Registration of company charges and personal property securities reform
With the rate of corporate insolvencies seemingly on the rise, it is timely to revisit the requirements regarding the registration of charges under the Corporations Act 2001.
This article begins by outlining what constitutes a charge and follows on to list some of the main legal requirements regarding the registration of charges. It then provides some introductory comments in relation to the Commonwealth Government’s proposed reform of the regulation of Australia’s personal property securities legislation.
What is a charge?
Charges are a popular and effective device used in business to secure debt obligations owed by companies. Charges are granted by companies in a variety of commercial transactions, including in respect of loan facilities and vehicle or equipment finance arrangements. They are sometimes also used (most often by smaller businesses) to secure deferred payment arrangements in the context of business sales and separations.
A charge typically takes the form of a written contract entered into between two parties. The contract creates a legal security interest over the property to which it relates and provides its holder secured creditor status, placing it ahead of unsecured creditors and subsequent registered secured creditors in the event of insolvency.
Company charges can be:
- “fixed”, where the charge relates to a specified item or items of property only. A common example is the interest of a finance company over company vehicles or equipment under finance. The charged property cannot be sold without the consent of the financier; or
- “floating”, where the charge floats over all of the company’s assets unless and until a pre-determined event (eg insolvency) causes the charge to crystallise. The company remains free to deal with its assets in the ordinary course of business unless and until a crystallising event occurs. If the charge crystallises (ie becomes fixed), the affected property cannot be dealt with free of the charge without the financier’s consent; or
- a combination of both, that is a “fixed and floating charge”.
Registration and why it is important
Once created, “registrable charges” are required to be:
- recorded by the company granting the charge in its register of charges; and
- lodged with ASIC for registration under the Corporations Act 2001.
The legislation defines “registrable charge” to include floating charges, charges on uncalled share capital, personal chattels, goodwill, patents, trade marks, book debts, marketable security, etc.
Registration with ASIC is generally a procedural formality which results in the security interest being recorded on the public register maintained by ASIC.
Most importantly, a registrable charge must be lodged for registration with ASIC within 45 days after it is created. Although failure to register does not invalidate the charge, a registrable charge is void as security against a liquidator or administrator unless it is lodged for registration either within 45 days after it is created or at least 6 months before the liquidation or administration commences.
The financial consequences for a charge holder if the company does not observe the registration requirements - and the consequential loss of secured creditor status - are obviously potentially disastrous.
It should also be noted in the context of lending arrangements between certain related parties, that a charge granted in favour of a “relevant person” will be void, unless leave is obtained from the Court to enforce the charge, if the charge is sought to be enforced within 6 months after its creation. A “relevant person” is: (a) a person who is, at the time when the charge is created, or who was at any time during the preceding 6 months, an officer of the company granting the charge or (b) a person associated, in relation to the creation of the charge, with such an officer. We would encourage clients who may have taken a charge as security to take steps to ensure that the registration requirements outlined above have been complied with.
Personal Property Securities Reform
The Commonwealth Government has recently embarked on an ambitious reform of the law relating to “personal property securities”. The program has been hailed as “a significant milestone towards achieving an efficient and effective national regulatory regime for Australian secured lending over personal property”. The reforms are widely regarded as the most significant change to Australian commercial law since the Corporations Act was introduced in 2001.
“Personal property securities” are security interests created in relation to personal property - effectively anything other than land and interests in land (i.e. leases and mortgages). The reforms will not affect the current State-based land titles registration systems.
A personal property security arises when a lender takes an interest in personal property as security for a loan or some other obligation, or enters into an arrangement that involves the provision of secured finance.
The reforms will consolidate over 70 Commonwealth, State and Territory Acts into a single Act and are being driven by recognition that Australian finance law has failed to keep pace with changes witnessed in recent times in the domestic Australian economy and finance sector. These reforms aim to keep some consistency with the law in other jurisdictions (including New Zealand, Canada and the United States) that have already undertaken personal property securities reform.
The government’s overall aim is to “promote more certain and consistent outcomes, reduce financing costs and encourage more diverse financing options”.
One important implication of these reforms will be the abolition of the current distinction between fixed and floating charges. However, features of current system identified above regarding registration and the consequences of failure to register are likely to be retained.
A single national electronic register of personal property security interests will be established and will replace the existing company charges register maintained by ASIC.
The new system is expected to come into operation in 2010. It is anticipated that there will be a transitional phase of 2 years to enable businesses to adapt to the new requirements.
Hall & Wilcox’s Banking and Finance team is monitoring these changes closely and will provide a more comprehensive analysis of the government’s reform package, and its practical ramifications for business, in the coming months.
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