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Are you considering investing in a company? Any capital invested in a company will be detailed in the Shareholders Agreement or a separate written agreement (i.e. a loan agreement) between the investor (i.e. you) and the company. In relation to the type of investment, depending upon the terms agreed between the parties, you may either be an unsecured or a secured creditor of the company.

Secured Creditor

In the event there is a written agreement in place which contains a security clause, you may be able to register a security interest against the company on the Personal Property Security Register (PPSR). The PPSR operates as a national online noticeboard on which you can register a notice to show that you have rights over personal property which secure a debt or obligation that someone owes you. Alternatively, if the company owns real property, it may have granted you a mortgage or caveatable interest in any real property owned by the company.

The granting of security for the investment will deem you a secured creditor of the company. Where the company defaults on its obligations under such security interest, and you have registered your security interest, as a secured creditor, you could sell the security to recover the debt (please note that the assets must be sold at market value or the best reasonably attainable price).

Unsecured Creditor

Without any written agreement in place or security for the investment, you would likely be deemed an unsecured creditor of the company in the event of its insolvency. This means that you will be unable to register an interest on the PPSR or over real property of the company and in the event the company is placed into liquidation, you would need to provide the liquidator sufficient information to prove your debt.

Generally, the liquidator will notify you if there is likely to be funds available for distribution and must call for formal proof of debt forms to be lodged with the proof to be provided within 14 days after that. If there are funds left over after payment of the costs of the liquidation, and payments to other priority creditors, including employees, the liquidator will pay these to unsecured creditors as a dividend. Generally, the order in which funds are distributed is:

  1. costs and expenses of the liquidation, including liquidator’s fees;
  2. outstanding employee wages and superannuation;
  3. outstanding employee leave of absence (including annual leave, sick leave and, where applicable, long service leave);
  4. employee retrenchment payments; and
  5. unsecured creditors.

This means that in the event of insolvency and without security for your investment, you would only receive a certain percentage of your investment (i.e. cents in the dollar), and this is only if the company has funds remaining following the above funds distribution.

It is important that if you decide to make an investment in a company that you have the details of your investment in writing to protect your legal position. It is, of course, a commercial decision for you as to whether such an investment if secured or unsecured however we would generally recommend lending funds with security to protect your legal position in the event the company becomes insolvent.

Conclusion

If you would like specific advice about your investment or potential investment in a company and whether you can register your security interest on the PPSR or over real property, get in touch with our commercial lawyers.

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