We have recently been asked to advise on the efficacy of a company director entering into a loan and general security agreement with the company to which it has loaned funds and registering this on the Personal Property Security Register.
- Many small to medium size businesses often only have a handful of shareholders and directors, frequently all related to each other. As each of these directors are all emotionally and financially in the business, they commonly loan funds to the business to cover short term cashflow issues, to inject funds to expand the business or purchase a new asset.
- Usually, unsecured ad hoc loans from directors to the business have no consequences other than for the accountant but sometimes the business does not recover, is hit with a large unexpected expense or a major client fails to pay a significant invoice eventually leading to the business being put into administration or being liquidated.
- In these circumstances, each of the directors will rank as an unsecured creditor, potentially only recovering cents in the dollar loaned to the business but these loans could easily have been secured against the businesses assets.
- For example, some years ago we acted for a client who injected significant funds into the business to give it capacity to land a major infrastructure subcontract. The main contractor ended up in a dispute with the client, meaning it withheld payment from its subcontractors for over a year. The knock-on effect meant that our client’s business was unable to keep trading and was eventually liquidated, with our client receiving no return from the funds invested in the business.
- Our client could easily have placed themself in a stronger position as a secured creditor against the assets of the business, either through a General Security Agreement (“GSA”) (also known as a fixed and floating charge) or a specific fixed charge against particular assets of the business and registering this on the Personal Property Securities Register (“PPSR”).
- General Security Agreements
- A GSA is a document which grants security to the lender of funds against the assets of the business and gives the lender the right to register its secured position on the PPSR.
- The GSA secures the obligations contained in the loan document, which can either be for a particular amount or, where funds are being forwarded on an ad hoc basis, a loan facility agreement against which the business can draw down against.
- The Personal Property Security Register
- The PPSR is available for registering various interests (such as consignment arrangements, leases, etc) but we only focus on securing loan agreements in this paper.
- The PPSR applies to personal property, which is any property (including a licence) which is not land or a right, entitlement or authority granted by a Commonwealth, State or Territory law which also states it is not personal property.
- The relevant security interest is any interest in personal property which secures payment or performance of an obligation, including, amongst other things, fixed and floating charges, leases, consignments and hire purchase agreements. The security interest may provide security in after acquired property (property acquired after the loan agreement is entered into) and secure further advances if provided in the loan agreement.
- A security interest is perfected if the security interest is attached to the collateral, it is enforceable against a third party and the registration is effective.
- The security interest attaches to collateral at the time of the loan but is generally only enforceable against third parties for a particular collateral if there is a security agreement evidenced in writing, signed by the grantor, containing a description of the particular collateral or a statement that the security interest is taken in all of the grantor’s present and after acquired property (though some items of classes of personal property can be excluded), basically a GSA.
- Where there are multiple claims or security interests, priority is determined as follows:
- perfected security interests has priority over unperfected interests in the same collateral;
- between perfected security interests is in which it is registered; and
- between unperfected security interests in the same collateral, by the order of attachment of the security interests (being the date).
- A registration is ineffective because of a defect on the register if:
- there is a seriously misleading defect in any data relating to the registration;
- it is required to be described by a serial number but searching the register immediately before the transfer by reference to the serial number only the register would not disclose a registration; or
- a search of the register by reference to the grantor’s details (for collateral not to be described by serial number) would not disclose a security interest.
- Motor Vehicles & Specifically identified collateral
- A buyer of personal property takes that asset free of any security interest if the regulations provide that it must be described by serial number in registration and searching the register immediately before the transfer by reference to the serial number only the register would not disclose a registration.
- The buyer of a motor vehicle (being self-propelled property built to travel wholly on land, capable of at least 10km/h and with one or more motors with total power greater than 200W) takes the vehicle free of any security interest if the regulations provide that motor vehicles of that kind may be described by serial number and searching the register immediately before the transfer by reference to the serial number only the register would not disclose a registration.
- [tie the link between this and security in motor vehicles]
- Enforcing the Security
- A secured party may voluntarily subordinate their security interest to any other interest in the collateral, such as where a bank will only loan funds if they have priority over the director’s loan.
- The secured party may seize any collateral, as permitted by law, if the debtor is in default of the security agreement. The secured party may dispose of seized collateral by private or public sale (including auction or closed tender), by lease or licence (if intellectual property), if the security agreement so provides.
- Benefits of Directors Registering Interests
- Generally, a secured creditor holds its security interest in assets of the business against which it is secured above that of unsecured creditors and other secured creditors above whom they hold priority.
- There are some exceptions such as under section 561 of the Corporations Act 2001 which gives priority to the satisfaction of unsecured employee obligations over the claims of a secured party.
 Personal Property Securities Act 2009 section 10.
 Personal Property Securities Act 2009 section 12.
 Personal Property Securities Act 2009 section 18.
 Personal Property Securities Act 2009 section 21.
 Personal Property Securities Act 2009 section 20.
 Personal Property Securities Act 2009 section 55.
 Personal Property Securities Act 2009 section 164-165.
 Personal Property Securities Act 2009 section 44.
 Personal Property Securities Act 2009 section 45.
 Personal Property Securities Act 2009 section 61.
 Personal Property Securities Act 2009 section 123.
 Personal Property Securities Act 2009 section 128.
 Corporations Act 2001 Division 7 Subdivision B