Security interests must operate as a 'safety net'
Security law is complex, intricate and technical. Broadly, though, creditors are generally familiar with the concept that the registration of security interests is a 'safety net' to secure and ensure contractual obligations are ultimately met. The effectiveness of this safety net will be a paramount consideration for creditors amid COVID-19, as many corporations and business will almost certainly experience financial stress (and distress), which will ultimately place safety nets in the spotlight and test their adequacy to protect creditors.
Many creditors will have systems in place to initially assess the adequacy of security, enter into security agreements to secure their customers' contractual obligations and arrange registration of those security interests on the Personal Property Security Register (PPSR)1. However, once those initial safety net assessments are conducted, many creditors overlook a periodic review of whether the security adequately secures the other party's current obligations (rather than the obligations that existed at the beginning of the arrangement, which are often lower) and the ongoing effectiveness of the registration of the security interests on the PPSR.
The purpose of this article is not to summarise all the nuanced considerations of security law, but to set out some practical considerations for creditors in reviewing their security interests, and utilising security advisory services, as a matter of priority amid COVID-19.
- Defects in registration of security
Defects in the registration on the PPSR against the correct details of the contracting customer (as required by the legislation) can render it ineffective and the security interest will be lost2. At a minimum, one of the following must be shown for a security interest to be perfected:
- Customer is an individual, then the security interest must be registered against the individual's name and date of birth;
- Customer is a body corporate, then the security interest must be registered against the company's ACN (unless it is a responsible entity of a registered scheme within an Australian Registered Scheme Number);
- Customer is a trust, then the security interest must be registered against the ABN of the trust; and
- Customer is a partnership, then the security interest must be registered against the ABN of the partnership
Practically, creditors must be alive to the fact that, if they are to enjoy the benefits of registration in respect of their security interest, then the onus is on them to ensure that they register their security interest correctly in accordance with the Regulations.3 The failure to register correctly will leave the creditor vulnerable in the event their customer suffers an insolvency event (see below).
- Perfection of security interest
Security interests4 that have not been perfected by registration within 20 business days of the security agreement coming into force or at least 6 months before the commencement of the insolvency are ineffective against an insolvency administrator5 Practically, affected creditors would become unsecured creditors in the insolvency of their customer and are at risk of receiving limited or no dividend in the liquidation of the customer (ranking behind priority creditors and secured creditors). If this applies, alternate or substitute security should be considered as a matter of priority to effectively secure customers' obligations.
A moratorium operates under sections 440B and 440F of the Corporations Act 2001 (Cth) and restricts a creditor's ability to exercise third party property rights whilst the defaulting company is under external administration.
However, the moratorium does not apply to a secured creditor that has a security interest over the whole or 'substantially the whole of the company's property'6 if enforcement action is taken either before or during the 'decision period'7 (13 business day period beginning on the commencement of the administration or when the creditor receives notice of the administration under section 450A of the Act).
Practically, and provided the creditor's security interest is over the whole or 'substantially the whole of the company's property'8 and 'perfected' within the meaning of the PPSA9, the creditor has the option to appoint an administrator to their corporate customer and is not required to form an opinion that the customer is insolvent10.
Security advisory services amid COVID-19
Our team has the expertise to assist businesses maximise their prospective return in the event of a customer's insolvency. This includes upfront, responsive and practical guidance such as:
- advice on the adequacy of security agreements and effectiveness of your security registrations
- assessment of the legal implications of a business's security position particularly, given the likelihood many customers will face financial stress (or distress) amid COVID-19, which will test the safety net
- assistance with enforcing security interests should this become necessary or recommended
We can provide clear guidance for creditors concerned about:
- the likely impacts of COVID-19 on their customers
- the likely impacts to their security position and the implications for their bottom line.
1 The register established pursuant to the Personal Property Security Act 2009 (Cth) (PPSA).
2 Sections 153, 164 and 165 of PPSA; Schedule 1 of Personal Property Securities Regulations 2010 (Cth).
3 Schedule 1 of Personal Property Securities Regulations 2010 (Cth); In the matter of OneSteel Manufacturing Pty Ltd (administrators appointed)  NSWSC 21;
4 Section 588FL Corporations Act 2001 (Cth) applies to security interests perfected by registration. It does not apply to a security interest that is perfected by possession or control, or that is temporarily perfected, prior to the insolvency event.
5 Section 267 PPSA; Section 588FL Corporations Act 2001 (Cth).
6 See section 435B Corporations Act 2001 (Cth) which includes, "PPSA retention of title property" (s 51F).
7 Sections 9 and 441A Corporations Act 2001 (Cth)
8 'Substantially' refers to 'almost of the assets but certainly not 68% of the assets': Re Australian Custodian Holdings Ltd  VSC 492 at .
9 Section 436C(1A) Corporations Act 2001 (Cth).
10 Section 436C(1) Corporations Act 2001 (Cth) does apply to a company in liquidation: section 436C(2) Corporations Act 2001 (Cth);
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.