Are those assets really secured?
Some lenders (large and small) take securities over assets to protect their exposure to borrowers. Most of these lenders are aware that Section 262 of the Corporations Act requires certain charges over company assets to be registered with the Australian Securities & Investments Commission (‘ASIC’).
These charges include:
- Floating Charges;
- Charges on personal chattels (this does not extend to certain ships which require separate registration);
- Changes over goodwill and patents or trademarks;
- Changes over book debts; and
- A charge over crops, wool or stocks.
A charge over land is slightly different. They are registered in a State or Territory Lands’ Titles Offices and do not require registration with ASIC.
A fixed and floating charge over all a company’s assets would also cover any real property owned by the company. To be safe, lenders should ensure that a mortgage is lodged on the certificate of title as well as lodging the charge with ASIC. Otherwise the lender may fall behind other lenders that have registered their charges on the property’s title.
Details of any charges that require registration must be lodged with the ASIC within 45 days of its creation.
263(1) Where a company creates a charge, the company must ensure that there is lodged, within 45 days after the creation of the charge:
(a) a notice in the prescribed form setting out the following particulars:
A charge is voidable against a Liquidator or Administrator if it is registered outside the 45 day period, unless it is registered more than 6 months before an appointment. It is possible for a lender to apply to have the Court extend the 45 day period, but a creditor will need a very good reason why it was not registered in time and these applications are not automatically granted.
(a) an order is made, or a resolution is passed, for the winding up of a company; or
(b) an administrator of a company is appointed under section 436A, 436B or 436C; or
(ba) a company executes a deed of company arrangement;
a registrable charge on property of the company is void as a security on that property as against the liquidator, the administrator of the company, or the deed’s administrator, as the case may be, unless:
(c) a notice in respect of the charge was lodged under section 263 or 264, as the case requires:
(i) within the relevant period; or
(ii) at least 6 months before the critical day; or
Charges are put in place to secure a company’s indebtedness to a lender. The charge gives the lender tangible security over property of a company should the loan fall into default. It is a form of insurance. If lenders fail to correctly register a charge, the charge may not be worth the paper it is written on, and the loan may be unsecured.
The Bankruptcy Act has no provisions for the registration of charges and there is no standard national position regarding the registration of securities over personal assets or property (not including real property). This position is being rectified with the release by the government’s draft “Personal Property Securities Bill 2008”.
In the mean time, creditor wishing to take security over personal assets or property must navigate the different provisions in each State or Territory. The key in all cases is registration. Using Queensland as an example, any Bill of Sale under which a lender has power to seize or take possession of any chattels must be registered under the Bills of Sale and Other Instruments Act 1955.
If it is not registered, it may not be enforceable when needed most. Section 18(1) of that Act provides: “An unregistered security interest has no effect against a person who is not a party to the instrument creating the interest”.
The effect of an unregistered Bill of Sale against a Trustee in Bankruptcy was considered by the Full Court of the Supreme Court of Queensland in Re Mercantile Credits Limited (1989) 1 QLD. R. 305. On 26 July 1984 the debtors executed a Bill of Sale in favour of Mercantile Credits. On 10 October 1986, the debtors committed an act of bankruptcy and a sequestration order was made against them on 15 December 1986. The Bill of Sale was registered for the first time on 12 May 1987. The question was whether the Bill of Sale was effective against the trustee in bankruptcy who was not “a party to the instrument …”.
The Court held that the trustee was a person within the meaning of the Act. Accordingly, at the time the property vested in the trustee, the Bill of Sale was unregistered and the trustee in bankruptcy took the property free of the Bill of Sale. This is the case even if that Bill of Sale was granted prior to the act of bankruptcy, but registered later.
Next month: A financier’s rights when an Insolvency Practitioner is appointed