Key Considerations for Enforcing Your Security
It’s no secret that Australians love property. We grow up wanting to buy a first home, an investment property and build a portfolio on the back of that. That has led to real property being the most commonly used form of security in Australia due to its stability, resistance to theft, ease of valuation, and the country’s strong and well-defined property laws.
When a default occurs, a lender seeking to enforce its security generally has two options: appointing a receiver or taking possession of the property. This article considers some of the advantages of each option when the borrower/owner is a corporation.
Mortgagee In Possession (“MIP”)
A MIP occurs when a lender assumes direct control of a mortgaged property following a borrower’s default. The appointment occurs when the lender exercises its right to enter into possession under the mortgage. This appointment applies exclusively to real property.
The relevant legislation is different in each state and territory; however, the core obligations are the same. Once in possession, the mortgagee has broad powers, including:
Collecting rent or other income from the property.
Managing, leasing, or undertaking improvements to the asset.
Selling the property to recover the outstanding debt.
However, a MIP comes with legal responsibilities, including the duty to act in good faith and ensure the property is managed prudently. Any negligence in handling the property can expose the lender to legal liability. This is a key reason why non-bank lenders often elect to use a third party to act as their Agent. An experienced Agent can:
Realise the property efficiently.
Make commercial decisions.
Insulate the lender from liability.
Draw upon their experience.
A significant advantage of a MIP is that the first-ranking mortgagee has priority over other lenders for all funds generated by the property, whether from its sale or rental income. They can sell the property with minimal regard for other mortgages or caveats registered against the property. This means that a MIP can sell the property without being obstructed by other charges against the title.
Receiver/Receiver & Manager
There are two types of receivers:
Receiver: this appointment is over specific assets. Their role is to sell a specific asset(s) and pay the secured creditor. The asset is not limited to real estate, and includes debtors, plant and equipment or even a research and development claim.
Receiver & manager: this appointment is over a company as a whole. There are some further complexities when dealing with circulating and non-circulating assets; however, at its core, the receiver & manager is still responsible for realising company assets and repaying the secured creditor.
A receiver has a few key advantages over a MIP:
A receiver and manager have greater information gathering powers:
Upon commencement director(s) must submit a Report on Company Affairs and Property within 10 business days of the appointment.
ASIC can assist in compelling cooperation from uncooperative directors.
They may publicly examine company officers or other parties.
They may seek Orders of Production for records from the Court.
They may borrow against property.
However, the receiver has a diminished ability to set aside registered mortgages and caveats, which may hinder the realisation of real property.
The right fit
When determining the best approach, a broad range of factors must be considered:
The type of security.
Other creditors and any security they have.
The nature of the property and business - for example, in the case of a commercial property, the best value may be achieved by selling it alongside the business.
If there are any leases in place.
Any information pertinent to the debt recovery process.
The state of property.
In some cases, the most effective strategy may involve both a MIP and the appointment of a Receiver. By ensuring that there is a strategy in place from the outset, lenders can ensure they recover their funds as quickly and efficiently as possible.
