Australia has a sophisticated market for debt ﬁnancing, which oﬀers ﬁnancing products in connection with a broad range of businesses, assets and transactions, including general corporate ﬁnancing, acquisition ﬁnancing, project ﬁnancing, leveraged ﬁnancing, real estate ﬁnancing, securitisation and structured ﬁnancing and debt capital markets.
The debt ﬁnance market in Australia is generally open to international participants, whether as borrowers or lenders. The well-developed legal system in Australia provides borrowers and lenders with a high degree of certainty in relation to the legal treatment of various aspects of debt ﬁnancing arrangements. This gives local and international debt market participants conﬁdence to be able to enter into debt ﬁnancing arrangements that will be legally enforceable against the parties to them.
Under Australian law, there are generally no restrictions or limitations on foreign lenders making loans to Australian companies or Australian companies making loans to foreign entities. However, we note the points set out in the:
- Taxation, Stamp Duty and Custom Duty chapter of this publication in relation to interest payable from Australian companies to foreign entities; and
- Foreign Investment Regulation chapter of this publication in relation to the authorisations and licensing and registration requirements in relation to foreign banks and ﬁnancial institutions.
Unless an Australian company is restricted from doing so in its constitution, it can give a guarantee for the debt of a borrower, whether the borrower is incorporated in Australia or in a diﬀerent country.
However, there are certain laws in Australia that may aﬀect the enforceability of a guarantee. A guarantee provided by an Australian company may be unenforceable if:
- the company does not have the power, under its constituent document, to provide the guarantee in the relevant circumstances; or
- the directors do not exercise their duty to act in good faith for the beneﬁt of the company and for a proper purpose in giving the guarantee.
In determining whether there is suﬃcient beneﬁt, all relevant facts and circumstances of the transaction need to be considered by the directors, including the beneﬁts and detriments to the guarantor in giving the guarantee, and the respective beneﬁts to the other parties involved in the transaction. The issue is particularly relevant where a company provides a guarantee in relation to the obligations of another member of its corporate family. In determining whether there is suﬃcient beneﬁt, the directors need to give primary consideration to the beneﬁts and detriments to the guarantor in giving the guarantee, in addition to the beneﬁts to the other members of the corporate family.
Whether a guarantee that is entered into in breach of directors’ duties can be avoided against a party relying on the guarantee depends on certain factors, including whether the party knew of or suspected the breach. Under Australian law, a person is entitled to assume that the directors have properly performed their duties to the company unless that person knows or suspects that they have not done so.
In addition, in an insolvency of an Australian company, certain transactions may be set aside by a court, on the application of a liquidator of the company. A liquidator has the power to make such an application in respect of transactions entered into in the 6 month period prior to the application to wind the company up (or the commencement of the administration of the company (where applicable)) that constitute ‘unfair preferences’ or ‘uncommercial transactions’ and the company was insolvent at the time or became insolvent because of the transaction (or an act or omission made for the purpose of giving eﬀect to the transaction).
Security over land
Security over land is typically taken by way of a registered mortgage over the speciﬁc piece of land. Land may also be charged under a general security agreement (e.g. over all property which the grantor owns from time to time). A failure to register a security interest in land will not generally aﬀect the validity of the security in an insolvency of the grantor. However, if that security interest is not properly registered in accordance with the applicable statutory requirements in relation to the registration of security interests in land in the relevant state or territory, it will generally not have the beneﬁt of priority over subsequent registered security interests in the land.
In most Australian states, most land dealings are now registered on an online property exchange network known as PEXA, eliminating paper-based registrations and certiﬁcates of title. However, certain land dealings may still be required to be lodged in paper, depending on the requirements of the state land authority.
Security over property other than land
The grant, validity and priority of security over most classes of property other than land are subject to the Personal Property Securities Act 2009 (Cth) (PPSA) and its related legislation. The PPSA applies to ‘personal property’, which is deﬁned broadly to include any kind of property other than land (subject to certain exceptions). Personal property therefore includes, among other things, tangible and intangible property, ﬁnancial property, intermediated securities and intellectual property.
Where a lender is taking security over all of the assets of a grantor, a general security deed will generally be entered into between the parties pursuant to which the grantor will grant security in all its present and after-acquired property. If the grantor is granting security only over only a speciﬁc asset or goods (e.g. the shares in a company), a speciﬁc security deed will be entered into.
Registration of security interests in personal property
Security granted over most classes of property other than land is required to be perfected under the PPSA in order to protect its validity and priority as against third parties and its validity in an insolvency of the grantor. Except for certain types of property in relation to which security may be perfected through prescribed methods of possession or control, perfection must generally be by registration on the Personal Property Securities Register (PPSR). There is no prescribed time period for the registration, however (subject to certain exceptions):
- priority will generally be determined by reference to the order in which security interests have been perfected, so a delay in registration can adversely aﬀect the secured party’s priority; and
- if a security interest is not registered within 20 business days after the security agreement which provides for it is entered into, it will generally be void in an insolvency of the grantor which occurs less than 6 months after registration.
It should be noted that registration on the PPSR provides no assurances of priority and there may be prior security interests perfected through some means other than registration (e.g. by possession or control or under temporary perfection rules). It is also possible that later security interests may also obtain priority by being perfected by control or because they beneﬁt from special priority rules relating to particular kinds of security interests such as purchase money security interests.
Security granted over certain other speciﬁc classes of assets, such as minerals and resource interests, requires the consent of, and/or registration with, certain other government bodies.
Enforcing security interests
A secured party’s ability to enforce a security interest will generally be governed by the security agreement pursuant to which that security was created. Therefore, when a security interest is documented, the parties should negotiate the time when the security become enforceable (e.g. on the occurrence of an event of default) and any procedural requirements applicable to the enforcement of the security interest (e.g. notice of enforcement).
If a secured party is a foreign government or a related entity of a foreign government, the enforcement of security will constitute a ‘direct investment’ to which the requirements under the Australian Foreign Investment Policy may apply. Equally, unless an interest is acquired by a receiver appointed by a foreign lender, approval would be required prior to obtaining an interest in national security land, an exploration tenement, an asset of a national security business or in securities of an entity that carries on a national security business.
Under the PPSA, in enforcing a security interest, the secured party must act honestly and in a commercially reasonable manner.
If an administrator is appointed to a grantor, a statutory moratorium period will apply to a secured party taking enforcement action against the grantor’s security, subject to certain exceptions. The key exception is where a secured party has security over the whole, or substantially the whole, of the grantor’s property. In those circumstances, the secured party may enforce its security during the ‘decision period’, which is the period expiring on the 13th business day after:
- the day that notice of the appointment of the administrator is given to the secured party; or
- otherwise, the day that the administration begins.
A secured party will generally take steps to enforce its security by appointing a receiver or a receiver and manager in respect of the assets the subject of the security. The receiver or receiver and manager would then take steps to realise the assets in order to repay the debt owing to the secured party (e.g. by collecting receivables, seizing and disposing of assets or exercising contractual rights of the grantor under its contractual arrangements with counterparties).
Under current law, no stamp duty applies to security granted in respect of assets located in any Australian state or territory. However, if any of the loan or security documents contain a declaration of trust, stamp duty may be imposed on that declaration of trust. The duty is generally a ﬁxed amount (currently no more than A$500) provided that the property over which the trust is declared is only of nominal value or is not dutiable property. If a trust is declared over valuable dutiable property, ad valorem rates of duty will apply.
Unfair preferences and uncommercial transactions
The comments above in relation to unfair preferences and uncommercial transactions would also apply to an Australian company granting security.
Part 2J.3 of the Corporations Act precludes a company from providing ﬁnancial assistance to a person who acquires shares in the company or any of its holding companies except in limited circumstances.
Financial assistance is not deﬁned but is interpreted broadly and will include the giving of a guarantee or granting of security by a company to support debt used to acquire shares in that company or its direct or indirect holding company. A company may ﬁnancially assist a person to acquire share in the company or any direct or indirect holding company only if:
- the assistance does not materially prejudice the interests of the company, its shareholders or the company’s ability to pay its creditors;
- the company obtains shareholder approval in accordance with the prescribed whitewash procedure; or
- the assistance is exempted under section 260C of the Corporations Act.
Lenders are often only prepared to rely on the whitewash procedure. The whitewash procedure includes a 14 day waiting period following lodgement of a notice with the Australian Securities and Investments Commission (ASIC) and a requirement that approval also be obtained from the shareholders of any Australian listed holding company or the ultimate Australian-incorporated holding company of the company giving the assistance. Assuming that shareholders’ consent to a short notice period can be obtained (which is usually the case where the relevant companies are not listed), the process takes a minimum of 15 days from the date of lodgement of the ﬁrst notice with ASIC.
Most commonly in acquisition ﬁnancing, that procedure takes place following the acquisition, and it is a condition subsequent that it is completed, and the target companies accede to the ﬁnancing as guarantors or security providers within a speciﬁed time period.
Contravention of the prohibition does not aﬀect the validity of the ﬁnancial assistance or any related contract or transaction and the company is not guilty of an oﬀence. However, persons (which could include a lender) involved in a breach of the prohibition may be liable for ﬁnes of up to A$200,000 and/or (for individuals whose involvement is dishonest) imprisonment for up to ﬁve years. Civil penalties may also be imposed requiring persons involved in a breach to compensate the company concerned for any loss it suﬀers as a result of the breach.
Under Australian law it is possible to subordinate debts such that one lender (the junior lender) may agree that a second lender (the senior lender) be preferred over the junior lender for repayment of a debt, provided that the subordination does not disadvantage any other creditor of the debtor that is not a party to the subordination arrangements.
In the Australian market, there are two principal contractual methods used to document such an arrangement, which will usually be documented in a tripartite agreement between the senior lender, the junior lender and the debtor:
- contingent debt method: whereby the lender’s right to have its debt repaid is contingent upon the senior lender’s debt having ﬁrst been repaid (to a speciﬁed extent); or
- turnover agreement / subordination trust method(s): whereby the junior lender agrees to pay the senior lender and/or to hold on trust for the senior lender, any amounts paid by the debtor to the junior lender, until the senior lender has been repaid (to a speciﬁed extent). Senior lenders generally prefer for the junior lenders to agree to hold such amounts on trust for the senior lender (rather than to merely pay the senior lender) to protect these funds against the insolvency of the junior lender.
The second method may give rise to a security interest over the junior creditor’s claim in favour of the senior lender for the purpose of the PPSA and require registration on the PPSR.
Subordination may also be achieved by way of structural subordination, whereby a lender to a parent company in a group of companies is structurally subordinated to lenders to that parent company’s subsidiaries, who have direct claims against the assets of the subsidiaries.
It is a common provision of loan documentation in Australia for a party to trigger an event of default through the occurrence of an insolvency related event in respect of that party. For example, that party entering into voluntary administration, a creditors’ scheme of arrangement, a receivership where the receiver is appointed over the whole or substantially the whole of the property of the company and certain categories of restructuring. Such an event of default ordinarily would lead to a right for the non-defaulting party to terminate the loan agreement.
In Australia, the Corporations Act imposes a moratorium on the non-defaulting party from enforcing its right to terminate the contract where one of these types of insolvency related events has occurred. The intention of the moratorium is to aid in the successful restructure of a business or its sale as a going concern.
The length of the moratorium will depend on the type of insolvency event that triggered the termination right – for example, if the defaulting party had triggered the insolvency event by applying for a scheme of arrangement, the moratorium will generally last until that scheme of arrangement is withdrawn or the court dismisses the application.
There are several contractual rights that are exempt from this ipso facto regime. These include some common remedies which arise upon an event of default occurring (beyond a termination right) in Australian loan agreements, such as the right to payment by way of indemnity, the right to charge a different (i.e. higher) interest rate, the right to assign, transfer or novate obligations or rights of set-off or combination of accounts. The Corporations Regulations 2001 (Cth) also exclude certain types of contracts from the ipso facto regime, including (among others):
- covered bonds, securities, financial products, promissory notes;
- syndicated loans and related underwriting arrangements;
- securities financing transactions;
- certain types of project financing arrangements;
- margin lending;
- subordination and priority arrangements;
- factoring arrangements.
Last updated 01/01/2023