When looking to take out a loan, you may be required to provide some form of security, known as a guarantee, to the lender. This security will usually in the form of an asset, like your house or car. If you do not pay back the loan, the lender can sell off that asset. Therefore, it is important to be aware of the law surrounding guarantees to ensure that you understand your legal rights and obligations. This article will explain how the different types of guarantees and security agreements work in Australia.
A guarantee is a simple security document. It states the conditions where the guarantor must 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. However, as a guarantor, you will want to be as sure as possible that the borrower will uphold its obligations with regards to repayment.
A guarantee can be provided by:
- an individual;
- a company; or
- or another type of corporate entity.
In the context of a small business, an individual will normally provide a guarantee. However, in a more corporate environment, it’s common for a company to guarantee the repayment of a loan that a subsidiary company has borrowed.
It’s a good idea to avoid the provision of a personal guarantee. This is because this type of guarantee may expose your personal assets to a creditor.
2. Specific Security Agreement
The introduction of the PPSA regime changed the manner of taking security. Before the legislation, 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
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 concerning a given asset, such as a lease or a chattel. Once executed, this specific agreement must be registered with the PPSR register. Therefore, any potential future lenders are informed of the original lender’s security.
3. General Security Agreement
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 every asset that you are using as security. Furthermore, 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 pieces of information that you will need to be able to make this registration:
- secured party details: information on the person who holds the security interest in the personal property;
- 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 bank loan to finance the purchase.
- grantor details: a grantor is a person that owns or has an interest in the personal property attached to a security interest. A grantor includes a person who receives goods under a commercial consignment agreement, a lessee under a PPS lease and a person who transfers an account or chattel paper.
- method of payment: for a casual user, a credit card will suffice. However, 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. There are four key types of security agreements in Australia. These include:
- specific security agreements;
- general security agreements; and
- PPSR registration.
If you need any assistance with a loan agreement, contact LegalVision’s banking and finance lawyers on 1300 544 755 or fill out the form on this page.
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