Survey on claw-back of security in insolvency

Survey on claw-back of security in insolvency Response to questionnaire in respect of Australia by Rommel Harding-Farrenberg, Tony Chen and Adam Seeto, Corrs Chambers Westgarth, Sydney, New South Wales, Australia (rommel.harding-farrenberg@corrs.com.au, tony.chen@corrs.com.au and adam.seeto@corrs.com.au). Please note that the responses to this questionnaire deal with the position under the laws of Australia generally where security is taken from a company. They give a general high level overview of the position and as such are not intended to be definitive or comprehensive legal advice. The circumstances of a particular situation may well affect the legal position. Furthermore, this response in general only deals with the claw-back under the Corporations Act 2001 (Cth) and does not consider common law and other remedies which may be available in certain circumstances. 1. Introductory questions 1.1 Please briefly describe the main type of security in your jurisdiction (per type of asset; per perfection technique; per type of secured obligation). General Security Agreement A general security agreement creates a security interest in all of the grantor s present and afteracquired property (subject to any agreed exclusions), including plant, equipment, receivables, goodwill, intellectual property, real property and the proceeds of such property. (It will typically secure all money or obligations owed to the secured party either generally or pursuant to certain transaction documents.) Where the secured property includes real property, it is standard and prudent practice also to take a separate real property mortgage over that real property. Real property mortgages are discussed in more detail below. Specific Security Agreement A specific security agreement creates a security interest in a specific item or category of the grantor s property, typically being shares, units in a unit trust, receivables, money in an account, agricultural property, assets or equipment subject to a specific asset financing or intellectual property. (It will typically secure all money or obligations owed to the secured party either generally or pursuant to certain transaction documents.) Under the Personal Property Securities Act 2009 (Cth) (PPSA), in order to be perfected, a security interest in personal property (whether created under a general security agreement or a specific security agreement) must generally be registered on the Australian Personal Property Securities Register (PPSR) (s 21(2)(a), PPSA). This can be done by lodging an online financing statement on the PPSR website. In the case of a security interest in certain types of property (including shares and receivables) which is controlled by the secured party for the purposes of the PPSA, it is also possible to perfect the security interest in that secured property by the secured party s continued control of the secured property (e.g. in relation to shares evidenced by a share certificate, by possession of the certificate and having the ability to deal with the shares). 7488710/3B 1

Real property mortgage A real property mortgage creates a mortgage over an interest in real property (including a leasehold interest). (It will typically secure all money or obligations owed to the secured party either generally or pursuant to certain transaction documents.) A real property mortgage consists of a pro forma cover sheet (which differs in each Australian state or territory) and an annexure which sets out the substantive terms of the mortgage. It should be perfected by registration with the land titles office in the jurisdiction in which the relevant real property is located. If the real property is in New South Wales, mortgage duty (a form of stamp duty) will generally be payable on the real property mortgage. In that case, mortgage duty must be paid and the real property mortgage stamped before it can be perfected by registration. (New South Wales is the last jurisdiction in Australia that still has mortgage duty. Such duty is expected to be abolished in New South Wales on 1 July 2013. In general, mortgage duty is payable in New South Wales in respect of any security agreement under which the secured property is, or includes, property located in New South Wales. It is payable on a pro rata basis in relation to the proportion of secured property that is located in New South Wales at the rate of approximately 0.4% of the amount secured.) Other security interests Following the operational commencement of the PPSA on 31 January 2012, any interest in personal property that in substance secures payment or performance of an obligation is defined as a security interest (s 12, PPSA) and treated in the same way as a security interest arising under a general security agreement or specific security agreement. Accordingly, there is now a broad variety of arrangements which will give rise to a security interest in relation to personal property for the purposes of the PPSA, including the sale of property on retention of title terms, finance leases and flawed deposit arrangements. All such security interests should be perfected in accordance with the PPSA (usually by way of registration on the PPSR). Under the PPSA there are also certain types of deemed security interests (see 2.3 below). Pre-PPSA security interests Prior to the operational commencement of the PPSA, common forms of security in Australia included fixed and/or floating charges, equitable share mortgages and charges over bank accounts. Except in relation to real property, these forms of security have in general been replaced by two new forms, being general security agreements and specific security agreements. Circulating security interests In addition, the concept of a floating charge has been replaced by the broader concept of a circulating security interest. A circulating security interest is defined as: a floating charge (including a charge that conferred a floating security at the time of its creation but has since become a fixed or specific charge); or a PPSA security interest which has attached to a circulating asset, (s 51C, Corporations Act 2001 (Cth) (Corporations Act)). 7488710/3B 2

A circulating asset includes a monetary obligation arising from the disposal of property or granting of a right or providing a service in the course of a business of granting rights or providing services of that kind, proceeds from inventory, currency and other negotiable instruments. Importantly, it also encompasses personal property that the grantor has express or implied authority to transfer free of the relevant security interest in the ordinary course of its business (s 340, PPSA). However, a security interest is not a circulating security interest to the extent it is: over goods and perfected by possession; or perfected by control over the secured property, if an effective PPSR registration discloses that the secured party has possession of the secured property. The intention in respect of circulating security interests is to capture floating charges and security interests in the nature of floating charges. In practice, it is now usual to refer to a circulating security interest rather than a floating charge. 1.2 Please briefly describe whether your jurisdiction provides for a procedure of protection against creditors (usually initiated by a debtor at a time when the debtor is yet not insolvent) and if so what are its basic assumptions. Administration Under Part 5.3A of the Corporations Act: a person who is entitled to enforce a security interest in the whole, or substantially the whole, of a company s property (s 436C, Corporations Act); the company itself (s 436A, Corporations Act); or a liquidator of the company (s 436B, Corporations Act), may appoint an administrator to the company. Typically, an administrator is appointed because the directors of a company believe the company is insolvent or is likely to become insolvent at some future time. The appointment brings to an end the period in respect of which the directors can be liable for insolvent trading. The principal aim of administration is to allow a distressed company time to develop and implement a restructuring plan with its creditors, with the result that the company can resume trading or ultimately be liquidated with a better return for the company's creditors and members than would result from an immediate winding up of the company. The administration period begins once the administrator accepts its appointment and will generally end when (s 435C, Corporations Act): a deed of company arrangement is executed (discussed below); the company s creditors resolve to end the administration; or the company s creditors resolve to wind up the company. 7488710/3B 3

While a company is in administration, the administrator assumes control of the company from the directors, and creditors are prevented from initiating legal proceedings against the company, including winding up proceedings and execution against company property (s 437C and Division 6 of Part 5.3A, Corporations Act). However, if a creditor has a security interest in all or substantially all of the company s property, it may nonetheless enforce such security interest provided that within a specific period (Decision Period) after the commencement of the administration (generally being 13 business days) the creditor enforces the security interest in relation to all property of the company subject to such security interest (e.g. by appointment of a receiver under a power contained in an instrument relating to the security interest) (s 441A, Corporations Act). During the administration, the administrator must investigate the affairs of the company and report to the creditors. Within a set period of the administration s commencement (generally about 20 business days), the administrator must convene a meeting of creditors in which the creditors may determine one of the three outcomes for the company referred to above (ss 439A and 439C, Corporations Act). Deed of Company Arrangement One outcome of an administration is that the company s creditors may elect to execute a deed of company arrangement (DOCA). There are no restrictions on what a DOCA may contain, but its primary purpose is to set out how the debts of the company will be settled as between it and its creditors. Upon the execution of the DOCA, the administration of the company will come to an end and secured creditors will no longer be restricted in commencing proceedings against the company and its property (s 435C, Corporations Act). However, if a secured creditor has voted in favour of the DOCA, it will be bound by the terms of the DOCA, including any restrictions upon enforcement (s 444E, Corporations Act). A court order may be obtained to prevent dissenting secured creditors from taking enforcement action if the court is satisfied as to certain matters (s 444F(2), Corporations Act). If the company fails to execute the DOCA within 15 business days after the creditors meeting (s 444B(2), Corporations Act), the administrator becomes the liquidator of the company (s 446A, Corporations Act). Scheme of Arrangement A scheme of arrangement is a statutory process pursuant to Part 5.1 of the Corporations Act which can in some circumstances be used as an alternative to administration. Pursuant to a scheme of arrangement, a company and its creditors (or a certain class of creditors) agree to a compromise or arrangement which varies or extinguishes certain obligations of the company to those creditors (s 411, Corporations Act). The scheme is then reviewed by a court and, if approved, given effect by court order. At this point, the creditors (or relevant class of creditors) will be bound by the court-approved scheme. 7488710/3B 4

1.3 Please briefly describe the types of insolvency proceedings contemplated by your legislation (liquidatory proceedings; reorganisation or recovery proceedings). Voluntary winding up The company s members may wind up the company by special resolution (s 491, Corporations Act). Before the resolution is put to the members, the company s directors must first consider the financial position of the company. If the company is determined to be solvent, the directors must lodge a declaration to this effect with the Australian Securities and Investments Commission (ASIC) (s 494, Corporations Act). The winding up will then proceed as a members voluntary winding up. If the directors determine that company is insolvent, the winding up will proceed as a creditors voluntary winding up. In either case, the special resolution to wind up the company will then be put to the members. If passed, the members will appoint a liquidator to wind up the company (s 499(1), Corporations Act). The liquidator will determine the claims of the company s creditors, realise the assets of the company, distribute the proceeds to the creditors (and members if there is a surplus) and deregister the company. In the case of a creditors voluntary winding up, the liquidator must subsequently convene a meeting of the company s creditors within 11 days of its appointment (s 497(1), Corporations Act). At this meeting, the creditors may replace the liquidator and appoint a committee of inspection (ss 497(10) and (11), Corporations Act). Compulsory winding up A company is insolvent if it is unable to pay all of its debts as and when they become due and payable (s 95A, Corporations Act). Where a company is insolvent, certain parties may apply to court for the company to be wound up (s 459P, Corporations Act). This application is usually made by a company creditor, but can also be made by a liquidator of the company, a director, the company itself or ASIC (amongst others). In the case of a director, ASIC or a creditor who is only owed a contingent or prospective debt, the application will require the leave of the court. The court may only grant leave if it is satisfied that there is a prima facie case that the company is insolvent. Following an application for compulsory winding up, a court may also appoint a provisional liquidator to the company at any time before it makes a final winding up order (or, if such order is appealed, before a decision in the appeal is made) (s 472(2), Corporations Act). However, a court will usually only do this if there is strong and clear evidence which demonstrates a need for the appointment of a provisional liquidator, such as the need to preserve the assets of the company. Receivership A secured party under a security agreement will usually have the contractual right to appoint a receiver to the property of the company subject to that security agreement upon the occurrence of certain events of default specified in the security agreement. Less commonly, a party with an interest in property of the company may apply to court for a receiver to be appointed to that property. 7488710/3B 5

A receiver generally acts as the agent of the company, and usually has a broad range of powers to deal with the relevant property pursuant to the security agreement under which it is appointed. Its role is either to administer or realise the relevant property and remit the proceeds in satisfaction of money owing to the secured party. If a receiver is appointed in relation to a company by a secured party with a security interest in all or substantially all of the company s property prior to the end of the Decision Period, the receivership may continue during the administration (s 441A, Corporations Act). Where a receiver is appointed in respect of property of a company before the beginning of an administration, unless a court orders otherwise, in general the receiver will not be prevented from enforcing the relevant security interest in relation to that property (s 441B, Corporations Act). Generally, receivership is the favoured enforcement option for a secured lender. Administration Please see response at 1.2. Scheme of arrangement Please see response at 1.2. 1.4 Please briefly describe the types of claw-back actions available in your jurisdiction. Please address, in particular, any of the following questions: (a) (b) (c) (d) Is claw-back automatic or does it require a positive assessment of the existence of the relevant conditions by the court or the receiver? Does your legislation differentiate between transactions (including the granting of security) with consideration and without consideration? Does your legislation differentiate, in cases of security in general, between security taken concurrently with the granting of the secured debt and security taken in a different period of time? Are there special provisions for intra-group transactions and transactions between related parties? Voidable transactions Under Division 2 of Part 5.7B of the Corporations Act, a liquidator may in certain circumstances apply to court for certain transactions of a company being wound up (known as voidable transactions) to be set aside or varied, including: an insolvent transaction, being an unfair preference or an uncommercial transaction (as to which see below) which is given effect to while the company is insolvent (or due to which the company becomes insolvent) (ss 588FA, 588FB and 588FC, Corporations Act); certain unfair loans (s 588FD, Corporations Act); 7488710/3B 6

certain unreasonable director related transactions (s 588FDA, Corporations Act); and a transaction made for the purpose of defeating creditors rights (s 588FE(5), Corporations Act). In respect of a voidable transaction, the liquidator may apply for the court to order (amongst other things) that: all or part of any agreement constituting part of the transaction is void or unenforceable, or is varied as the court thinks fit; some or all of the money paid by the company under the transaction be repaid, or the return of property the company has transferred under the transaction; a person pay an amount to the company (or transfer property to the company) which fairly represents the benefit received by the person from the transaction; or a debt, security or guarantee incurred or given by the company in connection with the transaction be discharged or released, (s 588FF, Corporations Act). A liquidator may only apply for an order in relation to a voidable transaction if an act was done to give effect to the transaction during a prescribed period (relation back period) ending on the date on which the winding up of the company commenced (or, if winding up is ordered by the court, the date on which the application for the winding up order was filed). The relation back period differs depending on the type of voidable transaction, ranging from 6 months for an unfair preference to an unlimited period for an unfair loan (s 588FE, Corporations Act). A court must not make an order in respect of a voidable transaction if the order would materially prejudice a right or interest of a person (other than a party to the transaction) where: the person received no benefit because of the transaction; or in relation to each benefit that the person received because of the transaction: o o the person received the relevant benefit in good faith; and at the time the person received the relevant benefit, the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as a result of its entry into the transaction or any person giving effect to the transaction, and a reasonable person in the person s circumstances would have had no such grounds for so suspecting, (s 588FG(1), Corporations Act). In addition, in respect of any voidable transaction other than an unfair loan or unreasonable director-related transaction, the court must also not make an order in respect of that voidable transaction if the order would materially prejudice a right or interest of a person where: the person became a party to the transaction in good faith; at the time when the person became such a party, the person had no reasonable grounds for suspecting that the company was insolvent at that time or would become insolvent as a result of its entry into the transaction or any person giving effect to the transaction, and a reasonable person in the person s circumstances would have had 7488710/3B 7

no such grounds for so suspecting; and the person provided valuable consideration under the transaction or changed his, her or its position in reliance on the transaction, (s 588FG(2), Corporations Act). Unfair preferences An unfair preference is a transaction between a company and one of its creditors which allows the creditor to recover more of an unsecured debt than it would otherwise receive by proving in the winding up of the company (s 588FA, Corporations Act). If an unfair preference is given effect to while the company is insolvent (or causes the company to become insolvent) and during a relation back period of 6 months, the unfair preference is a voidable transaction which a liquidator may apply to have set aside or varied (s 588FE(2), Corporations Act). Uncommercial transactions A transaction is an uncommercial transaction if it may be expected that a reasonable person in the company s circumstances would not have entered into it, having regard to: the benefit and detriment to the company of entering into the transaction; the benefits received by other parties to the transaction; and any other relevant matter, (s 588FB(1), Corporations Act). For example, if the counterparty to a transaction receives a gift or obtains a bargain of such magnitude that it cannot be explained by normal commercial practice, the transaction may potentially be an uncommercial transaction. If an uncommercial transaction is given effect to while the company is insolvent (or causes the company to become insolvent) and during a relation back period of 2 years, the uncommercial transaction is a voidable transaction which a liquidator may apply to have set aside or varied (s 588FE(3), Corporations Act). Insolvent transactions for the purpose of defeating creditors If an insolvent transaction (i.e. an unfair preference or uncommercial transaction which is given effect to while the company is insolvent or causes the company to become insolvent) is entered into for the purpose (regardless of whether it is the sole purpose) of defeating, delaying or otherwise interfering with the rights of any or all of the creditors of the company upon its winding up, the relation back period for that transaction for the purposes of determining whether it is a voidable transaction is 10 years (s 588FE(5), Corporations Act). Insolvent transactions with a related party If an insolvent transaction (i.e. an unfair preference or uncommercial transaction which is given effect to while the company is insolvent or causes the company to become insolvent) is entered into with a related entity (which is broadly defined and includes directors and members and their relatives) of the company, the relation back period for that transaction for the purposes of determining whether it is a voidable transaction is 4 years (s 588FE(4), Corporations Act). 7488710/3B 8

Unfair loans An unfair loan is a loan in respect of which the interest or charges were extortionate when it was entered into, or have since become extortionate because of a variation to its terms. In determining whether a loan is an unfair loan, the court will consider (s 588FD(2), Corporations Act): the risk to which the lender was exposed; the value of any security in respect of the loan; the terms of the loan; the schedule of payments of interest, charges and principal; the amount of the loan; and any other relevant matter. An unfair loan is a voidable transaction in the liquidation of the borrower company. There is no limitation on the relation back period for this kind of voidable transaction (s 588 FE(6), Corporations Act), and the company does not need to be insolvent when the transaction was effected. Unreasonable director-related transactions A transaction is an unreasonable director-related transaction if the transaction is (s 588FDA, Corporations Act): a payment made by the company; a conveyance, transfer or other disposition by the company of property of the company; an issue of securities by the company; or the incurring by the company of an obligation to make such a payment, disposition or issue, where: the payment, disposition or issue is, or is to be, made to a director, or close associate of a director, of the company; and it may be expected that a reasonable person in the company s circumstances would not have entered into the transaction concerned, having regard to the benefit and detriment to the company of entering into the transaction, the benefit to other parties to the transaction and any other relevant matter. An unreasonable director-related transaction is a voidable transaction in the liquidation of the company if it occurred within a relation back period of 4 years (s 588FE(6A), Corporations Act). The company does not need to be insolvent when the transaction was effected. 7488710/3B 9

Circulating security interests A circulating security interest (see 1.1 above) which arises over the company s property during a relation back period of 6 months is void as against the company s liquidator (s 588FJ(1), Corporations Act) except: if it is proved that the company was solvent immediately after it was granted; or insofar as it secures certain fresh consideration (s 588FJ(2), Corporations Act). Unperfected security interests in personal property Under the PPSA, if a company grants a security interest over personal property to which the PPSA applies and the security interest is unperfected at the time of: the making of an order or passing of a resolution to wind up the company; the appointment of an administrator to the company; or the execution of a DOCA by the company, the security interest will vest in the company (i.e. will be lost by the secured party) at that time (s 267, PPSA), subject to certain exceptions outlined in 2.4(a) below. In addition, in general a secured party should ensure that its security interest is perfected by registration on the PPSR before the later of: the date which is 6 months before the time of commencement of the company s administration or winding up (critical time); 20 business days after the security agreement giving rise to the security interest came into force (or, if the critical time is earlier, the critical time); and if the security agreement is governed by foreign law, but the security interest became enforceable against third parties under Australian law after the time which is 6 months before the critical time, the time which is 56 days after the security interest became so enforceable (or, if the critical time is earlier, the critical time). Otherwise, the security interest will vest in the grantor at the critical time (or if it becomes enforceable against third parties at or before the critical time, immediately before the event leading to the winding up or administration) (s 588FL, Corporations Act). S 588FL of the Corporations Act does not apply to certain security interests, including: a security interest which is perfected by other means under the PPSA (e.g. possession or control in respect of certain kinds of collateral); and certain kinds of deemed security interests which do not secure payment or performance of an obligation (as to which, see 2.3 below), (ss 588FL and 588FN, Corporations Act). A person may apply to court for an extension of time for the registration of the relevant security interest. A court may make such an order if it is satisfied that: the failure to register was accidental or due to inadvertence or some other sufficient cause, or is not prejudicial to creditors or shareholders; or 7488710/3B 10

equitable relief is justified on other grounds, (s 588FM, Corporations Act). Security interests in favour of company officers A security interest is void (and taken to always have been void) if it was granted in favour of: an officer of the company (either at the time of granting or within the prior 6 months); or a person associated with an officer of the company, and the secured party purports to take any step to enforce the security interest within 6 months after the date of the security agreement without the leave of the court. The court may grant leave for enforcement if it considers that the company was solvent immediately before the granting of the security interest and it is just and equitable for leave to be granted (s 588FP, Corporations Act). This provision applies regardless of whether the security interest was also granted in favour of other persons. However, it does not apply to a security interest arising from a retention of title arrangement. 7488710/3B 11

2. Specific questions 2.1 Is claw-back subject to specific rules with respect to any type of security available in your jurisdiction? If so, please describe any such rules. The precise rules associated with claw-back depend on what type of voidable transaction is involved. See 1.4 above. Voidable transactions In order for any voidable transaction (including the granting of a security interest) to be set aside, the liquidator must apply to court (s 588FF, Corporations Act). An application for a court order under s 588FF must be made during the period beginning on the last day of the relation back period and ending 3 years after that day or 12 months after the first appointment of the liquidator (whichever is later) (s 588FF(3), Corporations Act). The court may then, subject to its satisfaction that the criteria for a voidable transaction are met, make a broad range of orders in respect of that transaction (including setting it aside). Other security interest provisions No application to court is necessary for a liquidator (and, where relevant, an administrator) to set aside a circulating security interest, unperfected PPSA security interest or security interest in favour of a company officer or associate in the circumstances outlined in 1.4. All that is required is the establishment of the relevant criteria. 2.2 Are there any total or partial exemptions from claw-back, depending on (for example): (a) (b) (c) (d) (e) (f) The type of security; The type of transaction secured (including its legal form); The type of (wider) transaction within which the financing is granted and the relevant security is taken (e.g. financings granted in the context of certain reorganisation proceedings); The nature of the grantor of security; The nature of the beneficiary of security; Other. See 1.4 above 7488710/3B 12

2.3 How does your legal system address the claw-back of quasi-security transactions (e.g. a sale of a property in return for a price payable in instalments may hide a financing transaction secured by the property; which legal regime applies in this case: that of the claw-back of security, or that of the termination of pending (sale and purchase) agreements? The PPSA broadly deals with two categories of security interests: in substance and deemed security interests. The former covers any interest that is provided for by a transaction which in substance secures payment or the performance of an obligation. The latter comprises three types of interests in personal property which are deemed to be security interests, regardless of whether the transaction under which the interest arises in substance secures payment or the performance of an obligation. The types of deemed security interests are (s 12(3), PPSA): the interest of a transferee under the transfer of an account (in general terms, a monetary obligation arising from the disposal of property or granting of a right or providing a service in the course of a business of granting rights or providing services of that kind) or chattel paper; the interest of a consignor who delivers goods to a consignee under a commercial consignment; and the interest of a lessor or bailor under a PPS lease, being in general terms any lease or bailment of goods which is for a term of more than one year (or an indefinite term or a term which is capable of being renewed for more than one year). In the case of certain kinds of bailed or leased property such as motor vehicles, watercraft, aircraft and intellectual property, this period is reduced to 90 days. Under the PPSA security interests arising from quasi-security transactions in respect of personal property will generally be treated in the same way as formal security agreements. For example: a retention of title sale agreement gives rise to a security interest in the goods supplied, being the vendor s title in those goods; and a hire purchase agreement or finance lease gives rise to a security interest in the leased property, being the lessor s title in that property. Any such security interest (and the transaction itself) is subject to the provisions with respect to voidable transactions discussed in 1.4. 2.4 What are the legal consequences of the claw-back for the parties involved? For example: (a) Is an agreement, deed or transaction subject to claw-back invalid or just ineffective between the debtor and the party to the agreement; Voidable transactions In respect of a voidable transaction, the court has the discretion to make a wide variety of orders. Commonly, the court will order that the transaction is void at the time it was made and 7488710/3B 13

must be unwound. However, the court may also order a party to make a payment or transfer property to the company, or declare only part of the transaction to be unenforceable (s 588FF, Corporations Act). Other security interest provisions In the case of a circulating security interest, the security interest is only void against the liquidator of the grantor except as outlined in 1.4 above. In the case of an unperfected PPSA security interest, the security interest itself will vest in the grantor (and therefore no longer be enforceable by the secured party) (s 267, PPSA). However, this provision will not apply to certain types of security interests, including: deemed security interests arising from a transfer of an account or chattel paper, certain PPS leases of serial numbered goods or a commercial consignment if the security interest does not secure payment or the performance of an obligation; a security interest in respect of which perfection is governed by the law of a foreign jurisdiction at the time it would otherwise vest in the grantor; and a security interest arising from a subordination arrangement between a junior creditor and a senior creditor in respect of proceeds received by the junior creditor which are held on trust for the senior creditor, (s 268, PPSA). In addition, the security agreement which gave rise to that security interest is not in itself void, and to the extent that the secured party has other rights arising under the security agreement unrelated to the security interest, those rights should not be extinguished. In the case of a security interest granted in favour of a company officer, the security interest and any powers conferred by the security agreement are void and treated as always having been void. (b) To what extent can claw-back affect the successful exercise or enforcement of security rights which may have occurred prior to the adjudication in bankruptcy (e.g. claims cashed by the secured lender under a security assignment of receivables prior to the adjudication in bankruptcy)? Is there any difference between the case of selfenforcing security (e.g. the cashing of claims referred to above) and a court-driven enforcement (e.g. the enforcement of a mortgage)? Voidable transactions In respect of a voidable transaction, a court may make a wide variety of orders, including orders which effectively reverse any enforcement action taken before the liquidation or deem the security interest to have been void at the point of creation (in which case, any enforcement action purported to be taken would also be void) (s 588FF, Corporations Act). Other security interest provisions In the case of a circulating security interest, the security interest is only void in certain respects as against the liquidator. It remains unclear under Australian law as to whether this means the security interest is void at the time of its creation in those respects (in which case, the 7488710/3B 14

enforcement action is also void) or only void if the security interest is enforced again during the liquidation. In the case of an unperfected PPSA security interest, the security interest only vests in the grantor upon the commencement of the relevant insolvency proceeding. Accordingly, it would appear that any enforcement action pursuant to that security interest prior to such commencement should be valid, as the security interest is vested in the secured party until that point. In the case of a security interest granted in favour of a company officer which is void pursuant to s 588FP of the Corporations Act, the security interest is treated upon its purported enforcement as always having been void. Accordingly, any purported enforcement of the security is also treated as void. For the purposes of the above, there is no distinction between self-enforcing security and courtdriven enforcement. In Australia in the main enforcement of security is not court-driven. 2.5 What are the rights of the parties involved once the claw-back had been enforced (as a result of operation of law or court ruling)? A secured party whose transaction or security interest is set aside as a voidable transaction by a court may appeal the court order. Similarly, a secured party whose security interest is denied by a liquidator may apply to court to contest the liquidator s assertion that the security interest is void. 2.6 What is the claw-back regime for security granted by third parties/in respect of third party indebtedness? Please analyse from the perspective of the insolvency of the debtor and of the insolvency of the third party grantor of security. Does the possibility for the third party grantor to act in recourse against the insolvent debtor make a difference? If the debtor is insolvent but the third party remains solvent, no issue of insolvency claw-back should arise when enforcing security against the third party. The fact that the debtor is insolvent should not affect such enforcement action. Similarly, to the extent that the third party in turn has recourse against the insolvent debtor in respect of amounts claimed from it by the secured party, such recourse generally will be a matter as between the third party and the debtor (although often the third party is required to agree with the secured party that it must not exercise any rights of recourse against the debtor until the secured party has been paid in full). Whether or not this recourse exists should not affect the secured party s ability to recover from the third party. Note that where a third party guarantor discharges the secured debt of a borrower the guarantor will be subrogated to the security granted by the borrower to the lender. If the third party grantor is insolvent, the matters summarised in 1.4 above would be relevant. In addition, the issue of whether the third party grantor received any commercial benefit from granting the security may be relevant. 2.7 What is the claw-back regime for security which has been agreed (i.e. the relevant security agreement has been executed), but not yet perfected at the time of the adjudication in bankruptcy of the debtor/grantor? 7488710/3B 15

2.8 Other? As discussed in 1.4, an unperfected security interest in the personal property of a company will generally vest in the grantor at the time of its liquidation. In the case of a security interest in real property, the security interest is only perfected upon registration at the relevant land titles office. Until the security interest is perfected by registration, the secured party will only have an equitable security interest in the real property and will not have access to important statutory rights in relation to registered securities over real property. The appointment of a liquidator to the company does not cause the unregistered security interest in real property to vest in the grantor. However, until it is perfected by registration, the security interest will be defeated by a registered security (or other) interest and will be subject to the general law rules regarding priorities of legal and equitable interests in property which may cause it to lose priority against other unregistered security interests in the same property. In addition, an unregistered security interest in real property could be a voidable transaction. N/A 7488710/3B 16