Enforcing security when a borrower defaults.

Rights can be lost by election without anyone deciding to give them up. A lender that knows of a default and keeps acting as though the facility is unimpaired can be treated as having affirmed, and the right to accelerate for that default can be lost permanently. Accepting a scheduled interest payment, allowing a further drawdown, waiving a condition, or letting months pass while the borrower assumes nothing will be done, all carry that risk. A reservation of rights letter, sent early and repeated whenever the lender deals with the borrower, keeps the position open while payments continue.

The register and file check belongs before the notice goes out. It confirms that every limb of the security is registered and perfected, that any registration on the Personal Property Securities Register names the correct grantor identifier and collateral class, and that none has lapsed. Where the grantor holds assets as trustee of a trust with its own Australian Business Number, a registration made against the trustee company's ACN instead of the trust's ABN is defective. The same check picks up a mortgage protected only by caveat, which preserves priority but carries no power of sale, and a guarantor released by an amendment nobody re-executed.

The third task is the borrower's actual position: a 13 week cash flow forecast, aged debtors and creditors, the position with the Australian Taxation Office including any director penalty notice, and accrued employee entitlements. Unpaid superannuation and pay as you go withholding expose directors to personal liability, and that exposure pushes them towards an administration on a timetable the lender does not choose.

A standstill or forbearance agreement is what lets a lender give a borrower time without giving away rights. A workable one acknowledges the debt and the defaults that have occurred, states expressly that those defaults are not waived, runs for a defined period with clean termination triggers, sets dated milestones such as a valuation or an executed refinance commitment, reaffirms the security and every guarantee, and provides for costs. A bare promise to forbear may not be enforceable, and a fee or a fresh covenant supplies the consideration that removes the argument.

Waiting has a cost that is easy to miss because the ledger balance does not move. Circulating assets deteriorate fastest in a stressed business: receivables age past collection, stock is discounted to generate cash, and the pool the lender expected to realise shrinks while the reported position looks unchanged. Employee entitlements accrue every month and rank ahead of the appointing lender out of circulating asset proceeds under section 433 of the Corporations Act 2001 (Cth), so continued trading enlarges the priority claim in front of the recovery.

Restructuring during a standstill carries its own exposures. A circulating security interest created in the six months before the relation back day is void against a liquidator except to the extent of value provided at or after its creation, unless the company was solvent immediately afterwards, so a top up security covering exposure that already existed is the case most at risk. Payments received during a standstill can be examined as unfair preferences, although a creditor that is genuinely fully secured takes no more than it would in a winding up. A lender that moves from setting conditions for continued support to directing how the business is run risks being characterised as a shadow director.

The power to appoint a receiver comes from the security document, and the Corporations Act regulates what the receiver may do once appointed. The security agreement specifies the triggering events, the notice required and who may execute the instrument, and the appointment has to match those terms precisely: a receiver appointed without a valid power is a trespasser, personally exposed, with the appointing lender exposed alongside. The document will almost always make the receiver the agent of the grantor, which insulates the lender from the receiver's contracts and conduct, and is why the lender does not control the outcome.

The receiver then operates under Part 5.2 of the Corporations Act and owes duties beyond those owed to the appointing lender. Under section 420A a controller exercising a power of sale must take all reasonable care to sell for not less than market value, or where the property has no market value, for the best price reasonably obtainable. Breach of that duty is the standard complaint after a fast sale, raised by the grantor and by guarantors whose residual exposure moves with the price. Where the appointment is made under a circulating security interest, the receiver pays priority claims, principally employee entitlements, out of circulating asset proceeds first, so a recovery model built on the gross realisable value of a receivables and stock book, without subtracting that priority and the receiver's remuneration, will be materially wrong.

The lender's levers are the choice of receiver, the scope of the appointment and the funding and indemnity decision, and a lender that instructs beyond them erodes the agency protecting it. Where a managing controller is appointed over the whole or substantially the whole of the company's property, section 434J stays contractual rights triggered merely by that appointment, which is often what keeps supply and customer contracts alive long enough to sell a business as a going concern.

Priority over personal property turns on perfection and its timing. A perfected security interest defeats an unperfected one, and as between two perfected interests the earliest perfection time generally wins, whatever the dates on the security agreements. Perfection by control outranks perfection by registration whenever the registration was made, but control over an account with an authorised deposit taking institution is available only to the institution holding the account, which puts it beyond a lender that does not bank the borrower. A purchase money security interest registered within the statutory window takes priority over an earlier all assets registration, which is how a lender holding a general security agreement discovers that plant, vehicles or stock financed by a supplier sit outside its recovery.

Two vesting rules remove security interests altogether. A security interest that is unperfected when an administration or a winding up begins vests in the grantor, leaving the secured party unsecured. Section 588FL of the Corporations Act does the same where the interest was perfected only by registration, the registration was made more than 20 business days after the security agreement came into force, and the insolvency event falls within six months after that registration. The same late registration survives if it was made well before any insolvency and vests in the company if it was made shortly before an administration, so a court order fixing a later registration time has to be sought and obtained before the insolvency event.

The enforcement mechanics sit in Chapter 4 of the Personal Property Securities Act 2009 (Cth): seizure, disposal and retention of collateral, the notices required beforehand, the duty to obtain market value or the best price reasonably obtainable, and the obligation to account for any surplus. Those mechanics are switched off where a receiver or other controller is appointed under Part 5.2 of the Corporations Act, so the two routes are alternatives. Seizure is faster and cheaper against a discrete identifiable asset such as equipment or a specific receivable, and a receivership is what takes control of an operating business, its contracts and its cash.

Appointing a voluntary administrator under Part 5.3A of the Corporations Act imposes a moratorium that stops a secured party enforcing without the administrator's written consent or the leave of the court. It applies whether or not a default notice has been served, and directors frequently appoint because they can see enforcement coming. A statutory demand is a debt recovery step outside the security, and serving one on a borrower already in difficulty commonly precipitates that appointment. A winding up is different, because a secured creditor can generally still realise its security outside the liquidation.

One exception is why lenders take security over all of a company's property even where the key assets are covered by specific security. Under section 441A, a secured party whose security interest covers the whole or substantially the whole of the company's property may enforce despite the moratorium, provided it begins to enforce before or during the decision period, which runs for 13 business days from the later of the day the administration begins and the day the secured party is notified. Beginning to enforce means an actual step, such as appointing a receiver or entering into possession. Whether a package covers substantially the whole is assessed by relative value, case by case, which is why an all assets security for a nominal amount is taken alongside specific security purely to preserve the right, the device the market calls a featherweight security. Because the period is short, a lender relying on it needs the receiver briefed and willing to act, the funding and indemnity settled, the appointment instrument drafted against the correct security document, and the substantially the whole assessment complete before the notice arrives.

Under section 441D the court may, on the administrator's application, order a secured party not to exercise specified powers, where satisfied that what the administrator proposes will adequately protect that party's interests, which is the route taken where the secured property is essential to a restructure worth more than an immediate realisation. A deed of company arrangement does not bind a secured creditor that did not vote in favour of it, so a lender that abstains or votes against generally keeps its enforcement rights, subject to the court's power under section 444F to limit them where realisation would have a material adverse effect on the deed's purposes. Part 5.3B restructuring runs a comparable moratorium on its own timetable.

While the borrower is in administration, section 440J stops a guarantee of the company's liability being enforced against a director, or a director's spouse, de facto partner or relative, and stops a proceeding on it being commenced against them, without the leave of the court. The restriction is limited to that group, so a guarantee from an unrelated corporate guarantor is not caught. A lender holding a director's guarantee back as negotiating leverage can lose the ability to sue on it on the day the administrator is appointed.

A guarantor is discharged at general law where the principal obligation is materially varied without consent, and the protection against that sits in the guarantee's own consent to variation and no discharge provisions, which have to be wide enough to cover the variation actually made. That is why a standstill carries an express reaffirmation from every guarantor, and why an amendment nobody had the guarantors sign is worth finding before enforcement begins.

A guarantee of debt used to acquire shares in the guarantor or its holding company engages the financial assistance provisions of the Corporations Act, which require shareholder approval unless the assistance does not materially prejudice the company, its shareholders or its ability to pay its creditors; a breach does not invalidate the guarantee but exposes those involved in giving it. Separately, a guarantee given without commercial benefit to the guarantor can be attacked as an uncommercial transaction by that guarantor's own liquidator, and cross guarantees from group entities with no interest in the borrowing are the usual candidates.

Where the package includes a mortgage over land, that limb runs on the real property legislation of the state or territory where the land sits. Each jurisdiction requires a default notice and a period to remedy before the power of sale can be exercised, the periods are not uniform, and a notice that understates the period has to be given again. Most jurisdictions also impose a statutory duty on a mortgagee exercising that power to take reasonable care about the price obtained. Where the borrower is an individual and the credit is for personal, domestic or household purposes or for residential investment property, the National Credit Code in Schedule 1 to the National Consumer Credit Protection Act 2009 (Cth) imposes its own default notice regime, minimum remedy period and hardship procedures. Whether the Code applies follows the purpose of the credit and the identity of the borrower, whatever the facility is called.

In a syndicated or club facility a security trustee holds the security for the finance parties under a security trust deed, and that deed, read with the intercreditor arrangements and the facility agreement's decision making provisions, determines who can cause enforcement to occur. The security trustee has no independent power or obligation to enforce; it acts on the instruction of a defined majority, and it can decline to act until indemnified to its satisfaction against the costs and liabilities of an appointment. A lender that cannot assemble the instructing majority is left with its share of whatever the waterfall produces and no ability to force the timing.

Five provisions decide how that plays out, and each is settled at documentation, while a lender still has bargaining power. The instructing group threshold sets what proportion by commitment or exposure constitutes the majority the security trustee must follow, and which decisions instead require unanimity. Disenfranchisement provisions determine whether a defaulting lender, or one affiliated with the borrower, is suspended from that count. The indemnity condition governs whether the security trustee can require cash prefunding before it appoints a receiver. Transfer provisions decide whether a lender that wants a different outcome can sell its participation. The waterfall's treatment of enforcement costs, default interest and any hedging close out amount moves each lender's recovery even where the gross realisation is identical.

Where the exposure sits inside a pooled private credit vehicle, the trustee or responsible entity carries its own obligations to investors about how an enforcement decision is made, recorded and reported. Whether the position is bilateral or syndicated, four questions decide whether enforcement is available when it is needed, and each takes days to answer once a borrower is in difficulty.