over Australian assets is granted to a foreign lender, the prior approval of Australia's Foreign Investment Review Board (FIRB) may be required before taking or enforcing security. Broadly speaking, there is an exemption from notification and FIRB approval if the foreign lender holds the assets in the ordinary course of business as a money lender and only as security for the purposes of a money lending agreement.

Are there any exchange controls that restrict payments to a foreign lender under a security document, guarantee or loan agreement?

Generally, no. However, sanctions and anti-corruption laws, under both Australian and international law, may prohibit dealings with funds or economic resources with restricted persons. Where a transaction is restricted by Australian law, the specific authorisation of the minister for foreign affairs may be necessary.

Security – general

Security agreements

Is it possible to create a security interest over all assets of an entity? If so, would a single security agreement suffice or is a separate agreement required for each type of asset?

Yes, a single general security agreement over the general assets of a grantor (eg, tangible movable property or intangible property (including circulating assets such as stock in trade)) would be capable of granting security over all assets of an entity. Otherwise, if preferred, a specific security agreement over specified goods could be used.

Release of security

What are the formalities for releasing security over the most common forms of assets?

Security agreements (whether general or specific) are usually released using either a bilateral deed of release of secured property between the grantor and secured party or a unilateral deed poll of release given by the grantor.

In addition, the security must be de-registered on the register on which it was recorded, whether by electronically filing a discharge of a financing statement on the Personal Property Security Register or lodging a discharge of mortgage form for real property at a land titles office.

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.

Enforcement

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
  • foreclosure.

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.