There are two main types of loan agreements, unsecured and secured. If you choose to enter into a secured loan agreement you will by definition be required to provide some form of security to the lender. Taking security over an asset allows a lender to seize that asset, and sell it off, in the event of a non-payment of the loan. If an individual or company provides a guarantee the lender will have the right to pursue that guarantor in the event of non-payment. This article gives a brief explanation of the how guarantees and security agreements work in Australia with particular reference to recent PPSA legislation.
A guarantee can be provided by an individual, a company or another type of corporate entity. In a small business context a guarantee will normally be provided by an individual. In a more corporate environment it’s common for a company to guarantee the repayment of a loan borrowed by a subsidiary company. A guarantee is one of the simplest security documents. It basically states the conditions under which the guarantor will be required to take over the borrower’s repayment obligations upon default. As a lender you want to be sure that the guarantor will be able to satisfy its obligations under the guarantee. As a guarantor you want to be as sure as possible that the borrower will uphold its obligations with regards to repayment. Finally, it’s a good idea to avoid the provision of a personal guarantee if possible as this type of guarantee may expose your personal assets to a creditor.
2. Specific Security Agreement
The manner in which security is taken changed recently with the introduction of the PPSA regime. Before the legislation was passed, lenders would enter into a wide range of security documents with borrowers, such as share charges (a charge over the shares in a company), assignments (assigning your rights over an asset to the lender) or mortgages. The PPSA regime created a new class of security document called a “specific security agreement”. A lender can now enter into a specific security agreement in relation to a given asset, such as a lease or a chattel. Once executed, this specific agreement must be registered with the PPSR register, thus informing any potential future lenders of the original lender’s security.
3. General Security Agreement
Finally, a lender and borrower may choose to enter into a general security agreement. Before the PPSA regime came in, this type of security was known as a “fixed and floating charge.” This is a security agreement that covers all the assets of the borrower. The benefit of using a general security agreement is that you don’t need to list out every single asset that is being used as security, and you don’t then need to register a number of specific security agreements with the PPSR register.
4. PPSR Registration
As mentioned above it’s critical that you register any security agreement (but not guarantees) with the PPSR register. There are four kinds of information that you will need to make this registration:
(a) Secured Party Details: The person who holds the security interest in the personal property.
(b) Collateral Details: Collateral is the personal property that is the subject of a security interest. For example a motor vehicle that is provided as security for a loan given by a bank to finance the purchase.
(c) Grantor details: A Grantor is a person that owns or has an interest in the personal property to which a security interest is attached. A Grantor includes a person who receives goods under a commercial consignment agreement, a lessee under a PPS lease and a transferor of an account or chattel paper.
(d) Method of payment (for a casual user Credit Card will suffice but there are other payment options for more regular users of the register).
It’s relatively common for a lender to want some kind of security when lending to a corporate entity or individual. If you’re either a lender or a borrower, it’s important that you work with an experienced contract lawyer to draft or review security documents to ensure the best outcome for you.